Elite Colleges Exploit Federal Loan Programs

In The Dark Knight(2008) Joker burns a pile of cash, which is illegal in  the US. This little detail implies that Joker might be a bad person.:  shittymoviedetails

Much digital ink has been spilled denouncing for-profit colleges for getting students to take out federally subsidized and backed loans to enroll in academic programs that fail to improve students’ earning potential enough to repay the loans. Students are left worse off financially and taxpayers are left with the unpaid student loans.

Well, exploiting federal student loan programs is not just for fly-by-night for-profits. Seemingly respectable elite colleges have also figured out how to generate cash from this racket. The Wall Street Journal has a piece listing masters degree programs at selective colleges where the median student debt far exceeds annual salaries two years after graduation. As the Journal reports:

Lured by the aura of degrees from top-flight institutions, many master’s students at universities across the U.S. took on debt beyond what their pay would support, the Journal analysis of federal data on borrowers found. At Columbia, such students graduated from programs including history, social work and architecture….

At New York University, graduates with a master’s degree in publishing borrowed a median $116,000 and had an annual median income of $42,000 two years after the program, the data on recent borrowers show. At Northwestern University, half of those who earned degrees in speech-language pathology borrowed $148,000 or more, and the graduates had a median income of $60,000 two years later. Graduates of the University of Southern California’s marriage and family counseling program borrowed a median $124,000 and half earned $50,000 or less over the same period….

Highly selective universities have benefited from free-flowing federal loan money, and with demand for spots far exceeding supply, the schools have been able to raise tuition largely unchecked. The power of legacy branding lets prestigious universities say, in effect, that their degrees are worth whatever they charge….

Debt counselors recommend students not borrow more than they will earn right out of school. Yet about 38% of master’s programs at top-tier private universities in the U.S. failed that test, according to the Journal’s analysis of salary data for graduates from the 2015 and 2016 classes, the latest available.

At for-profit schools, a common target of regulators for high student debt and poor job prospects, 30% failed to meet the debt counselors’ advice.”

When confronted with this type of failure, where government subsidies fuel rent-capturing, the natural inclination of the technocratic class is to double-down. When reckless federal debt becomes burdensome, they advocate loan-forgiveness. When institutions become savvy about how to grab federal cash, they propose excluding those kinds of schools from the subsidized loan programs. Somehow, it fails to dawn on those proposing these solutions that forgiving student loans might encourage irresponsible borrowing by students and the desire to exploit federal programs is not limited to for-profit institutions. For-profits may only appear more inclined to game the system because they are more efficient in their operations. The others lag not out of virtue but out of incompetence. As the WSJ article illustrates, eventually virtually all universities will grab the federal cash at the expense of students and taxpayers once they figure out how to do it.

Rather than doubling down on debt-forgiveness, regulation, and ever expanding loan programs, policymakers might consider turning down the spigot of cash into higher ed in the hopes that less money sloshing around might encourage more responsible behavior.

One Response to Elite Colleges Exploit Federal Loan Programs

  1. Greg Forster says:

    Reminds me of this 2009 post on the ten-step process by which we move from free market to government monopoly in each sector of society.

    I noted in that post that Congress was in the process of taking step 8 on federal student loans. On college tuition generally I think we have been on step 5 for a long time, moving gradually toward step 6 (the process, while uniform, is not necessarily a rapid one).

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