What’s really causing the student debt crisis, according to Sheila BairThe Honorable Sheila C. Bair
(Market Watch) – When Sheila Bair took the helm of Washington College in Chestertown, Md., earlier this year, she noted that a small liberal-arts college about 75 miles east from Washington, D.C. isn’t where her friends and colleagues expected her to end up. Before assuming her role at Washington, Bair worked in finance and economic circles for decades, most famously as the chair of the Federal Deposit Insurance Corporation during the financial crisis.
But Bair’s economic background certainly influences her new job. In her inaugural speech in September, she highlighted the financial concerns dogging students as they enter and graduate from school. MarketWatch spoke with Bair about student debt, college affordability and her plans to address these in her new role. Below are some of the biggest takeaways from our talk:
One of the biggest causes of the student debt crisis is that Americans haven’t seen a raise in years
“You have this dynamic of declining real wages and an increased need for a college degree,” she said. “And so what you end up having is more and more young people applying to college with fewer families able to pay for it.”
Between 1980 and 2013, middle-class workers have seen their incomes barely budge, and low-wage workers have actually seen their incomes decrease, according to the Economic Policy Institute, a left-leaning think tank. At the same time that Americans have less money to pay for college, a degree has become an increasingly important ticket to the workforce. The gap between the earnings of high school and college graduates hit a record high in 2013 in large part because the wages of high school graduates have dropped off precipitously over the past few decades.
Without the money to pay for school, Americans increasingly turned to borrowing—and the government made it easier for them to do so
The origins of the student loan crisis have parallels to the origins of the mortgage crisis, Bair said. In both cases “very well intentioned” government programs made it easier for Americans to borrow for housing or school without getting a true sense of whether borrowers will be able to repay those debts.
“Debt is not the answer; real wage growth is the answer” to Americans’ inability to afford homes or degrees, Bair said. “The baby boomer generation has just been too easy to default to the financial sector and credit to get things that we want without focusing on real economic growth.”
Despite the good intentions of these government student loan programs, bad actors took advantage
Over the past several years, various federal government agencies and state law-enforcement officials have accused many for-profit college companies of using heavy advertising and inflated graduation and job placement statistics to lure students into taking on loans. The increase in the percentage of students borrowing to attend for-profit college — and two-year community colleges to a lesser extent — accounts for a large share of the growth in the number of students struggling to pay off their loans or not paying them off at all, a recent Brookings Institution studyfound.
“There needs to be more accountability by schools who have been taking advantage of these kids, It makes me very angry,” Bair said.
She noted that The Obama administration is working to crack down on these issues, she added. Earlier this year, the government implemented its gainful employment rule, which requires for-profit colleges to prove they’re preparing graduates to get a job in order to continue to receive federal financial aid funding.
Bair said she’d also like to see schools with high default rates forced into some kind of risk-sharing arrangement. One version of this proposal appears in a bill proposed by a pair of bipartisan lawmakers earlier this year. If implemented, colleges would be required to give the federal government a share of some of the federal loan dollars their graduates aren’t paying back. Democratic presidential front-runner Hillary Clinton endorsed this proposal as part of her college affordability plan.
Right now, the bad actors in the college space have “misaligned” incentives, Bair said. Their aim is to enroll as many students as possible in order to get the federal loan dollars that come with them, “and if the kids can’t pay it, they don’t care. It’s not their problem, it’s the taxpayers’ problem,” she said.
Some kind of risk-sharing arrangement could get these schools focused “on whether they’re giving kids an education that will lead to a degree that will help them land a job that will help them pay these loans back,” Bair said.
But even good actors can do more to make sure students aren’t going into unsustainable debt to get their degrees
One way colleges have tried to help less wealthy students avoid college is by raising the so-called sticker price of a school in hopes that upper-income students will pay that price and give the schools more room to subsidize students who can’t afford to pay much for their schooling.
This strategy hasn’t really worked, Bair said; even as colleges’ sticker prices grow, the amount of revenue schools have been earning from tuition has remained flat over the past 13 years if you adjust for inflation, according to Inside Higher Ed. “It is this self-defeating cycle that I think we need to break out of,” she said.
Instead, Bair said, schools should “hold the line on costs” and think critically about every non-faculty expense and whether it’s necessary. At the same time, they should focus on fundraising for scholarships so that students can rely more on money they don’t have to repay and less on loans.
Washington College also has two less-traditional programs aimed at helping students attend college and graduate with manageable debt. One, called “Dam the Debt,” is a fundraising campaign with a goal of bringing $1 million in scholarship funding that seniors of all income levels could tap to pay down their debt once they graduate. The second, “George’s Brigade,” allows first-generation, low-income students to apply to college as a group and give them full financial aid once they arrive at college (if they get in).
Parents who can afford to save, should do so
Bair was lucky enough to graduate college and law school debt-free thanks to help from her parents who saved for her schooling and her own contributions through working while in school. “I was blessed,” she said, noting also that tuition costs were lower when she was in school.
Still, she’s trying to give the same opportunity to her children. One has already graduated college debt-free and she’s confident she’s saved enough for her other child, who is headed to college in a few years, to graduate debt-free. Bair said she knows not all parents have the financial capacity to save enough to send their kids’ to college, but she offers an appeal to those that do. “Save it for your kids. What better investment could you make?” she said.