College Access Could Change Forever

In the last few months, three specific events have been discussed and appeared in the news.  These events could influence college admissions and impact college access forever.  For generations, our society has tried to improve access to a college education.  The increase in demand and easy access to loans have put this system at risk going forward.  What makes it worst is most people do not recognize this risk and how it may affect the future.

The three events are:

  • Department of Justice admission rule changes due to the celebrity college scandal
  • Ease of bankruptcy rules on student loans
  • A political movement to forgive student loans

What most people do not realize is that education, specifically college education, is a business.  The colleges do not promote this aspect but position themselves as an improvement to society. We, as parents and students, get emotionally tied to these colleges and often minimize the long-term financial consequence of a college decision.  That is why we have student loan debt of 1.6 trillion dollars.

What is interesting is these three recent events may bring a harsh reality to the business aspect of college.  We must realize is that these institutions have expenses and employees that require payment.  These three possible changes will cause significant disruption to the current model.

Department of Justice Admission Changes

In late 2019, the Department of Justice approached the National Association of College Admission about changing the rules that had been in place for years.

These recommendations were a direct result of the recent celebrity admission scandal.  The changes were to limit some of the commitment rules associated with a student admission decision.  The changes that were voted and approved will impact both regular and early decision rules.  It minimizes or eliminates the strings related to a student’s college commitment.  This policy mandate could result in significant changes in how colleges compete for students in the coming years.

Going forward, colleges will have the right to pursue students after specific admission dates.  They can even continue to pursue them in the following years with transfer incentives under these changes.  The only parallel that I can make is the free agency in professional sports.  Now just imagine that after an athlete commits to a team that he or she could change their mind because another team came back with a better offer.  Imagine the possible confusion and disorder this would cause in sports.  Now apply it to college admissions.

Student Loan Bankruptcy Easing

In a recent New York court case, a judge eliminated the student debt for a military veteran for non-traditional reasons. There is a growing trend of law firms starting to specialize in this area.  Under the current law, this student loan debt would not have been forgiven.  Federal student loan debt can be forgiven due to death and disability but not generally because of bad financial decisions.

Lenders provide a much lower approval threshold due to these bankruptcy rules than other personal loans.  Besides, most other loans have a physical asset that can be reclaimed, such as a house or car.  Education is not a tangible asset that can be recovered and is partially the reason for the more stringent bankruptcy rules.

Now imagine that the lender no longer has that same protection against the borrower.  A borrower could claim bankruptcy and that debt would be forgiven creating a loss for the lender.  This is why mortgage debt has a lien against the property and, at some point, the lender will get a portion of their money back.  This is not true for student loan debt.

If we see an easing of student loan bankruptcy rules, lenders will not be as likely to lend money for education.  In return, this will limit students’ and parents’ ability to borrow the needed money to pay for education.  Colleges could also increase their focus on families who can pay.  This elimination of current student debt could change admission and access policies significantly.

Political Student Loan Forgiveness

As the student debt crisis continues to grow, a simple solution would be to forgive the student loan debt for the current borrowers.  There are a few financial consequences that are overlooked with this political movement.

The first is the possible increase in the divide within our country.  Think of all the people who are trying or have paid for their education.  Now imagine all the people who would benefit from this one-time forgiveness benefit.  I do not know the answer, but how would you feel if you realize that you should have taken on the debt and not had to pay it back?

The impact going forward would put a new pressure on colleges and lenders to limit their exposure to future debt forgiveness.  This could also change the criteria for college admission as a family’s ability to pay will become a bigger factor in their admission decision.  This happens today but would have a greater impact to access than current policies.

The last possible consequence involves the person whose student debt has been forgiven.  Under current law, the debt forgiveness is considered taxable income.  The borrower would have to pay income tax on the amount forgiven.  Yes, they would receive the debt freedom but for some period, this forgiveness would appear on their credit report.  It would make them less attractive as a future borrower for lenders.  It is true they may be in that situation now, but this new freedom may not be as attractive as perceived.

New College Access Summary

As college costs and student debt continue to rise, changes will need to happen.  The future is unknown, but based on these three events, access to college will most likely suffer.  In the next few years, the business aspect of a college education will become much more transparent.  I am hoping that these decisions are well thought out and not an immediate, feel-good reaction.  The need for a highly educated workforce will be critical in this global economy.  Our children will need access to the best education so that they can afford to compete in the future.

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