Solving the Student Debt Problem?

Posted on January 25, 2015 by jackheidel

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.
Mr. 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.

What Will It Take to ‘Fix the Debt’?

Posted on January 22, 2015 by jackheidel

I have recently become a volunteer for the national bipartisan organization, Fix the Debt. It is the outreach arm for the Washington think tank, Committee for a Responsible Federal Budget, which is an offshoot of the Simpson-Bowles Commission from several years ago.
As such, I give presentations to local civic organizations about our national debt and what needs to be done to get it under control. Typically the audience will readily appreciate the seriousness of our debt problem. What they want to talk about are practical ways to address it. They have their own ideas and want to know what I think as well. My first message is that we don’t have to pay off the debt or even balance the budget going forward. Realistically we need to shrink our annual deficits in order to put the debt on a downward course as a percent of our growing economy, as shown in the chart just below.

It will be a huge challenge to accomplish even this! Here are my ideas, in very general outline, on how to get this done:

Entitlements (Social Security, Medicare and Medicaid) are the biggest single problem because our population is aging so fast. Furthermore, in order to control the growth of Medicare and Medicaid, we have to do a much better job of controlling the overall cost of healthcare in the U.S. For example, even though healthcare costs slowed down to an increase of only 4.1% in 2014, this is still more than twice the rate of inflation!
The second thing we need to do is to make our economy grow faster than the roughly 2.3% growth we have achieved since the end of the Great Recession. The main way to get this done is through broad-based (and revenue neutral) tax reform at both the individual and corporate levels, by reducing tax rates, paid for by closing loopholes and limiting deductions.
Finally, there is enormous waste and inefficiency in the federal budget, with huge redundancy and overlap of programs between different federal departments. Responsibility for such programs as education, community development, transportation and social welfare, for example, should be returned to the states with block-grant funding to replace rigid federal control.

I have discussed each of these major reform ideas in much detail in previous blog posts and will continue to do so. As large as our fiscal problems are, I remain optimistic that they can and will be successfully addressed.

Honoring Martin Luther King’s Legacy

Posted on January 20, 2015 by jackheidel

Every year at this time, our nation is reminded of the progress our country has made in race relations as well as the work which remains to be done. Here are three different approaches to concrete actions which can be taken to help black Americans improve their lot.
Not too long ago I quoted the black scholar, John McWhorter, as follows “Today’s struggle should focus on three priorities. First, the war on drugs, a policy that unnecessarily tears apart black families and neighborhoods. Second, community colleges and vocational education, which are invaluable for helping black Americans get ahead. And third, the AIDS and obesity epidemics, which are ravaging black communities.”
An extensive report by the Hamilton Project (associated with the Brookings Institute), “Policies to Address Poverty in America,” focuses on four discrete areas where progress can be achieved:

Promoting Early Childhood Development
Supporting Disadvantaged Youth
Building Skills
Improving the Safety Net and Work Support

Finally, the Budget Committee of the House of Representatives has recently released a new plan, “Expanding Opportunity in America,” proposing to redesign the American welfare system to help more people move off the bottom rung. The idea is to let selected states experiment in consolidating separate means-tested programs such as SNAP, TANF, childcare and housing assistance programs, into a new holistic Opportunity Grant Program. Here’s how it would work:

Each participating state will approve a list of certified providers who are held accountable for achieving results such as moving people to work, out of poverty and off of assistance.
Needy individuals will select a provider who will conduct a comprehensive assessment of that person’s needs, abilities and circumstances.
The provider and the recipient will develop a customized plan and contract both for immediate financial needs and also for long term goals towards self-sufficiency.
Successful completion of a contract will include able-bodied individuals obtaining a job and earning enough to live above the poverty line.

Here are three very distinct sources addressing the issue of black poverty in America. All three approaches are looking for practical solutions to a very difficult problem and they have a lot in common. This suggests that it should be possible for national leaders to come together and take effective action!

Why America Needs the Common Core

Posted on January 18, 2015 by jackheidel

It is well understood that American educational standards are falling behind those of many other developed nations. I have recently discussed this issue from the point of view of giving more public support to community colleges, as recently proposed by President Obama.
But the problem is much broader than this. American college students in general score very poorly in basic critical thinking and communication skills. As the above chart shows, even college seniors are only 60% proficient in these skills and college freshmen do much more poorly.
A new book, “The Smart Society: Strengthening America’s Greatest Resource, its People,” by the political scientist, Peter Salins, provides a good description of the basic problem. It starts long before college! America actually has two different K-12 academic achievement gaps. One, the “Megagap” is the huge test score disparity between middle class students and low-income students, who are largely minorities. This achievement gap is best addressed with expanded early childhood education, as we are beginning to do in Omaha NE where I live.
But as Mr. Salins points out there is also a Mainstream Achievement Gap between what most non-disadvantaged American youth are capable of learning and what is actually expected of them in the typical U.S. public school. It is this learning gap which is primarily responsible for America’s mediocre standing on international achievement tests.
Mr. Salins argues that the Mainstream gap is closable because there is such an enormous variation in achievement scores among the 50 states, as shown in the above chart. In particular, in Massachusetts, a top state, the Education Reform Act of 1995 included the following reforms:

The requirement for all state school districts to adhere to rigorous curriculum specifications.
A new statewide diagnostic testing protocol.
More rigorous testing of new teacher candidates.
A statewide uniform high school graduation standard.

Reforms such as these are what make up the Common Core State Standards Initiative. Such high standards are working well in the top performing states. Other states need to seriously implement these same standards. America’s competitive edge depends on it!

Preventing the Next Housing Crisis: Shared Responsibility Mortgages

Posted on January 15, 2015 by jackheidel

It is now commonly agreed that the Financial Crisis of 2008 was caused by the collapse of the housing bubble beginning in 2007. There were three main aspects to the huge collapse of wealth caused by the Financial Crisis:

It Destroyed Mainly Middle Class Wealth. During the Great Recession housing values collapsed by $5.5 trillion, a large fraction of the total $14 trillion economy. As shown in the above chart, most of this loss of wealth came at the expense of middle- and lower-income families.

Foreclosures on Underwater Mortgages Lowered Housing Values across the Board. When foreclosed houses are sold at steeply discounted prices, the appraised value of all other houses in the area are lowered as well.

The Loss of Wealth of Indebted Households Forced Them to Cut Back on Their Overall Spending. The decline in aggregate demand due to wealth loss of the indebted then becomes a problem for everyone in the economy.

In a new book, the economists Atif Mian and Amir Sufi have proposed a new way to set up mortgages, called Shared Responsibility Mortgages (SRM), to protect holders of underwater mortgages during a housing crisis.
Consider a house bought for $100,000 with a 20% down payment and a 30 year mortgage of $80,000 at 5% interest. The annual mortgage payment is $5,204 per year. Suppose the value of the house drops 30% to $70,000. With an SRM the owner’s equity drops to 20% of $70,000 or $14,000. The annual mortgage payment would also drop 30% to $3,643. It would continue to be adjusted each year until the house returns to 100% of original value at which point the payment would revert to and remain at the original amount unless the value again drops below 100% of original value.
In return for sharing in the loss caused by a drop in value, the mortgage holder would receive 5% of any capital gain realized whenever the house was sold or refinanced in the future.
Suppose that all mortgages in 2007 had been SRMs. All three of the problems outlined above would have been avoided. The financial crisis would have been much less severe!

The Future of American Higher Education

Posted on January 13, 2015 by jackheidel

President Obama’s proposal, to make community college free of cost for all Americans, is generating a lot of controversy. Major complaints are that:

The projected cost of $6 billion per year is too high and the program is highly duplicative with other scholarship programs such as Pell grants.
Education is primarily a state and local responsibility, not federal.
The graduation rate at community colleges is only 21%, much lower than at other types of educational institutions.
There is a whole new marketplace of non-degree credentials such as competency-based programs and micro-certifications which often provide greater variety, quality and monetary value than community college programs.

These criticisms are largely valid and should largely be incorporated into the guidelines of the President’s proposal as they are drawn up and submitted to Congress.
But they miss the larger point. Today, about 30% of young people in the U.S. graduate from a four year college. Tuition and fees at public college averages $9,000 per year while the comparable cost at private colleges is $31,000. Loan debt for college graduates averages $27,000 per year, and is much higher for many. And, according to the above chart from the New York Times, educational attainment in the U.S. lags behind the rest of the developed world.
Today’s increasingly high-tech and interconnected world puts a huge premium on educational attainment and America’s system of higher education is not meeting the challenge. It is too expensive and not educating enough people, especially minorities and those with low-incomes.
The best way to address this problem in a cost-efficient manner, which is a necessity in today’s fiscal climate, is to expand opportunities at our 1100 community colleges. Community colleges are not only incredibly low cost operations, they accept all students and start them out at whatever academic level is necessary. They provide the ideal venue to lift up large numbers of average and previously-failed students and turn them into productive members of society. Boosting community college enrollments will, in turn, give our economy a big boost.
This is the real reason why President Obama’s free tuition plan should be taken seriously. It will shine a strong light on an educational sector whose potential is greatly under-appreciated by many Americans.

Is Universally Free Community College a Good Idea?

Posted on January 11, 2015 by jackheidel

President Obama has just proposed that two years of community college be free for all Americans “willing to work for it.” Forty percent, or about nine million, of today’s college students are enrolled at one of America’s more than 1100 community colleges which have an average annual tuition of $3800. First estimates are that such a program would cost about $6 billion per year when fully implemented. The advantages of such a program are:

The biggest advantage is to greatly increase college enrollments especially for the low-income, minority and first generation college students who typically attend community colleges.
It will make a contribution toward solving the college affordability issue. With tuition averaging $9,139 at public four-year colleges and universities and $31,231 at private institutions, students unsure of their future plans can start out with much lower expenses before deciding if they really want a four year degree. Equally important, it will put pressure on four-year institutions to do a better job of controlling their costs and focusing more strongly on what they do best.
Finally, such a plan will put great pressure on expensive for-profit educational institutions, whose primary source of income is from federal student loans, to demonstrate much more clearly their true educational value. Community colleges are likely to expand their course offerings under a big influx of new students and expand into specialized practical subjects where the for-profit institutions now have a virtual monopoly.

There is, of course, one nitty-gritty little thing to be concerned about with such an ambitious new education program. How is it going to be paid for in our current era of high federal deficits and exploding debt?
I think there are two ways to approach this question. First of all, the federal education budget is quite large, $141 billion for FY 2014. We should be able to trim other education programs in order to pay for this new initiative. This kind of budget discipline, which is absolutely necessary, might require cutting back the President’s proposal in order to reduce its cost. This is quite appropriate.
There will always be good ideas for new programs which could prove to be quite valuable. But they will need to be implemented very efficiently!

Is Europe’s Decline an Indication of America’s Future?

Posted on January 8, 2015 by jackheidel

One of my favorite writer’s on current affairs is Arthur Brooks from the American Enterprise Institute. His article in yesterday’s New York Times, “An Aging Europe in Decline” gives a good explanation for the current malaise in Europe. “The optimists see the region’s economy growing by just 1% in 2015: many fear that a triple-dip recession is in the offing. … Predictions of decade-long deflation, low productivity and high unemployment are becoming conventional wisdom.” But Mr. Brooks makes a strong case that Europe’s core problems are as much demographic as economic:

In 2014, the average number of children per woman in the European Union was 1.6, well below the replacement rate of 2.1.
The labor participation rate in the EU in 2013 was just 57.5%, much lower than the 62.7% in the U.S..
In 2012 the median age of the national population in the EU was 41.9 while the average age of foreigners living in the EU was 34.7. But “anti-immigration sentiment is surging across the continent.”

In other words, Europe is “rejecting the culture of family, turning its back on work and closing itself off to strivers from the outside.” This is a powerful indictment of contemporary European culture.
To a certain extent these same trends are evident in the U.S. although to a somewhat lesser degree:

Our own fertility rate (see the above chart) is down to 1.9 children per woman in 2012, and is dropping among all racial groups.
Our labor participation rate is better than Europe’s but is our own lowest in 36 years.
We admit over a million legal immigrants per year who lower the average age of our population. However we fail to accept many highly educated and skilled workers who would be able to give our economy a huge boost.

Demographics are a problem for the U.S. just as they are for Europe. The only way to counteract strong demographic trends is with smarter economic policies.

Where Should the New 114th Congress Focus Its Attention?

Posted on January 6, 2015 by jackheidel

The two main themes of this website are how to boost economic growth and how to get our national debt under control. Faster economic growth will put more people back to work by creating more jobs. Faster growth will also bring in more tax revenue and therefore potentially reduce deficit spending.
The latest monthly unemployment rate, 5.8% for November 2014, is much higher than it should be almost six years after the end of the Great Recession in June 2009. The best thing that Congress could do to boost economic growth is to adopt broad-based tax reform, lowering tax rates in a revenue neutral way by closing loopholes and limiting deductions. I’m still in favor of doing this but I no longer consider it to be the top priority for the following reason.
The huge drop in the price of gasoline is already providing a big economic stimulus. At the current price of $2 per gallon, the average American family will save about $750 per year in driving expenses. This is even more relief than a tax cut would provide. The economy has already picked up steam in 2014 and is predicted to grow at the rate of 3% in 2015. This will keep the unemployment rate decreasing steadily throughout 2015 and beyond, which represents much progress.
It’s now time for Congress to focus more strongly on putting the debt on a downward path. This can only be done by shrinking our annual budget deficits well below the $483 billion deficit for the last (2014) budget year. As the above chart from Fix the Debt shows, our current fiscal path leads inexorably to a growing debt which is completely unsustainable in the long run. Annual deficits will have to be at least cut in half to be able to turn the debt trajectory downwards.
Getting this done will require much dedication and hard work by Congress. Many programs will have to be eliminated. Surviving programs will need to operate more efficiently. The entitlement programs of Social Security, Medicare and Medicaid will have to be greatly tightened up.
Is Congress up to this task? The future of our country depends on it!

The Legacy of Senator Tom Coburn

Posted on January 4, 2015 by jackheidel

Oklahoma’s Senator Tom Coburn has just retired from Congress after serving six years in the House of Representatives and ten years in the Senate. He will be sorely missed because his achievements were legion.
By ridiculing the “Bridge to Nowhere” in Alaska in 2006, he eventually prevailed upon Congress to totally eliminate earmark spending by 2011.
Beginning in 2010 his staff compiled an annual “Wastebook” each year listing numerous examples of wasteful spending by the federal government. The “2014 Wastebook” gives 100 such examples totally $25 billion ranging from laughing classes for college students to a State Department program to dispel the perception abroad that Americans are fat and rude!
Beginning in 2011, Senator Coburn has prevailed upon the Government Accounting Office to issue annual reports entitled “Actions Needed to Reduce Fragmentation, Overlap and Duplication and Achieve Other Financial Benefits.” Now, after four years, a total of 226 specific actions have been recommended by the GAO. GAO’s Action Tracker shows that the government has addressed about 19% of the efficiency recommendations made by the GAO. Be thankful for small progress!
His latest, finest and presumably last major effort along these lines is a 320 page report, the “Tax Decoder” which is intended to “decode the tax code for every taxpayer. It reveals more than 165 tax expenditures costing over $900 billion this year.” Although more than $1.7 trillion in tax revenue was collected by the government in 2014, the IRS will be unable to collect an additional $500 billion that is owed. This would have been enough to cover the $483 billion deficit for fiscal year 2014!
As Senator Coburn points out in the introduction to this document, “ideally Congress would throw out the entire tax code and start over. But at the very least, Congress should make the tax code simpler, fairer and flatter.”
It is rare that a single member of Congress makes such an extraordinary contribution to our country’s welfare!

It Does Not Add Up

Jack Heidel's blog on fiscal responsibility