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Student loan subsidies can have dangerous and unintended side effects

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The centerpiece of the student debt relief plan President Biden announced last month is his decision to cancel up to $20,000 per borrower in federal loans. But a more far-reaching and, over time, more costly element of the president’s strategy is the blueprint for a revamped income-linked repayment plan that will significantly reduce the amount many borrowers pay each month.

However, it can have unintended consequences. Unscrupulous schools, including for-profit organizations, have long used heavy-handed sales tactics, or outright fraud and deception, to incur more debt than students could reasonably expect to repay. By offering generous education subsidies, governments may be creating perverse incentives for both schools and borrowers, who may begin to pay more attention to the actual price tag of education and pay more tax. who may be left with more bills.

“When people have as much or more debt to pay off, the burden is only on taxpayers,” said Daniel Gibel, lead attorney for the advocacy group National Student Legal Advocacy Network. says.

Experts are particularly concerned about how the new grants could be manipulated by for-profit universities. Many of these universities have a track record of persuading people to take on large amounts of debt for a degree that often fails to deliver the revenue boosts that the schools advertise.

A 44-year-old first-generation college student, Sharon Arnold entered the University of Phoenix in 2009. Because she saw higher education as a way out of the $12 an hour service industry. She was drawn to the school’s online program for adults and an advertisement promoting a job placement service.

Pell’s grants and federal loans financed her tuition, but a bachelor’s degree in human services management four years later didn’t improve her job prospects. She was reluctant to take on more debt, but her career counselor encouraged her to pursue her MBA. She said she was told that having her MBA would improve her earning power and that the school is affiliated with major employers, giving it priority to recruit graduates.

But once again, her job search was fruitless. Arnold, who lives in the Oklahoma City suburbs, earns $16 an hour in hospitality jobs, and it’s been more than a decade since she enrolled at the University of Phoenix, where she owed $126,000 in student loans to the government. I’m here. Because of her debt, she and her husband were unable to obtain mortgage approval to purchase the house.

Ms. Arnold’s alma mater has long been in watchdog sights for what they said was a pattern of deceptive claims. and settle government lawsuits over illegal tactics such as tying recruiters’ salaries to the number of students enrolled and running deceptive marketing campaigns that falsely claim partnerships with large corporations. Did.

The University of Phoenix is ​​on a list of 150 schools that the Department of Education said had shown strong signs of “serious misconduct.” (The list is part of a legal settlement reached by the department in June to cancel $6 billion in federal student loan debt for 200,000 borrowers, including Arnold.) Still open for business. It is eligible for federal student loans and relies on federal student loans for nearly all of its income.

Andrea Smiley, spokeswoman for the University of Phoenix, said the school is “proud of all 1 million alumni, offering guaranteed tuition, academic and career coaches, lifelong career services, and We have a number of commitments, including 24/7 online support.”

She added that she “absolutely” did not agree with any suggestion that the school had ever acted inappropriately.The University of Phoenix did not comment on the Biden administration’s plans to cancel loans.

Biden’s new plan could increase incentives for schools to take on students unfair amounts of debt, experts say.

“Debt cancellation and income repayment cannot stand alone,” said Sarah Sattellmeyer, director of higher education projects at the think tank New America. is needed.”

Previous efforts to curb underperforming institutions have been derailed by lobbying, lawsuits and shifting political tides. Government’s most powerful hammer — a regulation introduced during the Obama administration known as the “paid employment rule” — cuts off federal aid money to for-profit schools whose student incomes are too low to repay their loans. threatened to do so — by Betsy DeVos, who served as secretary of education under President Donald J. Trump in 2019 when was abolished.

New subsidies may also make students less prudent about taking on large amounts of debt. The Department of Education has yet to release details of Biden’s new repayment plan, but the outline Mr. Biden released last month was designed to increase funding for higher education, especially bachelor’s degrees, by increasing the burden on taxpayers from borrowers. have the potential to transform

Jason Altmire, Chief Executive Officer of Career Education Colleges and Universities, a trade association representing for-profit colleges and universities, said: take on more debt. He criticized the Biden administration’s income-driven plan, saying it “does nothing to disrupt and cut college costs.”

About 45 million people owe the government $1.6 trillion in student loans, with an average balance of about $37,670. Currently, borrowers who choose an income-linked payment plan must typically fork 10% or more of their discretionary income, defined as all income above 150% of the poverty level.

Biden wants to raise minimum wage to protect income up to 225% of poverty level, reduce undergraduate loan repayment rate to 5% of income, and stop charging borrowers with monthly payments interest I hope As with existing income-driven plans, the remaining balance is waived after his 20 years of payment at the longest.

Taken together, these changes will result in millions of borrowers paying little or nothing on their loans. But what is not paid will eventually be absorbed by the government. This is a dangerous proposition in a system already rife with abuse.

With billions of dollars potentially at stake, schools accused of cheating are so eager to fight back that it can take years for even the most nefarious actors The government relies on independent accreditation bodies to ensure the quality of schools, but schools that have lost accreditation are accredited.

Jonathan Greater, a law professor at the University of California, Berkeley, said government options for dealing with school misconduct have never been “preventive—they work after the fact.”

“It would be nice to have a regulatory system that could actually prevent harmful behavior, but it is surprising that there is no more demand for it,” he added.

In a written statement, the Department of Education said the Biden administration “is committed to preventing future student debt crises by holding universities accountable when they put students into heavy debt or deprive them of good jobs.” I am doing my best,” he said.

The department said it was rebuilding the federal student aid unit’s executive team, which was recently dismantled by Mr. DeVos, and would crack down more aggressively on accredited individuals.

Aaron Ament, who worked on law enforcement issues at the Department of Education during the Obama administration, said it was a starting point, but agencies needed to act faster. hopes for the revival of

“This rule is one of the first accountability measures we need to take to weed out failed programs,” said Ament.

Arnold, a University of Phoenix alumnus, is proud of his degree, but in hindsight, he wouldn’t have been in so much debt if he knew how unrewarding his research would be financially. She said it wouldn’t have happened. “I’ve been working hard and putting hours into my education, but I also wanted a good return on my investment,” she said.

The University of Phoenix wants her back. She sent her an email last month saying she was offering a scholarship of up to $3,000 if she returned to pursue her doctorate. Arnold declined the offer.