Colleges should share the pain of student loan defaults: Charles Wight at TEDxWeberStateUniversity


Translator: Michał Sajda
Reviewer: Leonardo Silva Thank you. College is expensive. Especially for students. And it’s getting
more expensive every year. As State Governments struggle
to balance their budgets, students are picking up a larger share of the total cost of their education, in the form of increased tuition. The Federal Government
is helping out with grants and low-interest guaranteed student loans but we should always realize that with these great opportunities
come great risks. The total amount of outstanding
student loan debt today exceeds 1 trillion dollars. That’s trillion, with a ‘T’. It’s a one, followed by twelve zeros. It’s a staggering amount of money, especially when you consider
that it’s borrowed largely by teenagers, fresh out of high school, with lots of promise
but very little credit history. Then, Three-Year National
Average Default Rate on this money is now 14.7%. This is a really scary number
and it increases every year. There’s every reason to believe that we’re looking at just the tip of a student loan default iceberg. Now colleges and universities
use the first part of every student loan to satisfy tuition and fees, before we pass the rest
on to the student for living expenses and books. This is money that pays
operating expenses at colleges, it pays faculty and staff salaries, it funds our retirements. Universities have
a very strong vested interest in maintaining
a healthy student loan system. Consider this, one of the greatest threats
to higher education today, is the possibility that student loan
programs might be discontinued, as a result of high default rates. Without student loans, many students, many students, would be locked out of higher ed entirely. And romance would fall, universities would close. And ultimately, the global
competitiveness of the United States would go into a tailspin. That’s why universities must take more responsibility
for loan defaults of their students. We got to have some skin in this game. So here’s a simple idea, what if every time a person
defaulted on a student loan, the college or the university
were required to pay a percentage of the outstanding balance back to the lender. The percentage could be equal
to that college’s three-year cohort default rate, as published by
the US Department of Education? So I’m going to run through
a couple of examples here just to make a couple of points and we’re going to do
some loan default math, but I promise it won’t hurt very much. So the River State University currently has a three-year
cohort default rate. of about 9%. So if one of our former students
defaulted on a loan that had an outstanding balance
of ten thousand dollars, we would pay 9% of that
back to the lender, or about 900 dollars. But look what happens
to a similar university with an 18% default rate. The penalty for that university
would actually be 3,600 dollars, or four times the amount. Why four times? Well, the default rate is twice as large but also, on average, they would have twice as many defaults. So when you multiply
those two things together, you could a 4x penalty,
instead of a 2x penalty. OK? That way, the overall penalty that institutions would pay scales roughly as the size
of the institution, that’s right. But it would scale as the square
of the default rate. Ok? That’s a subtle point. So institutions that are responsible, that graduate students well, that teach them financial responsibility, will pay a relatively small penalty. But those that don’t
will pay much, much more. It’s a way that we can all share the pain when our students falter. But some institutions would share
much more pain than others. Now there seems to be some
strong support for this idea. Last December, Senator Jack Reed, from Rhode Island, introduced legislation, Senate Bill 1873, that would create
an institutional risk solution that’s somewhat similar
to the one I’ve just described. He and fellow democratic Senators Richard Durban and Elisabeth Warren are very strong supporters
of student loan reform. But this is not a partisan issue. Alex Pollock, from the Conservative
American Enterprise Institute, also believes that universities
should share a percentage of that responsibility
for loan defaults of their students. Now, a large part of this conversation centers around
private for-profit universities. Why? Well, Senator Richard Durban
puts it this way: you really only have to know
three numbers to understand the role
of for-profits in this mess. The first number is ten. About 10% of high school graduates attend for-profit universities
and colleges. OK? The second number is twenty. 20% of all federal financial aid
goes to for-profits. That’s about twice as much
as you would ordinarily expect. Why? Because it’s expensive. The third number is 47. 47% of all student loan defaults are associated with for-profit
colleges and universities. So, even though the for-profits only enroll about 10% of students they account for about a half
of the overall problem. So that means that whatever solution we come up with
to solve this loan default issue, we must ensure that
responsible colleges are treated fairly, but those colleges that are irresponsible, that have predatory practices
with students and settle students
with tens of thousands of dollars of debt that could never repay, those institutions have to be put
right into the hurt locker. So how would institutions respond to high penalties for high default rates? Well, we’d see a lot more attention
paid to keeping tuition affordable, that’s for sure. You’d see need-based scholarships, especially scholarships
that incentivize students to maybe not take that extra loan that they would otherwise qualify for. You’d see focus on student’s success, because graduates have lots more
earning potential, on average, to repay loans than dropouts do. And you’d see the advent
of strong financial literacy programs at institutions,
so that students can make wise, well-informed choices
about their borrowing. Now colleges currently
don’t have a lot of control over the way that students borrow. And so, you’d see colleges
pushing for creating institutional policies
that govern learning. For example, some colleges might actually
prevent their students from taking federally
guaranteed loans, entirely. But other colleges, most others,
would do things like stretching out
loan eligibility for students over the time period which corresponds with their intended program of study, so that students
don’t fall short of financial aid before they have a chance to graduate. Right now is the time to solve this trillion dollar mess. The Congress is beginning
to consider the re-authorization of the Higher Education Opportunity Act. This is the law that governs
student loans and other programs. If you agree with Jack Reed,
and Alex Pollock and others that universities should share
a portion of their responsibility for student loan defaults, then write to your Congressman,
write to your Senator, tell them about it. If they’re tech-savvy,
give them link to this presentation. I know that asking colleges to take a financial hit for students
is a tough sell. I know this.
(Laughter) But if we all pull together and get loan default rates under control and build a strong and healthy system of student financial aid, then students’ futures
will be a trillion times brighter. That’s trillion, with a “T”, twelve zeros. My name is Chuck White and I serve as President
of Weber State University in Ogden, Utah. Thank you. (Applause)

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