Making college possible.
"You know and I know," Clinton has told audiences of educators and students, "that there are too many young people who go to college and drop out or defer going to college because they think they can't afford it." It was not ever thus. After World War H, the GI Bill put higher education within reach of millions of working class people who, before the war, had not even dreamed of going to college. Then postwar prosperity and the relatively low cost of college quickly made what was available to veterans available to everyone else. It was possible through the sixties, for example, to pay for tuition, room, and board with a little help from home and a job in the campus cafeteria. But by the seventies, inflation and academic extravagance were driving costs back up, and by the end of the eighties, we were clearly getting back to a situation not unlike the thirties. A recent UCLA national study found the median parental income of incoming college freshmen increased more than twice as fast as the median income of all families with children in the eighties, a clear sign that students from less affluent families were again getting shut out of higher education.
Because costs were going up so fast--tuitions rose at twice the rate of annual inflation in the last decade--the federal college loan program became critically important since students could no longer make it with help from their parents and working around campus. So students had to borrow more and more from banks and other lending institutions. Because students were graduating owing an average $10,000 for an undergraduate education and a staggering $35,000 for graduate degrees, they frequently defaulted, in part because the size of their monthly payments was fixed without regard to their incomes. And for those students (frequently from poor backgrounds) who borrowed to attend shoddy two-year trade and beautician schools that offered dismal job prospects despite grandiose advertising, the default rate reached as high as 50 percent.
Because the government guaranteed repayment, lenders had no incentive to vigorously collect student loans. The result? From 1988 to 1993, the federal government lost $14 billion to student loan defaults--a sum that has clearly given people who say government programs don't work devastating ammunition to shoot down the whole idea of government involvement in making college loans. The sad thing about the default mess is that it discredits Washington's ability to do what the GI Bill did for veterans after the war: Make a university education, and its resulting benefits, possible for millions of people who would otherwise not be able to pay the freight.
And since students in this system came out of school so deeply in hock, they were forced into finding the most lucrative jobs they could. That means a law student who might prefer practicing public-interest law was nevertheless forced into going to work for a better-paying private firm, and a medical student who wanted to become a general practitioner was instead forced into a speciality he didn't really want but felt he had to go into for the bigger bucks.
Dollars and Diplomas
Clinton's attack on these problems began early last year when the administration was desperately trying to keep its economic package together. Deep in the package was the college lending reform, and as it wound its way through Congress, interests with stakes in the status quo systematically went after it. The lobbies, as one frustrated Senate staffer put it, "wedged a huge foot in the door."
Let's start with the banks and loan middlemen. To prevent the government from cutting them out of the lucrative student market altogether (student loans are the third most profitable kind of debt for lenders, behind only industrial loans and credit cards), banks and the Student Marketing Lending Association (Sallie Mae) swung into action. In hearing testimony, they darkly warned of the potential waste if the government were to take over the entire program. But Sallie Mae--which packages and sells bundles of loans to lenders, acting essentially as a private corporation--and its banker allies did not mention that under the existing system, fees consume 8 percent of a total loan (Clinton's reform caps fees at 4 percent).
Meanwhile, there's already enough waste in the private student loan business to keep publicity-seeking congressmen happy for years. Banks like Citicorp and Chase made more than $1 billion off student lending in 1992. (To the banks, defaults are unimportant; they just mean the banks get their money sooner rather than later.) Populist pressure could have been brought to bear on the fact that Sallie Mae paid its president more than $2 million in 1991, and the fifth man on the Sallie Mae totem pole earns twice what Bill Clinton earns as president of the United States. Nevertheless, under last year's imperative to find any savings in the budget anywhere, the interests' testimony helped convince Congress to preserve a private market for 40 percent of the loans.
Which is not in itself bad: To compete, private lenders will have to offer good service, because students will have the option of borrowing from the government. But students should be able to take advantage of private capital as long as the government regulates the interest and fees banks charge students. Clinton got 60 percent of the market for direct lending, cut the fees, and won lower interest rates. Everybody wins: The banks make interest they would not earn under a complete government lending program and students have access to more loans.
The problem is, without a reliable collection mechanism to catch deadbeats, there will be more of the waste that has subjected the programs to ridicule in the past. Clinton supported a brilliant solution to that problem: Put the Internal Revenue Service in charge of collecting loans, which it could do as it processes tax returns. Using the IRS would radically reduce the staggeringly expensive defaults by centralizing collections, saving money that could then be funnelled back to students. Yet this is the critical reform which was rubbed out of the bill at the last minute.
As winter gave way to spring in 1993, IRS involvement fell prey to students' lobbies, the IRS itself, congressional committees, and the Department of Education. No sooner had Clinton made his proposal in January than the United States Students Association (USSA), an influential group and potential Clinton ally, shrieked as if the sky were falling. "We don't think of the IRS as a student-friendly organization," huffed Pronita Gupta, USSA's legislative director. "Their mentality is 'collect first, ask questions later,' and we didn't see that as particularly helpful." Helpful to deadbeats, no, but the student group's opposition powerfully dramatizes one of the IRS's great strengths: It will deliver on collections as long as a borrower files a tax return--and virtually everybody does that.
Students who default because they don't have the money needn't worry about IRS persecution: The income-contingent option protects them. (And with Education cracking down on two-year schools which don't provide students with decent educations, far fewer students will have reason to resent paying back loans in the first place.) The IRS would just be tracking down those students who can pay but are choosing not to. Already, an agreement to have the IRS garnish defaulters' tax refunds has brought in $2 billion over three years.
Despite the idea's intrinsic good sense, the IRS was--in fact, still is--reluctant to take on collections, thinking it would mean a blizzard of more work. But it wouldn't. "There's already a space on the 1040 for 'extra taxes,' and those who owed payments would fill out a line on W-4 for additional withholding," says Joel Flader, a congressional aide who has studied the issue for years. IRS income data would make calculations much easier; its clout would make defaults much rarer.
Nevertheless, IRS bureaucrats conveyed their resistance to friendly staffers on the House Ways and Means Committee. The Ways and Means staff was sympathetic, because it in turn wanted to keep its power over the IRS instead of ceding oversight control to the House Education and Labor Committee, which oversees the entire direct lending program.
Ways and Means' decision to protect its turf should have set off Clinton's alarm bells. But the arm of the administration in the best position to fight for the IRS collections--the Department of Education--also wanted to hold on to its authority to oversee collections. "The Education people saw a piece of their action slipping away, so they jumped up and said all this needed 'further study'" says a Democratic congressional staffer. In late July, the conference committee on the president's economic bill jettisoned the IRS provision. In its place, the committee authorized "further study," with a report due back from an IRS/Education team in six months. (That would have made it due around February 1994; now, the administration has put it off until June while insiders say the IRS makes a case that it's too complicated, and Education nods in agreement.) Meanwhile, Education is contracting out collections or doing the job itself.
What's so bad about that? After all, even without the IRS, the feds doing 60 percent of the lending--which is the current plan--should save more than $4 billion by 1998. (In effect, Education will act as a bank, lending money directly to students.) What's so troubling is there are still billions more to be had if the default rate can be cut--the task for which the IRS is especially suited and Education is uniquely unsuited.
The General Accounting Office, for example, has repeatedly criticized Education for loan mismanagement. Education lost 33 percent of its personnel during the Reagan and Bush administrations, and the ones who are left have made a mess of many of the programs they are charged with overseeing. "The department has always been a thinly staffed, low-prestige agency with suspect administrative skills," says one veteran higher education lobbyist. In other words, these are the last people we want administering billions in loan collections. After all, these are the bureaucrats who, to take just one example from a February New York Times series on Education's mismanagement, failed to notice that Anthony Russell, a University of Miami athletic administrator, falsified $220,000 in grant applications to finance his crack habit. Even David Longanecker, the assistant secretary for post-secondary education, acknowledges that the department does not expect the default rate to decline significantly unless the IRS takes over.
But until Clinton gets his administration in order and fights off the wealthy private interests, that's the system we're stuck with. And that is especially sad considering how far he has already come. Saving money from the program--IRS collection could bring in an additional $1 billion a year--frees up money for grants, lower interest rates, and lower fees. The IRS may have its problems, but at least it's in the business of collecting money full-time.
Any long-term solution to the high cost of higher education involves keeping tuition down. One answer may be to have a federal agency report on the number of undergraduate hours taught by full-time faculty and publish itemized accountings of how much of each university's dollar goes to administration. That way, if universities aren't interested in economy just to do the right thing, at least there would be the threat of having potential consumers knowing where the money goes.
This is a case where the country has a problem (inefficient student lending), a solution (what has already passed, except for the IRS provision), and a president who understands both. The next time Clinton brings the subject up, he should tell both his own Education Department and his IRS to give up their opposition to his own initiative. What's at stake is nothing less than the government's credibility to run a program that has a direct, tangible social benefit--making college available to more people by saving money on loans, and enabling borrowers to do useful but low-paying work without fear of defaulting. But without the IRS around to catch the deadbeats, Washington's credibility will also be stuck in hock.
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|Title Annotation:||new student aid program proposed by Bill Clinton|
|Date:||Apr 1, 1994|
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