The GOP Just Handed a Gift to the Fast-Growing K-12 Student Loan Industry
The GOP tax bill’s inclusion of 529 plans for K-12 private tuition has been widely criticized as yet one more provision that aids the wealthy. That’s because only wealthy families have enough money on hand to sock away $10,000 a year toward each child's K-12 private school tuition. There’s been little mention of what these plans could mean for middle and lower-income families. By discouraging them from using 529 accounts for long-term college savings, these families are being set up for a future of indebtedness.
Here’s the problem. These savings accounts were meant to offer tax advantages to families in order to help them to put money away for college. Expanding the use of 529 accounts to cover K-12 expenses encourages families to spend money on private schools now. When it's time for those families to pay for college, their 529s or other college savings will be less— or nonexistent. Worse, GOP policy makers are providing just the “nudge" to convince these families to enroll in or justify staying in private schools they really can't afford (even with vouchers), and make up the gap with private loans. The 529 provision in the tax bill is more than anything else a boon to the growing K-12 private school loan industry.
Unlike higher education, where a student borrower’s financial relationship with colleges and lenders is well defined by federal and state laws, K-12 private education is a largely unprotected landscape.
Take Indiana, for instance, home of the largest private school voucher program in the nation. Despite paying out $146 million last year in publicly funded tuition vouchers for private schools, the Indiana Department of Education doesn't even have the right to see the enrollment contracts or student handbooks that govern the payment policies on that money, let alone provide any consumer protections to students who attend those schools. Unlike colleges, private schools at the K-12 level are almost completely free to impose whatever enrollment and financial policies they please. Lenders for K-12 also face far fewer restrictions than lenders for higher education.
Private schools even have the ability to double dip if they want, forcing one set of parents to pay tuition for the rest of the school year after their child withdraws (or is expelled) mid year AND enroll a replacement student and collect tuition from that one too. Churn, double dipping, and abuses in marketing and advertising can all occur in Indiana private K-12 schools, and there are currently no state or federal laws that would prevent such practices.
Middle and even upper middle class families may be able to use the proposed 529 for K-12, but only by damaging their long-term college savings. And because it's always more tempting to spend money now than later, especially when our children are involved (private school will help my son get into better colleges! he'll win a college scholarship too! I don't want to take him away from his friends! Just one more year, and then we'll transfer back to public!), they will.
Private lenders and loan servicers for colleges have been quietly growing their business in the K-12 private school market for the last few years. Nelnet, a publicly held company based in Nebraska, is one of the big four in college loan servicing. Nelnet contracts with K-12 private schools to do their financial aid calculations, billing and collections via its wholly owned business segment FACTS. Sallie Mae also markets its K-12 Family Education Loans to parents of children in private schools.
In 2015, Blackbaud, a publicly held company based in South Carolina, purchased New Jersey-based Smart Tuition, which helps many K-12 private schools manage billing and collections.
These companies receive fees from private K-12 schools for providing billing software and services, including collections of past due accounts from parents. If private K-12 schools grow with increased public funding to them (whether directly, or through vouchers, or through SGO state tax credit funded scholarships, or now, via the new tax plan, through federal tax funded 529 plans) then these companies' businesses will grow as well.
Private schools, even kind ones, eventually take some parents to court. Even upper and middle class parents get in over their head with private school tuition. Jobs change, health problems arise and budgets miss projections. As vouchers and access to 529 plan savings are used to pull more middle and lower income families into private schools, these cases will increase, ruining credit ratings, raising stress, and even causing loss of homes. And as private schools increasingly turn to for-profit companies to manage tuition, provide loans, and manage collections, more and more decisions will be made by the anonymous servicer located states away and not by the school administrator who actually knows the child.
Some conservative evangelical private voucher schools don't take past due parents to court. Instead, they force them to submit to mandatory mediation and binding arbitration under specified Christian mediation/arbitration rules, that are required in student handbooks or enrollment agreements as a condition of enrolling in the school. These requirements are presented as a kinder, more peaceful way of settling disputes. They can actually be used by the schools to keep disputes from public disclosure, and give the school the upper hand in negotiations. One major Christian mediation/arbitration service that is often named in these agreements is Peacemaker Ministries, an evangelical organization that has been promoted by Focus on the Family, which has received funding from the DeVos family.
Mandatory mediation/ arbitration clauses have generally been upheld in U.S. courts, even when they are religious in nature. In this case, however, they are being used to foreclose access to the courts on all matters between the school and its teachers, on the one hand, and the student and parents, on the other, even when the parents have paid part or all of the school's tuition with public state money. Will it be the same with 529 savings?
There are too many unanswered questions in the Republican tax bill. Could private schools force parents to use 529 money to pay tuition due for months after a K-12 student was expelled or withdrew? Could private K-12 lenders collect against 529 accounts that parents were saving for college, and don't plan to use till then? Many states protect 529 accounts from certain judgments. Will the federal government attempt to preempt those laws? Will that be different for largely unregulated K-12 student loans than for more regulated college lenders?
Could parents use 529 plan savings at ANY K-12 private school, no matter how small, inadequately capitalized, or poorly operated? Are there no standards at all? The Republican tax bill seems to say so.
The expansion of 529 accounts to include K-12 tuition represents more than yet another give away to the rich. It’s also a major new market opportunity for college loan servicers and lenders. And K-12 parents and children will become the new student debtors. Is K-12 the next student loan crisis? I think it is.