There are two initiatives that can dramatically change the way college pricing and student debt are being handled under the current system. Both are commonsense solutions that would, if accepted, dramatically help students, graduates and families burdened by the cost of tuition and the loans they take to earn their degrees.
First, income-based loan repayment (IBR) should be the default mechanism for student loans to be paid off. Second, a temporary exemption to federal antitrust laws would allow colleges to speak with one another about a sector-wide reduction of the gross price.
College affordability is driven primarily by price perception, namely the gross price of tuition published by each institution of higher learning. The public has observed price escalations that have moved the total cost of annual tuition, room and board to record highs. It is not uncommon to now entertain a $70,000 annual price tag for schools that charged $50,000 a little over a decade ago—increases that far outpace inflation. Some colleges have attempted to lower their gross price independently, only to find out that they have placed themselves out of line with the rest of the sector. Instead of being perceived as a bargain, most families wonder if there is something wrong, or if the school is not competitive academically.
Federal antitrust laws currently prohibit colleges from speaking with one another about pricing as there is fear of collusion to drive the price up. Several years ago, a group of college presidents met to discuss strategic initiatives, only to find out they were under investigation by the Department of Justice for simply discussing cost. There is now an effort underway to request a one-time exception of the antitrust law so that colleges can determine an across-the-board lowering of gross price for the sector. During the 2016 presidential primaries, I personally asked every candidate from both parties about this issue, only to learn that most of them had no idea that colleges were in fact bound by federal antitrust laws.
The National Association of Independent Colleges (NAICU), of which I am a board member and current chair of its Student Aid Committee, has undertaken an effort to advance this conversation among legislators. If successful, we could conduct regional and national summits on education pricing, and subsequently create financial-modeling systems to address the effect of institutional aid as it relates to discount rates. This would be a major step forward in addressing the needs of families across the country who see the need for a quality education for their children as a gateway to future success in life.
Income-based repayment currently appears as an option for students to select under the federal loan programs. However, fewer than 5% opt for this choice because the default is a fixed rate over a fixed period of time. This should be changed. The variability under the IBR is actually designed to help students in lower-income brackets, especially those who end up in service-sector professions that come with lower salaries early on. If one student obtains a job in investment banking making $100,000 a year and his friend ends up with a teaching position at $35,000 annually, both with $50,000 in loans, they will have the same payment over the same timeframe. Under the IBR, the interest is capped over the life of the loan (so the teacher does not end up paying more than the investment banker), but the banker will pay off the loan sooner because the monthly payment is determined by a percentage of their income.
This system has been widely used in places like England and Australia to great success. The efficiency of these programs can be tied to the automatic payment that is withdrawn from their pay, similar to deductions made by the IRS for tax purposes here in the United States. Such a system could drop the loan default rate to zero, thereby covering all administrative costs for the program. In fact, what is currently a cost center would soon become a profit center.
Addressing the issue of pricing for colleges would dramatically change the perception that institutions are not addressing the rising cost of tuition. In fact, price reductions may incentivize students who are college-eligible but fearful that the sticker price is too high to allow them to follow their dreams.
Income-based repayment would not only address the affordability question, but it would leave more discretionary income available for recent graduates to invest in their future. Saving money to purchase a home, buying a car or saving for advanced education would all be possible if they did not have to spend every last cent on loan repayment.
I firmly believe that these two initiatives would make a tremendous positive impact in the higher education community and assist families in improving the lives of our children, and hope that with this goal in mind, they will be advanced by our legislators in the near future.
Steven R. DiSalvo is president of Saint Anselm College.