student loan default

thank you. college is expensive. especially for students. and it's getting more expensive every year. as state governments struggleto 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)