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.
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.”
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.
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).
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.
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.
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. The 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!