Billionaire Mario Gabelli (Trades, Portfolio) started a discussion yesterday on how to resolve the astronomical debt owed by many college graduates, offering some of his own ideas.
The leader of hedge fund GAMCO Investors (GBL, Financial) asked his 13,700 followers for their suggestions as loan balances in the U.S. exceeded $1.26 trillion, more than four times the amount owed 12 years ago. According to the New York Fed, approximately 42 million people in the U.S. have student debt, and the delinquency rate on payments is 11.6%. The class of 2015 had it worst; the average student graduated with $35,051 in student debt, the highest amount ever, according to an analysis by Edvisors.com.
“Look at [the number]…” Gabelli said. “Total debt vs ten years ago… [money] traceable to ‘for profit ed’ ---suggest make payment from pretax [income]… ideas?”
Gabelli said correctly that much of the burden lies not on borrowers who attended four-year colleges, but on students who attended for-profit and community colleges. These borrowers were the most likely to default on their payments, at a rate of 21%. Only 8% of those from four-year colleges and 2% of those from graduate schools defaulted, according to a Brookings Institution paper.
Part of the reason for the disparity, according to the paper, was that attendees of for-profit schools and community colleges fared poorly in the job market, tended to borrow less, tended to come from lower-income families and were less likely to complete their program.
In 2015, the government sought to tighten regulation on the for-profit industry as it fell under increased scrutiny. It started requiring certain schools, such as the University of Phoenix (owned by Apollo Education Group (APOL, Financial)) and ITT Tech (ESI, Financial), to prove their graduates could find “gainful employment” after graduating, and preventing the average student’s annual loan payment from exceeding more than 20% of the student’s discretionary income after graduation.
Students have already begun suing, refusing to make federal loan payments and applying for forgiveness for the loans for degrees they earned from for-profit institutions that closed for failing to meet certain regulatory standards. One college, ITT Tech, closed on Sept. 6 after years of scrutiny for fraud and high-pressure tactics. Another, Corinthian Colleges filed for bankruptcy last year.
But some of the borrowing and default trends may improve on their own, according to Brookings. In addition to increased regulation, more people are choosing to work rather than go to school as the economy and job market improve. From 2010 to 2014, the number of new borrowers at for-profit and community colleges fell by 44% and the number of new borrowers at community colleges fell by 19%.
In his Twitter discussion, Gabelli also offered the idea of giving borrowers a tax deduction for repayment. He then posted a list of other options, including extending the time borrowers have to repay the loan and limiting the amount they could borrow from private lenders. Read the document below.
Potential actions to relieve student loan crisis:
a) Extending typical loan repayment period to 25-30 years (from current typical 10 years) – i.e. aligning the repayment period with the “life of the asset” (education).
b) Tying loan payments to income and mandating a certain percentage of monthly earnings (e.g. 2-4%) to be withheld and directed to loan repayments. There should be a certain pay threshold established that triggers that repayment process (e.g. borrowers pay nothing until their annual pay reaches a certain threshold; the threshold could be different for 2-year, 4-year, and graduate degree holders). The repayment withholdings will be in place until the loan is paid off (but will be put on hold if borrower’s pay falls below the threshold).
c) Establishing limits for total borrowing from private lenders
d) Better education about student debt and providing better disclosure / estimates of future loan payments while students are in school (e.g. providing student borrowers with updated estimates of what their student debt is and estimated future loan payments could be if they pay their debt off over certain period of time after graduation (e.g. select 10, 15, 20, 30-year periods and provide model repayment schedules/estimates of total payments); providing updated estimates every semester).
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