Unholy Matrimony

Empty-Wallet

As another school year starts, the flow of resources into universities in support of educational opportunities for students deserves careful assessment.

The shuttering of for-profit universities — witness Corinthian Colleges and Anthem Education; the staggering $1.2 trillion in student debt; the increasing delinquency rate on student loans with over one million students behind in payments; the $2.76 billion in contracts let by the federal government to collect student loans since 2012;  Sally Mae’s transfer of its student loan responsibilities to Navient, and federal loan servicer contracts passing $2 billion this year collectively demonstrate a cavalier attitude towards the costs of university attendance and a profiteering approach to the treatment of borrowers, by lenders and learning institutions.  This is a financial crisis.  It is deplorable.  However, the crisis of frittered trust and squandered confidence in an educational system that was the envy of the world is being given away in a few decades.  It took a few centuries to earn.  This is calamity squared.

At the heart of the matter is the façade of a public service marriage of banking and higher education providing educational opportunities to hopeful students and families. The sales pitch is the promise of a better life.  It is creating a generation of stepchildren who can’t find jobs and can’t pay back loans.  This is an unholy matrimony.

Exacerbating this broken relationship between lenders and learning institutions is the protection from failure provided to all but students through federally insured loans. A Ménage à trois of sorts. Poor lending decisions would normally be filtered out in an open market where failed colleges and/or students would target losses to lenders. The recent Corinthian Colleges restructuring was engineered by Bank of America, the Colleges and the federal government.  It saved all but students from a leadership and operational morass that should have been borne by lenders and/or failed students.

Students are the “illegitimate children” of this treacherous triangle of lenders, learners, and elected leaders.  Students are left holding the bag: frequently no degree, little durable education, and lifelong indebtedness — a Bermuda triangle.

I want to say Caveat emptor (Buyer beware.)

Bankers wouldn’t lend much money for Yugos, a product of Zastava Automobiles, whose production was stopped during the wars in Yugoslavia.  The cars were second rate.  Scrap metal with a window sticker proudly pronouncing MPG. Why don’t bankers make the same value judgments regarding lending for education?  Yugos are the automotive equivalent of junk bonds, and unfortunately similar to a good deal of education lending.

If banks exercised thoughtful reflection and standards of performance on college lending practices, many students would not be able to borrow money for the education they seek until they have earned the right by performance to pursue it.  The causes are three: lack of preparedness on the part of the student, doubtful ability to repay loans based on earning potential, or a lack of confidence in the university offering the degree. Another triangular twirl:  A Pythagorean Theorem of lending/learning practices.

Federal guarantees shield lenders from responsibility — they take the money and run.   The assurances are based on the aspirational opportunities of an educated citizenry for a better democracy and a more robust economy.  Federally insured student loans are perceived to be in the national interest.  So were housing loans at the outset of the housing bubble. Currently, bank repossessions of homes are at a four-year high.

Banks produce profits from student lending while protected from any real risk or responsibility.  Collection agencies also profit as do loan servicers.  Most troubling is that faculty and university pension funds invest in companies that benefit from ill-conceived student borrowing.  The interests of the university and its personnel are frequently connected to predatory lending practices that benefit everyone at student expense.

There should be clarion call from university leadership for students to borrow carefully if at all and for families to investigate lower cost approaches to education. There should also be courses from community colleges or reputable online distance education providers, or dual credit enrollment while still in high school.  Cost benefit ratios would increase.  If that is too business-like in an educational context, look at the nature of “higher education business” right now.

Institutions that respond to this predicament will win in the end. Honesty and transparency regarding the value of a university education will endear institutions to students and families. Decisive and bold leadership is required to replace crass educational practices with correct student centered thinking in the 21st century.

Universities that put anything between the student and educational purpose undermine themselves.

Image Credit:  www.flickr.com

 

 

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