A graduate says he paid too much for tuition, and the Supreme Court listens
On the surface, the case revolves around a federal law that makes it illegal to wipe out student-loan debt through bankruptcy. But Espinosa's situation fundamentally highlights the sprawling education business, which encourages students to pay a premium price for degrees that no longer translate into premium earning power.
The High Cost of a Degree
In the late 1980s, Espinosa took out $13,250 in student loans to pay for classes in computer drafting. After completing his program, he couldn't get a job in his chosen profession and had to pay his loans from his distressingly small paycheck as an airport baggage handler. This situation got worse once his employer, America West Airlines, cut wages, leaving Espinosa unable to keep up with his payments. His account went into arrears.
In the early 1990s, Espinosa declared a Chapter 13 bankruptcy; the plan he negotiated paid off his loans but did not cover $4,000 in accrued interest. His lender, United Student Aid Funds, tacitly agreed to the proposal, and in 1997, a bankruptcy court declared that Espinosa's debt was paid in full.
Two years later, United Student Aid Funds came knocking, demanding Espinosa repay the remaining interest, on the grounds that -- according to Federal law -- the bankruptcy court should have conducted a hardship hearing. The case worked its way up to the U.S. Court of Appeals for the Ninth District, which ruled in Espinosa's favor.
Private Education and Subprime Loans
If allowed to stand, the ruling could erase the hardship hearing requirement, making it easier for bankrupt students to discharge their loan debt. United Student Aid Funds argues that a Supreme Court finding in favor of Espinosa would discourage banks from making student loans. That argument rests on shaky ground: Federal student loans, like Perkins and Stafford loans, are guaranteed by the Department of Education, which should be sufficient security for any potential lender.
But United might be concerned with private educational loans, which have been compared to subprime mortgages -- they're not guaranteed by the U.S. and are aimed at borrowers who need more money or are ineligible for federal funds. They have higher interest rates, are less regulated, and are far quicker to go into default than federal loans. Worse yet, they help underwrite tuition at the sort of exceedingly expensive or non-accredited programs that often leave students with insurmountable debts that their pricey degrees can hardly justify. Looking at the student-loan business as a whole, an Espinosa-inspired reduction in private loans might not be a bad thing.
The key point is whether Espinosa's education was worth the cost. Tuitions are up 9% this year, in inflation-adjusted terms, according to the College Board; since 2000, tuition has risen by 23%. This has created a seller's market: High student demand and limited university supply means colleges can make students pay more and more. And with student loans underwriting tuitions, there's no incentive for colleges and universities to charge less. In fact, as one college president noted, lowered tuition would effectively translate into a loss of "millions of dollars in government money each year."
Tuition Up, Salaries Down
But as Espinosa demonstrates, this is hardly "government money." While the Department of Education underwrites many student loans, students are still legally obligated to repay the money. Ideally, a college education would translate into a high-paying job that would make loan-repayment easy, but the average salaries of college graduates have dropped by 11% since 2000 while tuition has risen 23%. Students today are paying a lot more for a degree that's earning them a lot less.
One way of looking at tuition is from a simple price-to-earnings angle. Payscale.com offers a College Salary Report that organizes colleges and majors by how much their graduates earn. As Michael Dannenberg demonstrates, weighing Payscale's report against tuition prices can give a good sense of the value of a college education. Balanced against the soft-and-fuzzy wonder of the "[insert university name here] experience," Dannenberg's measure may seem brutally utilitarian. Then again, not many people can afford to spend top dollar on an education that may not bear enough dividends.
There's no easy solution to the college pricing problem. Given this year's tuition increases, even a worldwide recession hasn't inspired colleges to lower their costs. In fact, as long as students and parents are convinced that a college education is the only route to financial success, institutions of higher learning will be preying on fear and ambition. And they'll keep raising prices.