Prepaid Tuition…Oh, Really?
Jane J. Kim reports on The Wall Street Journal this week that, “Participants in Early Payment Plans Learn Their College Bills Aren’t Always Covered”:
…Across the nation, college prepaid plans are operating in the red, putting their promises to investors like Ms. Lambert in jeopardy. For now, the states still are paying tuition as they agreed. But the fine print in some state contracts gives them some wiggle room to pay out less than the promised amounts.
“There’s an aura of guarantee around many of these programs,” said Tim Ranzetta of Student Lending Analytics. “But when you dig into it, it’s often a lot less than you’d expect.”
Prepaid plans—a type of 529 plan where qualified educational distributions are tax free—allow families to make an up-front payment in exchange for future tuition contracts or credits. They can prepay either the full tuition bill or a portion of it, in one lump sum or over time.
In general, the tuition guarantee applies to state schools in the state where it is offered, though you can use the money to pay for out-of-state or private schools, though the amount is likely to fall short of the full cost of tuition. If a beneficiary elects not to attend a college covered by the plan, the investor can get his principal back, usually with interest. If he receives more than his contributions, the excess is subject to tax and penalties unless, within 60 days, he rolls it over to another 529 plan.
Investors had flocked to prepaid plans in recent years as they witnessed skyrocketing tuition and huge market losses on their monthly statements for more-popular 529 college savings plans, which often invest in mutual funds.
But market losses also hammered prepaid plans—just less visibly than conventional 529 savings plans…Continue reading The False Security of Prepaying Tuition>>
Arne Duncan Makes a Case for Direct Student Loans
Arne Duncan writes on WaPo this week:
For too long, bankers have gotten a free ride from the U.S. Department of Education.
Under current law, taxpayers provide as much as $9 billion each year to subsidize guaranteed student loans issued by banks. The banks earn profits on the interest; if students default, taxpayers take the loss, not the banks. In other words, working Americans pay while bankers get rich.
Meanwhile, educators, engineers and computer scientists — the backbone of the new economy — face crushing debt from six-figure college tuitions. A study of national postsecondary student aid found that in 2008, two-thirds of college seniors graduated with debt averaging more than $23,000. That number will rise as public and private college tuition costs escalate.
The banks have had plenty of help with government bailouts and other subsidies while working families and students are increasingly squeezed…Watch the Video, and read the rest of the article, Direct student loans: A better way to invest in education >>
Rick Green: So what is it with UConn…that they think they don’t have to face the same financial limits as the rest of us?
Rick Green, a trustee of the University of Connecticut, writes on The Hartford Courant this week:
…I’ve had an increasingly difficult time grasping the ever-rising cost of higher education. I find quite persuasive Senate candidate Peter Schiff’s views about how cheap government loans have fostered a spendthrift attitude at colleges and universities.
Not everyone is tone-deaf. The University of Maryland has frozen tuition since 2005 and this year will raise student costs by just 3 percent — while boosting SATs and GPAs for incoming students.
Recently, Middlebury College President Ronald D. Liebowitz rocked the academic world with a promise to limit tuition increases at his elite Vermont school to 1 percent more than inflation.
An “arms race” has consumed colleges and universities in the past few decades, from classrooms to gilded fitness centers to academic programs, Liebowitz confessed.
“What business operates like this, where you assume that resources are no issue?” Liebowitz said when I called. “Who knows what percentage of the middle class we have already alienated.”
Alienated is right. We certainly won’t see municipalities increasing taxes by 5 percent this spring. I don’t know anyone getting a 5.6 percent raise. Many of us are living with wage freezes.
So what is it with UConn — and the entire state university system, which is also jacking up tuition by 6 percent — that they think they don’t have to face the same financial limits as the rest of us?
When a prominent UConn professor at the trustees’ meeting likened the budget situation to the “global climate change” crisis, I nearly ran screaming from the room.
Pardon me, but isn’t this the same school to which the legislature has allocated more than $2.5 billion over the past decade and a half, transforming the campus and pushing UConn into the top-25 tier of public universities?
But much as I’m ready to hold a tea party in Storrs, I’m stepping back and taking a big breath…Continue reading UConn Needs To Show Some Financial Restraint >>
HuffPo wants to know: How much student debt do you owe?
Leah Finnegan & Adam Clark Estes of The Huffington Post are reporting that the average college graduate owes $23,200. To share your story and find out more, see Share Your Story: Majoring In Debt
Yorktown University Trustee, Todd Zywicki, says “No” to the Obama administration’s proposed Consumer Financial Protection Agency (CFPA)
Complex Loans Didn’t Cause the Crisis
And Obama’s Consumer Financial Protection Agency wouldn’t protect us from another one.
Todd Zywicki
Regulatory reform that can improve competition and consumer choice in financial services is long overdue. But no new federal bureaucracy such as the Obama administration’s proposed Consumer Financial Protection Agency (CFPA) is needed to bring that about.
More importantly, the administration is incorrect in claiming that such an agency would have prevented the present financial crisis and is necessary to prevent the next crisis. On the contrary, such an agency might be the first step toward more problems.
During the housing boom bankers made a raft of extraordinarily foolish loans. Some were the result of lenders defrauding borrowers; probably at least as many were the product of borrowers defrauding lenders. But there is no evidence, as Elizabeth Warren (a champion of CFPA and chair of the TARP Congressional Oversight Panel) recently asserted on these pages, that lender fraud was the overriding cause of the crisis.
The bank loans were not foolish because borrowers didn’t realize what they were doing. They were foolish because of the incentives they created for borrowers, especially when housing prices turned south.
There were three distinct stages of the housing crisis. In the first, the Federal Reserve’s extremely low interest rates from 2001-2004 induced consumers to switch from fixed to adjustable rate mortgages and drew short-term speculators and house-flippers into the market in certain cities. The Fed’s increase in short-term interest rates over the next two years increased homeowner payments and precipitated a round of defaults.
My own research confirms the analysis provided by University of Texas economist Stan Leibowitz on these pages last July: The initial onset of the foreclosure crisis was a problem of adjustable-rate mortgages, whether prime or subprime. It was not initially a subprime problem.
In the second phase, falling home prices provided incentives for owners whose mortgages were under water to walk away from their houses. And in the third phase, which we are now experiencing, traditional macroeconomic factors like unemployment led to more foreclosures—especially where homeowners’ mortgages are already underwater. Reflecting this situation, the Mortgage Bankers Association reports that the fastest-rising segment of foreclosures in recent months has been traditional prime, fixed-rate mortgages.
None of this analysis has anything to do with fraud or consumer protection problems. Consumers rationally switched to adjustable-rate mortgages when their prices fell relative to fixed-rate mortgages—a pattern that has repeated itself numerous times since the 1980s. And when housing prices fell, underwater homeowners rationally responded by walking away from their houses. The proliferation of mortgages with minimal downpayments, interest-only or even negative amoritzation terms, and cash-out refinances meant that many consumers fell into negative equity territory much more rapidly than they would have otherwise.
Regulators may want to limit mortgages that provide so many borrowers with such strong incentives to walk away when housing prices fall. They may want to prohibit lenders from making loans with minimal downpayments or interest-only loans that result in consumers having minimal equity in their homes. But that’s an issue of safety and soundness, not protection against fraud. With respect to ARMs, the obvious solution is a less-erratic Federal Reserve interest rate policy. ARMs have been in widespread use for 25 years (and are common in the rest of the world) without mishap like in the current cycle.
So the problem isn’t consumer gullibility or ignorance. Borrowers have shown they understand, and act on, the incentives they face all too well.
It is worth remembering that, although the banking crisis was a national crisis, the foreclosure crisis is concentrated in four states—Arizona, California, Florida and Nevada—that comprise almost half of the mortgages in foreclosure. Even within those states, foreclosures are concentrated within a handful of hot-spots such as Las Vegas, Miami, Phoenix and the Inland Empire region of California. It is unlikely that borrowers in these cities are more gullible than borrowers elsewhere. Evidence does suggest, however, that there were a larger number of speculators and home-flippers in those cities than elsewhere.
This is not to deny that we are overdue for a comprehensive reform of consumer credit regulation. Over the years, federal laws governing disclosures have become encrusted with an ever-thickening coat of litigation- and regulation-imposed barnacles.
One example, according to Federal Reserve economists Thomas Durkin and Gregory Elliehausen in a book to be published this year, involves the Truth in Lending Act, which has grown from a simple effort to standardize disclosures on consumer credit to a morass.
Regulatory mandates and lawsuit fears are largely responsible for the mind-numbing length of a typical credit-card agreement and monthly statement. The most recent mandate-induced clutter requires the monthly statement to disclose how long it would take to repay the balance by making the minimum payment while making no new charges. According to a Federal Reserve Study by Mr. Durkin, only 4% of consumers would even consider this option.
Similarly, a 2007 Federal Trade Commission staff report by economists James Lacko and Janis Pappalardo documented the convoluted nature of current mortgage disclosure rules (which fail to convey key costs) and presented prototype disclosures that significantly improved key mortgage cost disclosures. Yet such common-sense proposals remain buried in the bureaucracy.
What’s needed is simplified and streamlined regulation, not another agency.
Policies based on a misdiagnosis of the true nature of the problem might actually lay the seeds for the next crisis. For example, Ms. Warren rails in her op-ed about “tricks and traps” such as “universal default” provisions in credit-card contracts, where a failure to pay one credit-card bill can trigger a default on another one. Yet it is obvious that a consumer’s failure to pay some of his bills provides valuable information about the likelihood of default on his credit-card bill (universal default provisions are common in commercial loans for this reason).
Thus a lender’s elimination of universal default will have to be offset by higher interest rates or fees. To the extent that a CFPA makes access to credit cards less available, excluded borrowers will inevitably shift to more expensive alternatives such as payday lending or pawn shops. If the CFPA were to impose bans on efficient risk-based pricing by lenders in the name of vague claims about “fairness,” the likely result will be to increase overall risk and make the next financial crisis more likely.
The financial crisis resulted primarily from the rational behavior of borrowers and lenders responding to misaligned incentives, not fraud or borrower stupidity. Policies that fail to appreciate the difference will not protect, and may hurt, the very consumers they are intended to protect.
Mr. Zywicki is a law professor at George Mason University and a senior scholar at the Mercatus Center. This op-ed is based in part on a Mercatus working paper, “The Housing Market Crash.”
John Podhoretz Pays Tribute to Arnold Beichman
John Podhoretz writes on CommentaryMagazine.com:
Word has just arrived of the death of Arnold Beichman at the age of 96. Arnold was, I think, the most extraordinary man I’ve ever known, and though I first knew him as a boy, I found to my wonderment that I became his friend as a man, even though he was nearly a half-century older.
And yet he was not older. He was younger. Younger than I at 23 when he was 72 and we became reacquainted at the Washington Times; younger than I at 47 when I last saw him in his 97th year, though he had finally wearied enough of walking that he was mostly using a wheelchair. Whatever Arnold Beichman had in him, if they could bottle it and we could take it, we would immediately lead lives of energy and purpose, high good humor and great good feeling, and a sense that, though there were very dark forces at work in the world, the world itself was a wonderful place and one should embrace it and drink it deep to the dregs, and then drink the dregs and relish them too.
What a life he lived! I’m talking about a man who grew up on the Lower East Side, a Yiddish-speaking son of a pious working-class father who made his way to Columbia University in the late 1920s — there to edit theColumbia Spectator along with the man who would be his lifelong friend, Herman Wouk. In the 1930s he worked for what was called the “exploitation department” of Warner Bros., I believe, writing press releases about Jimmy Cagney’s command of Yiddish and showing Cagney around New York during a publicity tour. (He knew Babe Ruth too.) He then became a journalist, and had a storied career, going from the New York Herald Tribune to PM to other places, as a labor reporter and city editor and foreign correspondent. He wrote cover stories for Newsweek about the anti-imperialist wars in Africa in the late 1950s and 1960s. In his 50s he decided he needed to educate himself better and went to get himself a Ph.D. in history, then became a teacher, and then, in his 60s, embarked on yet another career as a Sovietologist of distinction. He was writing regularly until he was 95…Continue reading Arnold Beichman, 1913-2010 >>
What do White Water, Monica Lewinski, Pepperdine, and Baylor have in Common?
What do White Water, Monica Lewinski, Pepperdine, and Baylor have in Common? As of today, Ken Starr. The A.P. via WaPo is reporting:
Baylor University named former Clinton White House nemesis Kenneth Starr its new president on Monday, saying the one-time independent prosecutor’s Christian ideals and experience heading a law school made him the ideal candidate to lead the world’s largest Baptist university.
Starr, whose investigation of the Whitewater land deal and Monica Lewinsky scandal led to Clinton’s impeachment in the House of Representatives, has been dean of the law school at Pepperdine University in Malibu, Calif., since 2004. He becomes the 14th president of Baylor and follows John M. Lilley, who was fired from the post in 2008.
“While I look forward to the honor of serving as Baylor’s next president, my wife Alice and I know how much we will miss Pepperdine,” Starr said in a statement released Monday by Pepperdine. “Working with Pepperdine students, faculty, and the law school’s alumni has been one of the most satisfying and rewarding experiences of our lives.”
Pepperdine officials said he would begin his new job in Texas on June 1…Continue reading Ex-Clinton prosecutor Starr named Baylor president >>
Does the U.S. Really Need More College Graduates?
U.Va.’s Miller Center Kicks off National Debate Series with Education Debate: Ohio University Economist Richard Vedder will debate former U.S. Secretary of Education Margaret Spellings.
Washington, D.C. – Does the United States need more college graduates to remain an economic power, or is college just too expensive to benefit many Americans? That will be the focus of a debate that the Miller Center of Public Affairs at the University of Virginia, in partnership with MacNeil/Lehrer Productions, is holding Friday, February 26 at 7:00 pm at the National Press Club. It will air on PBS stations across the country.
Participants include:
- Richard Vedder, Director, The Center for College Affordability and Productivity; Economics Professor, Ohio University
- George Leef, Research Director, The John William Pope Center for Higher Education Policy
- Margaret Spellings, former U.S. Secretary of Education
- Michael Lomax, President and CEO, United Negro College Fund
Paul Solman, business and economics correspondent for “PBS NewsHour,” will moderate the debate.
Today, about 40 percent of Americans, aged 25 to 34, have graduated from college. That figure has remained stable for decades, while graduation rates in other countries, including China, have increased dramatically in recent years.
Debate participants will argue several questions, including: To remain an economic superpower, does the U.S. need to focus on jobs that require innovation and critical thinking, skills best acquired in college, because it cannot compete with the world on the price of labor? Are college graduates better off financially and socially? Or with annual tuition averaging $20,000 for public colleges and $30,000 for private schools, does the cost of college outweigh the benefits for many Americans? Is it sound public policy to urge Americans to go to college, with the personal savings rate at its lowest since the Great Depression?
If you’re interested in attending, please e-mail or call one of the contacts listed above.
This debate is part of a series that the Miller Center will produce this year. A debate on whether the traditional model of higher education is broken will be held on April 27. In this debate, participants will discuss several trends in education, including increased tuition costs, declining public investment, and the advent of for-profit and online programs.
The Miller Center of Public Affairs is a leading nonpartisan public policy institution aimed at bringing together engaged citizens, scholars, members of the media and government officials to focus on issues of national importance to the governance of the United States, with a special interest in the American presidency.
‘Diversity’ for me, but not for thee?
Brittany Anas is reporting on Colorado University Boulder’s Daily Camera, that a Republican Regent is calling for more intellectual diversity among the faculty. The idea was met with some resistance:
A Republican University of Colorado regent suggested Wednesday that there be more political balance among faculty members, a proposal during a diversity discussion that didn’t bode well with other board members.
Jim Geddes, R-Centennial, said that as a leading university, CU should hire more conservative professors to replace retiring and outgoing faculty members. Intellectual diversity is the “greatest challenge facing the university,” Geddes said during the board’s meeting in Colorado Springs.
“We are a public university serving Colorado,” Geddes said. “Our students come to us, and it’s no concern what their politics are, but it is a concern about those who are teaching our students.”
The regents discussed a set of “guiding principles” that will be voted on Thursday and help establish CU’s mission. In the area of diversity, Geddes’ suggestion — which emphasized political diversity among faculty — was taken off the table…Continue reading Regent: CU faculty needs political diversity >>
No Child Left Behind?
Shaila DeWan is reporting on The New York Times this week:
Georgia education officials ordered investigations on Thursday at 191 schools across the state where they had found evidence of tampering on answer sheets for the state’s standardized achievement test.
The order came after an inquiry on cheating by the Governor’s Office of Student Achievement raised red flags regarding one in five of Georgia’s 1,857 public elementary and middle schools. A large proportion of the schools were in Atlanta.
The inquiry flagged any school that had an abnormal number of erasures on answer sheets where the answers were changed from wrong to right, suggesting deliberate interference by teachers, principals or other administrators.
Experts said it could become one of the largest cheating scandals in the era of widespread standardized testing…Continue reading Georgia Schools Inquiry Finds Signs of Cheating >>
