Rising college tuition and other fees (e.g., room and board) have burdened millions of families as students attempt to forge the pathway toward their career goals. These costs are causing students to accumulate an increasing value of loans, and these loans now account for the second largest US consumer debt market – only behind mortgages – which have increased the value of the Department of Education contracts. The recent New York legislation, which provides free tuition for qualified students at New York’s public colleges, is a large step in making higher education more affordable for individuals and families by significantly reducing debt burdens, which should lead to lower default rates of former students. However, as is the case with all legislation, there may be unforeseen consequences. Additionally, if other states begin adopting similar legislation, this could have a substantial effect on ARM companies servicing student loans.
The program is called The Excelsior Scholarship. Although it seems incredibly progressive, several implications limit the program from assisting, perhaps, those that need it most and are most likely to attend college.
The program has certain tenets that students must fulfill:
- First, scholarship eligibility is available only to those individuals from families earning at most $100,000 annually beginning fall 2017. The initiative will be rolled out over a three-year period where the annual income eligibility will increase to $110,000 in 2018 and $125,000 in 2019. According to the program’s website, close to a million families have college-age students and of those, 7% are eligible. Additionally, students are required to maintain a GPA that will allow for successful graduation and must take 30 credits per year, which may drive higher summer and winter semester enrollment.
- Second, the student must be in school full-time (as alluded to previously) and graduate within two-to-four years depending on the individual’s chosen degree (associate’s or bachelor’s) in a SUNY or CUNY institution. SUNY is the State University of New York and CUNY is the City University of New York – both of which make up the public university system in the state.
- Third, students must live and work in New York for the same number of years after graduation as they received the scholarship (i.e., associate’s degree lends itself to two years post-graduation and bachelor’s to four years). Otherwise, the tuition assistance becomes a loan in the same amount. The legislation is funded by the state and the SUNY and CUNY schools are not expected to offset the costs in the first four years.
As mentioned earlier, The Excelsior Scholarship may be a first step toward a larger nationwide trend of making higher education more affordable and accessible to students. The program is meant to be a last-resort option for students, meaning it covers tuition after federal/state financial aid, grants, and scholarships. The Excelsior Scholarships’ value is limited for students who may already have their tuition covered through a Pell Grant or other financial assistance but need help offsetting living expenses and fees associated with attending school. As a result, students enrolled part-time or those who can’t handle a full course load while juggling external responsibilities are clearly hindered by this initiative. Furthermore, fewer than half of undergraduate students graduate within four years according to the National Center for Education Statistics. As shown in the graph below, among the 2008 student cohort, only 39.8% of students nationwide graduated within four years. However, SUNY institutions actually maintain higher graduation rates compared to national data, amounting to nearly 50% in four-year graduation rates, which surely promotes the state’s decision to pass this legislation.
While 75.7% of student may be eligible, in the long run, a much smaller portion will fully realize the benefits of the program in accordance with its policies. While New York does want its return on investment by forcing students to work and live in the state, it also limits an individual's post-graduate options especially in a state that has one of the highest costs of living. If a student were to take a worthwhile offer in a different state, the student may be burdened with heavy loans for years to come.
Additionally, tuition is not the main culprit that students succumb to – it’s the growing fees that students must pay. In certain public universities where tuition is capped or frozen, like the University of North Carolina school systems, University of Cincinnati, and Ohio State University to name a few, schools respond by increasing its fees – a particularly rampant act following the financial crisis when state funding to public institutions significantly decreased. To make matters worse, fees increase exponentially further into one’s college career and can often come unexpectedly. Thus, programs like The Excelsior Scholarship that help offset rising tuition costs don’t fully account for the financial barriers students face. Nonetheless, more and more states have enacted policies to sanction greater access to higher education. Kentucky, Minnesota, Oregon, and Tennessee already have policies in place that provide some form of free financial aid for community college education to eligible students while many other states are in consideration of enacting a similar legislation.
If more policies like The Excelsior Scholarship are adopted nationwide, there could be a significant impact on ARM companies servicing student loans. The total amount of student debt should decline, or at least grow much more slowly, because fewer students will be borrowing money for college and those who do may be taking out smaller loans. As such, fewer graduates would be in debt immediately after graduation, so their earnings could then be allocated toward discretionary spending and other payments. This would prompt a domino effect in which other consumer debt markets may see sizable changes as consumers are better able to repay existing debts or take on new ones, such as mortgages. Next, this should lead to higher college education levels – thus a better educated population – which should cause graduates to be more successful finding jobs and a wealthier economy as a whole, and suggests a greater propensity to take on other forms of debt.
If this becomes a nationwide trend, then the values of the Department of Education contracts will presumably diminish since there’ll be relatively fewer delinquent borrowers and even fewer who owe federal debt. However, it may drive ARM companies to diversify and extend services to toward newly-created state-level student loan contracts and increased debt levels in other markets, such as financial services. Ultimately, the true impact of The Excelsior Scholarship in New York on the demand for Department of Education loans and ARM Industry, let alone a potential expansion to other states, is yet to be determined. That said, we recommend paying particular attention to this potential trend, as it may have profound impacts on the US higher education system and ARM companies servicing student loans.
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