The Center for Financial Literacy provides invaluable service towards teaching millennials like us the fundamentals of personal finance, particularly as it comes to student loan management, while also conducting hugely informative studies on the status of financial education across the good ole U-S-of-A.
Our conversation with Pelletier covered a lot of ground across financial management, debt and education, so the interview was broken up into two parts.
Part one focuses on the lack of financial management knowledge and the moral obligation of learning institutions to provide proper education.
Part two below focuses on the government’s role in the student debt crisis.
Pelletier’s analysis of the government’s role in the student debt crisis spans three core pillars: a flawed use of student loans as a revenue generator, subsidies for colleges that fundamentally fail their purpose, and the challenges faced by state universities post-Great Recession.
Considering the interest rates the federal government charges students, Pelletier points out that the “big, bad banks” look like charity houses by comparison.
On the government side, it’s pretty straightforward. Once the government assumed all student loans and not private entity, the spread of all student loans goes entirely to the government.
Talking about the spread for a bank as it relates to a 30-year mortgage, the spread is about 3.75 percent, assuming you have good credit. The irony is that the “big bad banks” make less money on a 30-year home mortgage than the government makes on a 10-year student loan.
They call it subsidy income. God forbid it should be called profit.
From Pelletier’s perspective, the need for immediate reform is dire.
I’m in total agreement with Liz Warren on this in that student debt should not be a profit center for the federal government. We’re creating a tax on people who borrow from the federal government to go back to college.
It’s all about reducing interest rates on student loans. In a perfect world we need to cover the cost, so we do need to assume some level of default, that’s a reality.
But this is an area where Economics 101 would tell you investing in education makes sense. We need to reduce this interest rate to a reasonable level, maybe one percent over a 10-year loan.
The government netting 66 billion in profit isn’t right. These kids are going to pay taxes right? Why are we adding this hidden interest rate tax?
While the government is effectively bilking students for profit, it is also propping up underserving institutions.
Education entities that do not deserve federal funds need to be cut off. If people look at recent student loan data, and the Wall Street Journal did an analysis recently, there’s a variety of colleges with outrageously high default rates, the kids coming out below the national average in terms of employment and low wages.
For some of these private colleges, this is corporate welfare. Why are we spending money propping up these institutions that are not achieving objectives – skills, jobs, decent wages?
Pelletier also points out the burden that compliance regulation places on colleges and how that burden is then transferred onto student costs.
Vanderbilt did a study of just complying with federal regulations. There’s a lot of cost just trying to not get into trouble with the federal government or an accreditation agency. The estimate puts it around $20 to $30 billion per year, running anywhere from four to 11 percent of college expenses.
The Great Recession pointed out some serious flaws in the financing of our higher education system and Pelletier argues it’s time to consider more dramatic changes.
[Free tuition] might be a way to keep the costs much lower. What happened in the Great Recession was states had horrible deficits and they ended up having to plug holes. They just reduced or stopped increasing funding to state-funded colleges and universities. Colleges can’t keep costs flat year-over-year without cutting services.
The important number is the net cost, not sticker price of college costs. The actual cost of tuition hasn’t gone up as dramatically as the sticker price, it’s actually been pretty reasonable for private colleges. It’s skyrocketed for public colleges.
For example, if health care costs rise five to six percent per year, and keeping in mind the number one cost of colleges are personnel costs, how do the colleges keep the cost down without transferring the burden onto their employees?
I don’t think it’s just as simple as not increasing student loans. The collegiate system is one ripe for innovation, but frankly the same price issues are happening at the K-12 level, it’s just a different bucket.
If you want to wring efficiencies out of something you need to make changes.
This interview has been lightly edited for formatting purposes.