Student Loans, University Expenses, and Personal Responsibility

The Wall Street Journal (WSJ) recently published an article entitled “Student-Loan Debtors Get Help From Judges” which reported that judges are now using “tools at their disposal” to reduce or cancel student loan debt after years of holding debtors responsible for the money they borrowed and promised to pay back.

One of these tools is asking lawyers who represent borrowers to provide their services for free. Yes, free. Students (legal adults) can borrow money to attend college, promise to pay it back, default on the loans, and the judiciary thinks its ok to ask a third-party (lawyers) to work for free.  Is there anything more absurd?

The article points out that the judiciary used to rely on a three prong test in deciding whether to cancel student debt:

• Was the borrower struggling?
• Will the borrower continue to struggle?
• And, did the borrower make a good faith effort to repay the loans?

Absent a yes answer to all three questions and the borrower was told to repay the loans. Now, the judiciary appears to be putting these questions aside and rethinking the meaning of “undue hardship” which is not clearly defined in the laws established by Congress.

Instead of transferring the hardship on to a third-party (the lawyers representing the borrowers) – which is not really addressing the problem – let’s step back for a moment and look at the two big issues surrounding student debt:  Personal Responsibility and  College/University Expenses.

Personal Responsibility 

When a legal adult takes out loans, he/she signs a promissory note, which outlines the terms of the loan. One party lends the money; the other promises to pay it back based on mutually agreed terms. That part is pretty simple. The process works with home and automobile purchases and even credit cards.

In education, the student made the decision to borrow the money to pay for an education of their choosing in the major of their choice.  Often times, students take on a lot of personal debt feeling the investment (and risk)  is worth the end result and often times it is, especially for business, law, medical, and certain undergraduate programs. But, there are other times, when students take on a lot of education debt and major in a field where the job prospects are dismal, at best…and, this is where part of the problem begins. Not all fields of study are equal in terms of employment and career opportunity.

In 2017, Kiplinger published an article called “10 Worst College Majors For a Lucrative Career” calling out the following majors as less than desirable choices:

• Religious Studies
• Exercise Science
• Music
• Art History
• Paralegal Studies
• Graphic Design
• Anthropology
• Radio and Television
• Art
• Photography

And, the College Handbook also published (2017) the “Top Ten Worthless College Majors of 2017” which included:

• Psychology
• Communications
• Art History
• Music
• Theatre
• Journalism
• Anthropology
• Liberal Arts
• Religious Studies
• Philosophy

The point is this:  people shouldn’t borrow money and major in a field where they can’t get a job to pay back loans. Of course there are no guarantees and a lot of factors contribute to lucrative careers outside of majors (i.e.motivation, interpersonal skills, intellect, etc) but generally speaking, people need to really think about job prospects when choosing a major.

There are those who will argue that a liberal arts education provides a great foundation for people to learn to think and it does if you have the liberty (and financial resources) to take that gamble. But, to borrow $100,000, $200,000, or even $300,000 for a 4-year college degree in the fields above seems like a crap shot, at best.  The bottom line:  If a person is going to take on student debt, study a field that leads to strong career opportunities.

At the end of the day, personal responsibility should be held to the highest standard because the foundation of our culture is based on our ability to trust the contractual system in place whether it’s for mortgages, loans, credit cards, or education loans. If people borrow money and they promise to pay it back then they should make good on that promise.

College and University Expenses

Universities don’t get a free pass on student debt because they contribute to the problem.  I often wondered why tuition skyrocketed over the past 30 years and decided to start looking at the IRS Form 990’s of dozens of colleges and universities and what I found was astounding.  Most education providers are non-profit – both state and private institutions – so they don’t pay taxes but they do pay some very high compensation packages to their staff. They may argue they have to pay these salaries to be competitive but I think the reasons are much deeper and self-serving.

The single highest expense at almost every single college and university in this country is compensation-related costs. Contrary to most thinking, staff at these institutions are paid very, very well.  Look at the University of Pennsylvania where a surgeon at the School of Medicine was compensated $8.4 million, the President was paid $3.3 million, the Dean of the School of Medicine was paid $2.6 million, the Vice Dean was paid $2.1 million, the Provost was paid over $1 million, and dozens and dozens more who were compensated between $300,000 to more than $2 million in 2015.

Or look at Wake Forest in 2016, where the President was compensated $4.2 million, the football coach $1.8 million, the basketball coach, $1.7 million, and the Director of Athletics $1.1 million. These are not outliers,  The point is this:  look at any IRS Form 990 of any college or university and the compensation packages are shocking. The question to ask is: should these people (and it’s not just a few in most cases) receive such high compensation packages?

Full pay tuition rarely covers all the expenses of an education institution because a large portion of expenses rests in the area of scholarships.  Look at Wake Forest (where tuition, room, and board is approximately $70,000 annually) who reported the following information n 2016:

$482 million:  Total Revenue ($391 million or 81% came from program services including tuition, room, and board while $72 million or 15%  came from gifts and grants and $8 million or 2% was from investment income and the sale of securities).

$447 million:  Total Expenses (not including $31 million in depreciation) of which $106 million was for grants – general tuition scholarships.

$1.1 billion:  The balance in the endowment, of which $284 million was restricted.

In essence, full-pay students subsidize the scholarships; the more scholarships that are awarded, the higher the expenses. However, look at the 990 of many institutions and reviewers will see that they also rely on investment income from their endowment (which ironically seems to grow every single year because most colleges and universities do, in fact make money every year).

To solve this problem, the whole system needs to be changed.  Borrowers need to be prudent in their decisions and held accountable for money they borrow; colleges and universities need to look at their own expenses and stop relying on the full pay students to pay high tuition costs to cover the extraordinary high expenses (including compensation and scholarships awarded). And, finally when the whole system is breaking down, judges shouldn’t be asking lawyers to work for free to make up for the actions of others. They wouldn’t work free, why should anyone else?