Why are repayment rates and median debt loads so prevalent in the discussion of higher education outcomes? More importantly, what will it mean for your school? With $1.5 trillion in student loans currently outstanding, the focus on student debt loads and the repayment of that debt has moved to the forefront of the Higher Education discussion. In recent years, unsecured student debt has surpassed all other forms of consumer debt, such as credit cards and auto finance, to become many household’s greatest obligation, only exceeded by mortgage loan debt.
With the last $1 trillion of the balance having been created in a little over a decade, the student debt debate has taken center stage in all walks of life, from families sitting around the kitchen table debating their children’s future to 55-year olds wondering how Parent Plus loans will affect their retirement. The discussion has also found its way to the heart of the 2020 Presidential campaigns and is a centerpiece of Higher Education Act (HEA) Re-authorization and Trump Administration policy discussions.
With this as a backdrop we will now turn our focus to three specific reasons why Christian Colleges and Universities should be very focused on these metrics.
The need for borrowers to repay their debt obligations is a generally accepted concept under most circumstances.
Parents and/or students being able to pay for the education they receive is rarely debated as a positive and necessary outcome. What politician, family or school administrator is going to take an alternate position to this? There may be heated debates on the best delivery and funding models for Higher Education, but at the most basic level, if families are going to borrow to pay for the cost of attendance, then there has to be a pathway to successful repayment.
However, according to remarks from Secretary of Education Betsy DeVos, in November of 2018 at Federal Student Aid’s Training Conference, “only 24 percent of outstanding Federal student loans are in a repayment status that is paying down both principal and interest.”
Additionally, based on College Scorecard metrics less than half of undergraduate borrowers have paid down $1 or more in principal on their loans within the first 3-4 years after leaving school. Based on our review of published Scorecard data, for Christian institutions this metric is about 60%.
In order for these outcomes to improve, schools, families, and the sources of capital are going to need to work collectively before, during, and after school to see improved stewardship and outcomes.
Debt and Repayment metrics will become part of the legislative, regulatory and consumer disclosures in the near future.
The re-authorization of the Higher Education Act can always be unpredictable, which is why it generally only occurs every 10–15 years (despite being statutorily required every five years).
However, all four of the current major HEA Congressional platforms (House/Senate Democratic; House/Senate Republicans) are all focusing on Institutional accountability to outcomes in key areas like persistence, completion, debt levels and repayment/default. All proposals also contemplate eliminating the historical Cohort Default Rate (CDR) that has been the gold- standard for post-separation outcomes for decades and replacing it with repayment-based calculations.
With consensus that CDR has outlived its usefulness, it’s clear that if HEA is accomplished, new metrics will come with it, albeit the nature and enforcement provisions around those metrics are still far from determined. One area of key importance to stay attuned to is whether these metrics are solely related to disclosure or attempts to create “skin-in-the-game” as it has been cited, by having Institutions guarantee or insure their students’ successful repayment.
In addition to legislative momentum around repayment outcomes, both the prior and current Presidential Administrations have attempted to focus on both debt and repayment as a key metrics from a regulatory disclosure and enforcement perspective. The Obama era Gainful Employment (GE) regulations focused heavily on student debt metrics (albeit isolated to only for-profit college).
When the Trump Administration took over GE, they sought during last year’s negotiated rule-making to have it apply to all colleges. Additionally, the March 2019 Executive Order “Improving Free Inquiry, Transparency, and Accountability at Colleges and Universities,” which received a lot of attention for its focus on free speech on college campuses, actually spent more time talking about consumer information, including a desire to release in 2020 program level earnings, median debt (broken down by — 1) median Stafford loan debt; 2) median Graduate PLUS loan debt; and 3) median Parent PLUS debt) and repayment disclosures (also broken down into these three categories).
The amount of consumer-facing information that is being contemplated by policy makers at an individual program level could be a paradigm shift on how students and families research and select their ideal institution and program of study. Therefore, no matter how you see the political landscape, the need for schools to become well versed in, and prepared for, greater accountability around debt metrics will be incredibly important.
Private Sources of Capital Demand Successful Repayment
Over the past few years there have been many conversations within the Christian Higher Ed community about the need to find additional sources of capital for its students. These conversations range from the simple need to find GAP funding beyond Federal and State aid (following the collapse of the private student loan market during the 2008–2010 credit crisis), to conversations about outright independence from Government-backed Aid sources, like Grove City and Hillsdale did decades earlier. Recent tension around definitions of marriage and gender have only intensified these discussions, with the majority of Christian College administrators having some level of anxiety about future funding sources.
Repayment is the cornerstone of any non-government backed education funding model. Regardless of whether you are talking private loans, Institutional financing solutions, or Income Sharing Agreements (ISAs), the math around repayment must work collectively for the Institution, the borrowers and the capital providers.
If repayments on obligations do not support the economics of the system, then some form of guarantor must step in, or the system will fail. The power of the Federal government and its ability to compel collection via wage garnishments, offset of IRS refunds and other Treasury benefits, the taking of social security benefits, etc., is an impossibly unique system to replicate.
Nowhere else in the world of consumer credit can you have virtually no underwriting, unsecured obligations, substantial entitlements eliminating the obligation to repay and less than 50% voluntary repayments, while at the same time achieving 100% recovery on every dollar lent.
No private model will ever have this amount of leverage. Therefore, in any future-state funding models it will be key to focus on some or all of the following:
- Understanding the drivers of student debt and repayment rates
- Preparing students for successful repayment while they are still in school
- Enhancing post-separation support to ensure that students remain successful stewards through final loan repayment
- Finding partners and sources of capital that align with your Christian worldview
The focus on educational outcomes, including those that go beyond graduation, is only going to continue to increase in the coming months and years. For many years key outcomes like persistence and completion have been prevalent in the Higher Ed conversation. It’s time that post-separation metrics including earnings, debt burdens and loan repayments have equivalent focus.
There is no time like the present to actively engage in these new outcome metrics and what they may mean to your institution going forward.