Why A Special Circle Of Student Loan Hell Is Reserved For College Dropouts

Just in case it wasn't already bad enough to be a recent Millennial college graduate in the US with tens of thousands in student debt (recall that of those lucky enough to have a job after graduation, roughly half live paycheck to paycheck; as for those without a job, well... our condolences), it turns out there is a special circle in student loan hell reserved for those who never manage to graduate. Because as Bloomberg reports, when it comes to collecting on student loans, the U.S. Department of Education treats college dropouts the same as Ivy League graduates: They just want the money back.

But that's only part of the bad news. It will come as no surprise that when it comes to wage potential, dropouts are in a category of their own. The dead last category. Unlike peers who earn degrees, dropouts generally don't command higher wages after leaving school, making it harder for them to repay their student debt. The typical college dropout experienced a steep fall in wealth from 2010 to 2013, figures from the Federal Reserve in Washington show, and an 11 percent drop in income—the sharpest decline among any group in America.

Worse, dropouts who took out loans to finance the degrees they ultimately didn't obtain often end up worse off for attending college.

It should therefore, as Bloomberg writes, come as no surprise that half of federal student loan borrowers who dropped out of school within the past three years are late on their payments, according to Education Department figures provided to Bloomberg. More than half of those delinquent borrowers are at least 91 days behind. By comparison, just 7.2 percent of recent college graduates are more than three months late on their debt.

There are two immediate takeaways from the figures, according to the author.  The first is that higher education experts eager to put families at ease about the increasing cost of college are likely to conclude that whatever crisis exists in student loans is concentrated among college dropouts, so graduates needn't worry. This is largely how the Education Department and the White House view the issue. The department recently focused its efforts on improving graduation rates, hoping it will lead to fewer loan defaults. But it's unlikely that approach will yield benefits soon. Graduation rates have increased by less than five percentage points over the past dozen years, federal data show.

The problem with this approach is that even the NY Fed recently admitted that it is not just the dropouts who are impacted as student loans are the primary culprit for record wealth inequality in the US: a demographic that is far broader than just the narrow dropout subset.

The second takeaway is that it's time for the Education Department and its loan contractors to pay special attention to the groups of borrowers most likely to struggle with their debt. The Education Department outsources the work of collecting payments and counseling borrowers on their repayment options to loan contractors such as Navient Corp. and Nelnet Inc. The government pays these contractors about six times more for accounts that are current rather than seriously delinquent, regardless of the costs the companies incur to help borrowers resolve their delinquency. Loan companies say they simply don't get paid enough to help the neediest borrowers.

As such, the segment of the US population most in need of counseling, and outright help, is least likely to get it. And this is happening under an 8-year progressive agenda.

Bloomberg adds that the Education Department has known for years that the typical borrower who defaults on her debt didn't graduate with a credential, federal records show. Yet its Federal Student Aid office—the somewhat independent unit that runs the government's student loan program—doesn't mandate special procedures for its contractors' dealings with borrowers most at risk of default. Instead, FSA gives its loan contractors "broad latitude" to handle borrowers' accounts.

And while the conclusion of the original piece is admirable, namely that the government should intervene on behalf of the borrowers and negotiate with the loan contractors to ease terms of the loan, adding that last month, the department directed FSA to structure its next round of contracts in a way that guarantees that dropouts would quickly get help with their loans from specially trained customer service representatives, the real story here is a simple one, and one we have repeated for a long time: the government should admit that the current higher learning paradigm is flawed, where as a result of ultra low rates, college tuition is soaring, but due to the unprecedented ease in attaining student debt, few find college costs to be a gating factor no matter how bleak the practical outcomes of a college education may be for loan repayment or future income potential.

As such what the government should do is overhaul the entire process of setting college tuition, which in recent years has exploded at a rate that is orders of magnitude higher than that of core inflation. And since ultimately this is not a government decision but one driven by simple monetary dynamics, and blessed by a low cost of money, the real culprit here is the Fed (the same Fed which ironically just last week found that student loans are the cause behind America's wealth divide) which by keeping the rates at zero, assures that problems faced by both college grads - and dropouts - will only get worse.

And yes, as even the Fed will now admit, the wealth divide in the US will only get more profound as the populist tensions revealed not only by Brexit but by the ongoing summer of rage in the US hit a breaking point at which point the Fed's decision will finally be taken out of its hands.