Category Archives: student loans

Beating the High Cost of Higher Education and Student Debt

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This blog addresses America’s too biggest problems:

  • Slow economic growth averaging just 2% since the end of the Great Recession in June 2009. Faster growth means more jobs and better paying jobs.
  • Massive federal debt now 77% of GDP (for the $14 trillion public debt on which we pay interest) and predicted to continue getting worse without a change in policy. As interest rates go back up to normal historical levels the interest payments on this debt will increase greatly and be a huge drag on the federal budget.

As I have reported recently, college costs are growing much faster than healthcare costs which are growing faster than the cost of living in general.  The excessive costs of education and healthcare are, in turn, holding back economic growth.


Regarding the student loan debt problem:

  • For every increased dollar of student aid, college tuition increases 60 cents.
  • Outstanding student loan debt has risen from $200 billion in 1996 to $1.3 trillion today.
  • The highest default rates on student debt occur for community college students (23%) and for-profit college students (18%).

The economist Richard Vedder has made some excellent suggestions for addressing this whole problem:

  • Simplify the entire federal student air system. There should be only two programs, one grant program (Pell grants) and one federal loan program (Plus loans, tuition tax credits, work study, etc.).
  • Give educational vouchers directly to students to empower recipients to weigh costs more closely. These would be strictly limited to low-income students and would be accompanied by modest academic expectations.
  • Require schools to have skin in the game. Schools with abnormally high loan delinquency rates should have to pay a tuition “tax” to the government to help cover costs.

Conclusion. “Financial aid has caused tuition to skyrocket. If we can’t abolish it, we can at least simplify it.”

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College Costs and Student Debt

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Student debt is a huge problem, see here and here, both for the college students and former students who have accumulated it as well as for the U.S. Government which has to carry the debt. I see this as a three-part problem which American society has to deal with:

  • As illustrated in the first chart, the cost of higher education has been rising very fast in recent years, even faster than the cost of health care, which in turn is increasing faster than the underlying rate of inflation.capture35
  • Since 1996 outstanding student loans have risen from $200 billion to $1.3 trillion.
  • The highest default rates on student loans occur at community colleges (23% in 2012) and for profit colleges (18%). Worst hurt are the low-income and minority students who never graduate but still have unpaid debt (see the second chart).capture36

For the federal government to increase subsidized loan limits or to establish a broad-based free tuition program will only encourage educational institutions to keep raising their prices.
A much better approach is needed as follows:

  • Faster economic growth would help immensely. Our 2% average annual growth rate since the end of the Great Recession in 2009 is simply too slow to create more jobs and higher paying jobs (which makes it easier for students to pay back their debt).
  • At the federal level the emphasis should be on putting more money into Pell grants for the neediest students, paid for by cutting back on non-need based aid.
  • At the state level the emphasis should be on making the two-year associate degree free for all students who pursue it. Tennessee started such a program, Tennessee Promise, in 2014, Oregon in 2016. The goal here is for many more students who try postsecondary education to end up with a degree or certificate of some sort.

Conclusion. There are positive and efficient steps which can be taken to alleviate the student debt problem for the hardest hit low-income students without aggravating the overall problem of rapidly increasing college costs.

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How to Solve the Student Debt Problem: Grow the Economy Faster!

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Based on a post I wrote last fall, “Solving the Student Debt Problem,” and a recent Op Ed by the economics journalist, Robert Samuelson, “Good News on the College Debt Front,” here is where I think we are on this serious problem:

  • The unemployment rate is very low for college graduates, about 2.5%. We should strongly encourage post-secondary education for all.
  • Since 1996 outstanding student loans have risen from $200 billion to $1.3 trillion.
  • Counting both community colleges, four year colleges and universities, 56% of college students borrow money to pay for college costs.
  • For undergraduates who attended two and four year colleges, more than half of loans were less than $20,000. Only 10% exceeded $40,000.
  • The highest default rates occur at community colleges (23% in 2012) and at for-profit colleges (18%). Hurt worst are low-income and minority students who never graduated but have unpaid debts.
  • The Federal Reserve Bank of New York has found a close correlation between subsidized loan and Pell Grant limits and the rapid increase of college tuition costs.

It seems clear that the way to address this problem is to focus on where it is worst: for the low-income and minority students who attend community colleges and for-profit colleges.
Capture36In other words:

  • Place a strict lid on the total amount of subsidized loans available for undergraduates, say $25,000 to $30,000 per person.
  • Use the savings achieved in doing this to increase the size of Pell grants for the lowest income students who need help the most.
  • Overall faster economic growth will help college graduates and dropouts alike find better paying jobs and make it easier for them to pay back their college debts.
  • On an individual basis, urge all students, but especially low-income and minority students, to avoid debt as much as possible in the first place!

Conclusion: Careful analysis of the student debt problem shows that there are very useful steps to take which will not cost the federal government more money.

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Solving the Student Debt Problem

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I have devoted several posts recently, here, here, and here, to discussing the rapidly increasing costs of higher education (see chart below) and the corresponding rapid rise of student debt.
Capture7Here are the basic facts:

  • There are too few college graduates in the U.S. At least ten OECD countries have a higher percentage of college graduates than we do.
  • America is graduating inequality. College degree attainment has increased between 1970 and 2011 for all income groups; however this is happening much more quickly for higher income groups.
  • Not all college degrees are created equal. Students at private, nonprofit institutions graduate at higher rates, and with lower debt, than students from public institutions who, in turn, graduate at higher rates and with lower debt, than students from for-profit institutions.
  • The Federal Reserve Bank of New York has found a close connection between subsidized loan and Pell Grant limits and the increase in college tuition costs.
  • The Federal Reserve Bank of St. Louis has found that “white and Asian college grads do much better than their counterparts without degrees, while college-grad Hispanics and blacks do much worse proportionately.”
  • The percentage of student borrowers at for-profit as well as community colleges who default on their loans has greatly increased since the year 2000 (see below)
    Capture1In other words, our current federal student loan program is not only driving up college costs for everyone but is also creating a huge financial burden for the very low-income students who are most in need of financial aid to succeed in college.
    The way to respond to this is to put strict lids on the amount of subsidized loans available to both undergraduate and graduate students ($30,000 and $60,000 respectively) and, at the same time, use the savings achieved in doing this to increase the size of Pell Grants available for the lowest income students who need the most help.
    Conclusion: our high-tech society needs more college trained workers and we should especially encourage capable low-income young people to go to college. We could also do a much better job of targeting Pell grants instead of loans to this group of students.

Solving the Student Debt Problem?

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Today’s New York Times has an excellent article by Kevin Carey on the current status of federal student loans, “A Quiet Revolution is Helping Lift the Burden of Student Debt.” Our current system, called Income-Based Repayment, allows former students to repay their college loans, on a monthly basis, at a rate of 10% of net income, after deducting basic living expenses.  It forgives all loan balances after 20 years, reduced to only 10 years for people who work for government or non-profits.  As shown in the chart below, participation in the IBR program is increasing rapidly.
CaptureMr. Carey shows by example, that the IBR program is quite generous to low paid workers.  Take a teacher who borrows the national average of $29,000 for a bachelor’s degree and another $13,000 for a master’s degree and then takes a teaching job starting at $35,000 and paying $50,000 ten years later.  The teacher’s monthly payments will start at $117 and rise to about $200 in the tenth year.  The teacher will pay back a total of $18,360 and be forgiven the remainder of $48,840 of principal and interest after 10 years.
It makes sense to subsidize college education for teachers and others who work in low wage occupations.  The problem, of course, is that it is very expensive to do so.  The federal government is now committing over $100 billion each year to student loans.  There is over $1 trillion in outstanding federal student loan debt.
Many people have pointed out that our very generous student loan program is subsidizing the rapidly increasing cost of American higher education.  Here are two specific ways to address this problem:

  • Put limits on the amount of money an individual can borrow for college expenses. One such suggestion, from the political scientist, Peter Salins, would set the maximum value of a loan at 50% of the full prevailing average cost of educating undergraduates at U.S. public colleges.
  • Require all colleges to cover 20% of a defaulting student’s loan out of their own pockets. Sheila Bair makes this suggestion for for-profit colleges only but it should apply to all colleges, public and private as well as for-profit.

There are lots of low-cost and high quality educational institutions around the country, including the University of Nebraska at Omaha where I work!  Both students (and their families), as well as the colleges they attend, need to have higher stakes in limiting the explosive costs of higher education.

Escaping the Student Debt Trap

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Student debt in the U.S. now tops $1.2 trillion with 37 million borrows, 5.4 million of whom have already defaulted.  President Obama has proposed to expand a program which allows students to repay debt based on what they earn, eventually forgiving the balance.  Massachusetts Senator Warren has proposed taxing millionaires to pay for student loan refinancing.  Small scale free market proposals abound.  What is badly needed is a sensible broad-based public program approved by Congress.
CaptureThe Brookings Institution has recently proposed just such a model for student loan repayment “Loans for Educational Opportunity: Making Borrowing Work for Today’s Students”.  It is based on four observations:

  • Moderate debt for the typical student borrower. 69% of students have borrowed $10,000 or less.
  • The high payoff of a college education. Over a lifetime the holder of a bachelor’s degree earns several hundred thousand dollars more than a high school graduate. Even those who attend college but do not graduate will experience an income gain of about $100,000.  Postsecondary education should be encouraged as widely as possible.
  • The highest rates of default are on typical loan balances. The average loan balance in default is $14,000 while the average loan balance in good standing is $22,000.
  • The highest rates of default are among young borrowers. For borrowers under age 21, 28% have defaulted, for borrowers between ages 30 and 44, 18% have defaulted and it is 12% for borrowers aged 45 and older.

The Brookings’ authors propose that student loan payments be deducted from pay by the employer, in the same way as for income taxes and Social Security.  The payment rate would be only 3% of the first $10,000 in annual earnings and would rise with higher earnings topping out at 10%.  Loan payments will stop when the loan is repaid or after 25 years, whichever comes first.  Various measures can be adopted to protect against deadbeats.  See the Brookings report for details.
The fairest system would be for all students, past and present, to be put into a program like this.  Nobody would be expected to pay during periods of unemployment. Interest rates could be adjusted from year to year to make the program self-supporting. Something along these lines is badly needed!

Do We Need a New School of Economics?

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“Consider the following scenario. You are an airline pilot charged with flying a planeload of passengers across the Atlantic. You are offered the choice of two different aircraft. The first aircraft has been prepared by chief engineer Keynes and the second by chief engineer Hayek.
You have to choose which plane to use, so naturally you ask the advice of the two engineers. Keynes urges you to use his aircraft, offering a convincing explanation of why Hayek’s plane will crash on take-off. Hayek urges you to use his aircraft, offering an equally convincing explanation of why Keynes’s plane will crash on landing.
At loss as to which plane to choose, you seek the advice of two leading independent experts – Karl Marx and Adam Smith. Marx assures you that it does not matter which aircraft you choose as both will inevitably suffer catastrophic failure. Similarly, Smith also reassures you that it does not matter which aircraft you choose, as long as you allow your chosen craft to fly itself.”
Thus begins a fascinating new book, “Money, Blood and Revolution: How Darwin and the doctor of King Charles I could turn economics into a true science,” by the fund manager and economist, George Cooper.
CaptureMr. Cooper sets up a circulatory model of democratic capitalism whereby rent, interest payments and profits flow from low income people at the bottom of the pyramid to the wealthy at the top. And then tax revenue (collected mostly from the wealthy) is redistributed downward in the form of government programs.
According to Mr. Cooper, the financial crisis was caused by a combination of lax regulation and excessive credit and monetary stimulus. The question is what to do about it. Mr. Cooper says:

  • Stop adding to the problem. High student debt and high mortgage debt are still being supported by government programs.
  • Change the course of the monetary river. Quantitative easing does not work because it just puts money into the hands of the wealthy and they have no incentive to spend it.
  • Change the course of the fiscal river. Instead put money into the hands of the people at the bottom of the pyramid with expanded government spending on infrastructure (paid for by taxing the wealthy).

Without endorsing all of Mr. Cooper’s suggestions, he nevertheless has many good ones and expresses them in a highly entertaining style!

The College Education Bubble

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A recent article in the Wall Street Journal by the expert on the economics of higher education, Richard Vedder, “The Real Reason College Costs So Much”, points out the similarities between the government’s higher education and housing policies.  “In housing we had artificially low interest rates.  The government encouraged people with low qualifications to buy a house.  Today we have low interest rates on student loans.  The government is encouraging kids to go to college who are unqualified just as it encouraged people to buy a house who are unqualified.”
The federal government is now spending $105 billion on student loans each year.  The average student loan debt is $26,000 but goes much higher for millions of students.  The maximum annual Pell Grant (intended for low income students) is now $5350 and 20% of the recipients come from families making over $60,000 per year.
President Obama suggests capping monthly loan repayments at 10% of discretionary income and forgiving outstanding balances after 20 years.  This creates a moral hazard.  It signals to current and future loan borrowers that they don’t have to take loan repayment very seriously.  It encourages students to major in “soft” academic areas which have poorer job prospects rather than “hard” areas like engineering and technology which have good job prospects.
Innovation in higher education is not coming from government programs but from private initiatives such as massively open online courses (MOOCs).  These have the potential to greatly reduce college costs.  Community colleges have rapidly growing enrollments and prepare students for skilled jobs in high demand areas such as truck driving, machine technology and health careers.
The cost of higher education is going up much faster than the rate of inflation and the infusion of federal money is making the situation worse by encouraging students to take on excessive amounts of debt.  A cap should be placed on the amount of government money which can be borrowed by an individual student.  There are plenty of low cost options available for obtaining postsecondary education and government policy should support, rather than subvert, such common sense options.