Jonathan Glater on Access to Higher Education and Student Loans

UCI Law Talks logoProf. Glater unpacks the nuances of student debt and effects on higher education. He argues that talking about student loans in terms of a “crisis” may be missing the true challenge.

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Image of Prof. Glater and Colleen Taricani recording podcast

Expert

Jonathan Glater Jonathan Glater, Assistant Professor of Law
Expertise: Higher education law, criminal law, corporate law, white collar crime and securities fraud
• The Daily Journal: Prof. Glater writes about “Shifting the risk of higher education” (PDF)

Host

Colleen Taricani Colleen Taricani, Assistant Dean for Communications

Podcast Transcript

[Narrator] Welcome to UCI Law Talks, presenting both perspectives on law from the University of California, Irvine School of Law. Join the conversation on Twitter at UCI #UCILawTalks

[Colleen Taricani] Welcome! I am Colleen Taricani from UCI Law Talks and today the tables are turned. Johnathan Glater, Assistant Professor of Law at UC Irvine School of Law, last semester asked all the questions on UCI Law Talks and now he joins me today here in our podcast studio this time as the guest. How does that feel Jonathan?

[Jonathan Glater] I have to admit it's a little bit stressful but I'm going to try and remain calm.

[CT] Good. I'm sure you’d do great. And we're talking today about a topic that is in the news every day and it's become one of the key issues in this presidential election: the cost of higher education and financing student debt. And Jonathan you've researched and written extensively on this issue. Could you set the stage for us and sketch out the problem for us?

[JG] Sure. One of the things that I've been really trying to do is identify as precisely as I can, what I think the problem is that as a law professor I should be thinking about which means I'm not really thinking about what are the drivers of tuition increases. I'm not really thinking too much about how students cope with debt once they have it, although these are important aspects of the problem. I'm trying to think about this as a challenge of access. So if we think about the government's role in providing student loans as an effort to make higher education more available what's the problem? My answer to the question is really that – and the reason this is complicated to think about is student debt is the solution we came up with to access. Right, so if you're a poorer student and you can don't want to take out a commercial bank loan with horrific terms, you have student loans that are available to you to pay the cost. So this looks like a great policy solution for access. The problem is once you take on all this debt, you are financially constrained. This is what debt does and the larger the debt is, the greater the constraint. Debt is not bad for everybody. In fact, it's not even bad for most students who borrow. But it is bad for some so I would argue that the right way to think about the challenges that we face are as forms of risk distribution. And so, if I borrow for college – if I borrow a lot of money to pay for college and after college I don't earn a high enough income to manage my payments, I've experienced – I ran a risk before and I've then actually experienced a bad outcome that I have to cope with. If we think about student debt as kind of this risk transfer device, right, if I don't have to pay for college, if the state pays for college, the federal government pays for college, I don't bear the risk that the state does if I go to college. And I don't get a good job or if I don't get a job at all or if I drop out if I don't owe any money there's no exposure to me. But if I do, I bear the risk and then then if we think about it that way we can start thinking about: well how do we cope with other kinds of risks. Right? We use insurance; we come up with some kind of mechanism to spread the risk around so that the burden is not so great for the person who has the unfortunate outcome. And this is – we're kind of moving towards this with the loan forgiveness programs that the Obama Administration has been developing. But it's not quite the same thing. But I would argue that this is this is how we need to think about it, that it's a problem of risk that students bear.

[CT] You know I want to get into the details of that especially the public versus private type of debt. You know, maybe it's helpful to go back and to kind of think how did we get here? You know the old talking heads question. How did tuition get to be so unbelievably expensive I mean when I went to school in the mid 80’s, my tuition was $9,000 a year and my law school was $11,000 a year in the late 80’s. So how do we get from there to where we are now?

[JG] So one short answer is just that tuition has increased more quickly than the rate of inflation. I'm not going to say forever, but for quite a long time. And if you go back and look at some of the first federal legislation to try to make grant and loan aid available to students, one of the things lawmakers cited was tuition is just growing too quickly. So this has been a perennial concern. We have seen with changes in the economy state spending less, allocating less financial support to public colleges and universities. And sure enough, if you look at the rates of tuition increase at public colleges and universities, they exceed the rates of increase at private nonprofit colleges and universities. The wealthiest ones have endowment income that they can draw on. So part of what's going on is, and this is an element of that shifting of risk, part of what's going on is, as the states are allocating less money to support the institutions that educate their students, the institutions have to get the money from somewhere else. Right, and I want to be careful in how I talk about states allocating less money. It's not the case, but in absolute terms, necessarily that the amount of financial support to public colleges and universities is gone down but the number of students has gone up. Right.

[CT] You know, would you characterize this as a crisis? I mean, every day there's a new story about the crisis and the presidential election candidates have termed it that way. Would you characterize it that way?

[JG] I think we need to be careful about what we're talking about if we want to call it a crisis. Often when people talk about the crisis, if you look at the headlines they'll be a reference to: there's $1.2 trillion or more in outstanding student debt and this is a crisis. It’s $1.2 trillion in student debt outstanding and that's more than other kinds of commercial credit outstanding. I can argue that's a good thing. Right? I would rather people were spending their borrowed money on education than maybe washing machines or you know something even more frivolous than that.

[CT] I need my washing machine; it's not frivolous.

[JG] Okay, bad example but something frivolous. So I would be hesitant about calling it a crisis simply for that reason. I do think that it is possibly appropriate to use the language of crisis if we're talking about access, right? If we're talking about who is able to go to college and if we're talking about that access question in a larger context of rising social inequality, then we can say maybe we're to maybe a crisis is developing, right? Maybe we have a system that is not going to do what we wanted to do which is put higher education within reach of students regardless of social economic or other, right, characteristics or backgrounds.

[CT] I mean is that – the way you characterize it, is that the crux of the issue then? Is it we have these two principles: one is wanting people to have access to higher education and the other is having that be affordable for everyone?

[JG] So the debt puts it within reach, right? The availability of loans makes it accessible in that sense. In order to see what the maybe the underlying or more recent concern is you have to think about what some of the effects of debt are. So if debt constrains your ability to pursue a particular kind of job, if debt undermines social economic mobility that you might otherwise enjoy, then debt is undermining not access but it's undermining what the goals of access were. Right? And when conversations about access were taking place in particular, in the context of the Higher Education Act back in 1965, if you look at the congressional record and the issues lawmakers debated, they were concerned about access. But the explicit conversation about what that access might be instrumental to and how it might be undermined by the choices of what tools we use to make access available, that wasn't a big part of the debate because tuition wasn't as high as it is now, because the debt amounts carried by students weren't as great as they are now. Now we have to think about what are the consequences of our decision, our policy decision, to make the availability of student loans the primary mechanism available to students to pay for college. So then we have to distinguish really between access, yes I can borrow and go, and what I would call meaningful access which would be when I graduate, I have the same opportunities open to me whether I borrowed or not. Right, putting me on the same footing as a student with extensive financial resources who did not have to borrow to go to college.

[CT] You know you make an argument and this is an op-ed piece in the LA Times, right? Public versus private loans. Can you outline that for us?

[JG] Sure. So generally, when people are focusing on rising student debt, they're talking about what I would call federal student loans. Right, which are now loans made by the federal government. In years past, they were loans that were guaranteed by the federal government but could also be actually made by banks. The critical characteristics of those loans, or the terms at least, were set by Congress as opposed to by whoever the lender was at a financial institution. So those are federal student loans. The federal government holds all new federal student loans. They don't sell them; they don't securitized them; they don't play. They're not like home loans. Private student loans are commercial loans like credit card debt but you get the loan from a financial institution and you use it to pay for your education. And the terms can vary based on characteristics of the borrower based on a financial institution. So those – and those account for I think the last time I checked was around 10 percent of the amount loaned every year. So federal loans dwarf the private student loans. But if you are going to an expensive institution, because the amount an undergraduate can borrow through federal loans are capped, students often have to turn to private student loans to make up the difference. Right, if they don't have resources of their own. My argument is that we should raise those caps so that students don't have to turn to the commercial loans which typically have worse terms. And they have worse terms for good reasons. If you're extending credit to someone who's not putting up any collateral and who because they're a student, they don't have anything to – they have nothing they can pledge. You’re going to charge a higher rate of interest because they look riskier so…

[CT] And even though you're suggesting that you increase those amounts, it's still the same amount overall because they’re going to borrow it from somebody?

[JG] That's right. That's right. My argument is that there's no particular – it's not as though this will mean that students will be borrowing money that they weren't otherwise going to borrow. There's an answer to that, right? Someone could respond and say well actually if you make more money easily available through federal programs, people will actually end up borrowing more than they would if they had to part from two places. That's possible, but I would view that the benefit of having them in federal loan programs with the availability of forgiveness and forbearance exceeds the risk that students will borrow, overall, a larger about.

[CT] Let me turn now to the residential mortgage crisis and you've written about this too. You know, what lessons do we glean from that crisis?

[JG] Right. So I don't want to spend too much time talking about that. That is an enormously complex phenomenon that we endured. But I do want to try to distinguish student loans from residential mortgage loans just to try to illustrate that there's – it's just not likely. Tt's very unlikely that student debt poses the kind of systemic risk that home loans did. For one thing, the dollar amounts are just very different, right? Again that $1.2 trillion figure that I mentioned before. At its height, residential mortgage market was maybe more than nine times larger. So you would – you would need to see much higher rates of default on student loans for the ripple effects to work their way through financial markets if there were a transmission mechanism for those affects in the first place. Student loans , as I said, the federal student loans,  the government holds. So there is not a possibility that default on – a series of default on loans could affect a financial institution's ability to pay on its obligations to other financial institutions. So you don't have the transmission mechanism present in the same way. Private student loans are securitized, right. So there's a there's a transmission mechanism that's possible there but again that's a much smaller slice of the market. And the reason I raise this concern about drawing the analogy between student debt and mortgage debt which is intuitively appealing, is if you do that, it suggests importing into the student loan context some of the policy solutions that we talk about in the mortgage loan process. So if the critique, if the story about home loans is too many people were irresponsible and borrowed more than they could repay, the solution is don't let those people borrow. Right? Or don't let them borrow as much.

[CT] And by the way, do you think that was a fair characterization?

[JG] No I don't.

[CT] Why not?

[JG] I think this is a – I think the roots of the financial crisis that began in 2008, are much more complicated. You can trace them to regulatory failures, policy breakdowns, conflicts of interest rate at multiple levels both in the government and in financial institutions. Right? It's much more than individual borrowers who took on too much debt and then regulators who were caught by surprise and institutions that had no idea that this was happening that if you – if you look at the Financial Crisis Inquiry Report, it paints a much more complicated picture of what of what happened. If we import some of those policy solutions into the context of student loans, for example, restricting access to credit so that people can’t take out loans that we think they shouldn't, what that means is students can't borrow to go to college, right, which is the whole point of the providing the student loans in the first place. Right is to enable people to go to college. So we could imagine a system in which some omniscient and almighty sorting hat, Harry Potter style, could determine okay this student is a good risk and we should extend as much credit as they want to go to college and the student is a bad risk therefore they shouldn't. If we had a system like that, and the Sorting Hat were magic and perfect, great. Absent that, it seems unfair to make credit of it to restrict the availability of credit to restrict access to higher education on some other non-bad magic and quite fallible, right, basis.

[CT] You know some people have talked about that as a solution and you know all the presidential candidates right now have floated out solution. You know, Bernie Sanders is saying that we should make four-year university’s tuition free. You know, do any of these candidates have it right?

[JG] I love the idea of universal free higher education. Yes. I think that would be a fine solution. The trick is, who's going to pay for it and how? Right. And so, if we're talking about – I've tried to delve a little bit into some of these proposals to get a sense of how are they going to pay, right? It's going to be block grants to the states to direct greater funds to their public colleges and universities to increase their ability to educate more students. I'm obviously – I'm not opposed to that. As a public university employee –

[CT] As am I.

[JG] I'm certainly not opposed to increased funding. That trend of the past several years has not been towards increasing funding for public colleges and universities generally. California’s a little bit of an exception with Prop 30, but we haven't seen that kind of reinvestment in higher ed with an I either two expanding how many students can – can matriculate and graduate. Or to try to hold down tuition. And by the way, I'm not sure holding down tuition is actually where we should focus their virtues to a high price, high aid model because that enables us to be more progressive in how we price it. Whereas if we hold the prices constant, that's a subsidy to students who don't need it as well as those who do.

[CT] Someone else has talked about – I read this article this morning – likening our response that David Bowie had as a financial innovator. You know, the first artist to securitize his future earnings and those famous Bowie bonds that were issued in 1997. Does that seem like an enticing novel solution to today's issue or no?

[JG] Other people have thought more rigorously about the possibility of kind of having third party investors who would finance a student's education in exchange for a fraction of their earnings over time. The part that I struggle with is why is it a good idea to allow the third party investor to profit? Right? If the alternative is the federal government extends the money and then the federal government gets the income over the stream of payments over time. Okay. I like that.

[CT] Because they're more able to bear the risk? Or they're more… why? Why do you like that?

[JG] I don't see – I don't see why we need to encourage third party investors to profit off the students. Right. We already have a mechanism whereby the government makes credit available to students to pay for college. This is an alternative model to have the third party investor step in and do it. I'm not sure what it adds except profits for the third party investor. Right? And if I'm that third party investor, and this all this goes into the design of the specifics of that regime, but if I'm that third party investor I'm going to be pretty picky about whom I'm going to invest in. What about the students who don't meet the investor’s criteria, right? That's a possible concern.

[CT] No, and that's serious and that's a nice segue to my next question which is: The larger societal repercussions of this. You know, not only is this an issue for right now but you know the next generation of students like what is that going to look like if we don't solve this issue here?

[JG] So I feel like the fundamental question that we really need to grapple with is how do we want to allocate this precious resource, right? This this higher education opportunity. And we need to have that debate. If we want – if we wanted to be more broadly accessible that's laudable. But it's not infinitely accessible and we need to figure out who should have this privilege, right? Because it is a privilege to participate and enroll in one of these institutions and take advantage of, you know, some of the most advanced educational opportunities in the world and all the benefits that go with that. We need to we need to stop and think about whom – to whom should we be awarding this opportunity? And that ties directly to questions of what kind of society, what kind of community do we want to live in?

[CT] And how do you answer those questions?

[JG] I am in favor of promoting access. You know I'm clearly in favor of promoting access and I'm in favor of promoting access, not just on the material grounds, not just on the argument that it will mean that you earn a higher income if you get more education. I am a believer that education is an intrinsic good. I think it is hard to remember to think about the virtues of education intrinsic to education. When you have to borrow, right, thousands, tens of thousands of dollars to pay for it. I mean a student who does that has to think about it in material terms because that's an obligation that they will have to repay in material terms. But, somehow, we need to – we need to have that debate and remember some of the virtues associated with higher education. That may not be tangible but the go to again, what kind of community do we want to inhabit?

[CT] And I feel like this is getting lost today in this whole debate, in this whole it's a long crisis debate. This narrative is nowhere.

[JG] I think that – I think that intuitively, when people complain about rising tuition what they're complaining about is: this is an opportunity that is increasingly out of my reach. And I don't want to be in a society, in a community where this kind of opportunity is closed to me just because I happen not to have money. And I don't think – and I don't think that it's even necessarily a minority perspective. Again if you look back to the Higher Education Act of 1965, what President Johnson said at the time I can't remember the quote exactly. But I can paraphrase: is this legislation means that no one will be – college will not be closed to anyone just because they happen to be poor. And that's lofty rhetoric and I would argue something to shoot for.

[CT] Is there anything else about this issue that we should be talking about?

[JG] We haven't really talked about for profit schools versus nonprofit schools but I don't think we should.

[CT] For another time.

[JG] That's probably a topic for another day. There's a – that's a complex – a complex phenomenon, you know.

[CT] Yes, for another day but I want to ask you this final question, Jonathan. You know, what motivates you to do your work in this area and brings that passion you have for this area of law?

[JG] So when I was in college, one of the things that I found myself thinking a lot about was who were my classmates and why? And when I was a reporter writing about higher education, one of the things I was struck by was how the – the value of the education opportunity was something that seemed to get lost in discussions about student debt. And I wanted to try to make sure that we don't lose sight of the – of the bigger picture, right, which is this question of how we how we allocate opportunity and who has access to opportunity. Even as we talk about some of the intricacies of funding mechanisms and appropriations and bankruptcy treatment of discharge of student loans which we haven't talked about, that's also another podcast, it's easy to get caught up in the details or get distracted by the size of that $1.2 trillion figure. When I think what we need to remember is were engaged in a process of designing a system that's going to determine who has access to what opportunity and we should remember that.

[CT] Thank you, thank you so much for joining us today Jonathan.

[JG] Thank you for having me.

[Narrator] Thank you for joining us at UCI Law Talks. Produced at the University of California, Irvine School of Law.