PhillyDeals: What's wrong with Obama's student-debt plan

The rising cost of college drew new attention, but some experts said the president's ideas do nothing to cut costs.
The rising cost of college drew new attention, but some experts said the president's ideas do nothing to cut costs. (DANIEL ACKER / Bloomberg News, File)
Posted: August 26, 2013

President Obama complained last week about the rising cost of a college education and student debt.

Isn't that kind of like the chief pirate complaining merchant ships are getting scarce?

The price of anything that's privately built but heavily U.S. taxpayer-funded - weapons, medicine, colleges - tends to rise faster than stuff that trades more or less competitively, like tomatoes or scrap metal.

Obama's response: By 2015, he wants U.S. taxpayers to subsidize schools, based not just on how much they charge, or whom they let in (the poorer the better), but also on how much money their graduates make.

Will this really slow tuition hikes?

"The federal government should keep its fat fingers off curriculum choice," says Al Lord, former head of the Wilmington-based college lender Sallie Mae.

"America's higher-education establishment prices its product to meet demand," he told me. "They charge big numbers because they can. Microeconomics 101.

"Who really created the debt? The Obama administration has pumped more federal cash into higher-ed in each of the last four years through loans, and now laments that educators raised tuition to get that money.

"The money comes with the promise that if the student can't pay it back, the government will forgive it."

The college gets paid either way. Result: Only about six in 10 college borrowers whose loans have passed their first payback date are repaying on schedule, according to the Consumer Financial Protection Bureau.

What would Lord do differently?

Make colleges pay a few percentage points of the loss on each unpaid loan, as private lenders used to do before the government took over most student lending. "That would make universities more mindful," says Lord, "about graduation rates and curricula content."

Require students to start making small loan payments while they're still in school. That practice "has reduced default greatly" at Sallie Mae.

"Market-price" and "underwrite" loans by checking borrowers' income and prospects of repaying.

Government has a role making "those loans the private sector will not make," Lord says. But even those students should pay something like market rates and have to start paying back quickly.

If it sounds "hard-hearted" to tighten the rules, Lord says, that's what we'll need if we're serious about reining in the cost of college education.

Joseph G. Trainor, chief financial officer at University of the Sciences during its recent expansion, who recently took a similar post at Wistar Institute, says he appreciates Obama's intentions. But he has seen too many proud families - from poor school districts that sometimes don't prepare bright students well - take on more debt than they end up paying back.

Trainor says people whose schools haven't prepared them for college should spend time at community colleges before trying for a four-year degree - as Delaware does in forgiving tuition for successful community college students and transferring their credits to the University of Delaware.

There's also concern that Obama's measurements, like President George W. Bush's grade-school benchmarks, will become a high-stakes game that distracts from teaching.

"Finding a set of measurable variables," said Joseph A. DiAngelo Jr., head of St. Joseph's University's Haub School of Business, "that apply to all schools - private, public, research-based, comprehensive, technical, and the liberal arts - will prove daunting and, I would suspect, unmanageable."


Contact Joseph N. DiStefano at 215-854-5194 or JoeD@phillynews.com, or follow on Twitter @PhillyJoeD.

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