Amid declining household debt, rising student loans remain a drag on the economy

Total household debt continues to decline, but rise in student debt hampers economic recovery.

The total amount of debt held by Americans fell again in the first three months of the year and stood at the lowest level since the middle of 2006, the New York Federal Reserve said Tuesday….

The level of household debt in the first quarter fell by $110 billion, or 1%, to $11.23 trillion, mainly because consumers reduced mortgage balances and used their credit cards less.

A…
Auto and student loans rise.

The increase in the value of auto loans was the smallest in four quarters, suggesting that car companies might have cut prices to attract buyers as demand for new vehicles slackened. Still, auto loans rose $11 billion to $794 billion to mark the ninth straight quarterly gain.

Student loans have ‘surged 46% since the end of the recession’.

Student loans, which climbed $20 billion in the first quarter, have surged 46% since the end of the recession to an all-time high of $986 billion. More students are going to college or remaining in school longer to obtain graduate degrees to improve their chances of finding a job amid a slow economic recovery.

Yet the escalation in student loans is also leaving many young people saddled with large debts. Although the delinquency rate on student loans fell slightly in the first quarter to 11.19%, that’s still the second highest rate ever. Before the recession, delinquencies averaged around 7%.

The decline in household debt is good for a recovering economy, but economists believe growing student loans are ‘acting as a drag on growth’.

The anemic economy has left millions of younger working Americans struggling to get ahead. The added millstone of student loan debt, which recently exceeded $1 trillion in total, is making it even harder for many of them, delaying purchases of things like homes, cars and other big-ticket items and acting as a drag on growth, economists said.

High school writing instruction should be less creative and more ‘formulaic’

“Academic writing is formulaic“, according to one SAT tutor who has written a number of books on the topic.  It would seem to follow that creative writing should not be an important focus of high school curriculum.  Students should master the “formula” before they spend too much time on poetry, journaling, or similar exercises in creative writing.

… one of the things I try to get kids away from in terms of their academic writing is the idea that everything they write has to be wildly new and creative. Academic writing is formulaic. It just is. Clarity trumps pretty much everything. You can be creative when you’ve mastered all the rules, but until they, you need to pay attention to what people with more experience do and learn from them. (I think part of the problem is all the hysteria over plagiarism: of COURSE kids shouldn’t be stealing other people’s work, but they also need models! How else are they supposed to learn to write?) When they try to be creative, they write jumbled sentences and the like — it’s just a disaster.

When it comes to writing, most students need to learn the rules before they can break the rules.

Students are not being taught academic writing in high school.

In his “third column on the teaching of writing in colleges and universities“, Stanley Fish addressed a question from readers.

Isn’t the mastery of forms something that should be taught in high school or earlier?

His response, based on years of experience as a college professor:

By all the evidence, high schools and middle schools are not teaching writing skills in an effective way, if they are teaching them at all….

High schools should try something different.

I think K-12 schools would see greater success if they used something like the Kerrigan method of ‘Writing to the Point’, a methodical and efficient approach to writing instruction.  I would love to see a separate composition course in high school, employing a basic method like that of Kerrigan, and involving plenty of practice writing.  I suspect a course like this would work well as an online option.

It worked at New Dorp High School in New York City, where it was found”that returning to fundamentals like explicit grammar instruction and formulaic writing has succeeded in turning around the dismal performance of high poverty students”.

Is education the most important equalizer?

Jeffrey Selingo, author of College (Un)bound: The Future of Higher Education, and What It Means for Students, spoke with NPR about “why colleges are no longer an equalizing force”.

… One of the most disturbing numbers I came across in research for this book was that if you come from a family with a family income above $90,000, you have a 1 in 2 chance of getting a bachelor’s degree by the time you’re in your mid-20s. If you come from a family under $35,000, you have a 1 in 17 chance.

“One of the fears, and one of my fears, is that we might become a country where the next generation is less educated than the generation that preceded it.”

If current trends continue, the next generation is also much more likely to have grown up in a household without a father.

Missing fathers are at the core of a ‘vicious cycle’ of poverty and low education levels.

The chance of a child ending up poor declines by 82 percent when raised in a two-parent family.

Which one factor is more important in equalizing financial opportunities – college or fathers?  I don’t know, but if I had a magic wand and could change only one of these, I’d put fathers back into American families.  The education part would probably start to take care of itself.

Related:  Non-marital births by education level as part of the growing class divide (Cost of College)

Quick Links – College grade inflation; understating federal cost of student loans; trends in physical education

College grade inflation

Forty years ago, only 10 percent of grades awarded by Yale College were in the A-range. Last spring, that percentage was 62.

Yale is reviewing its grading policy.

“If B-plus is being kept for bad work, and virtually everyone is getting A or A-minus, this eliminates any genuine feedback,” Kagan said. “I’ve always thought this is a disservice to undergraduates.”

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The federal government systematically undercounts the cost of student loans by ignoring market risk.

… the federal government’s accounting practices systematically understate the cost of student loans by failing to account for market risk. A superior method called “fair value accounting,” which is the strong preference of academic economists and the Congressional Budget Office (CBO), would show considerably greater costs due to the risk associated with expecting loan repayments….

However, almost all economists believe that the way the federal government accounts for student loan costs is simply wrong. Under the principles of “fair value” accounting, which the CBO endorses, the discount rate applied to the revenue from students’ repayments should be much higher than the rate on U.S. Treasuries. A higher discount rate would reduce the present value of those repayments, thus increasing the cost of the student loan program to the government.

The reason the discount rate is higher is because it incorporates the price of market risk into cost estimates, while current accounting practices ignore that risk. Students might pay back what the government predicts they will, but taxpayers must cover the full cost of the loan regardless. Since defaults tend to occur when the economy is weak, taxpayers face the risk of losing expected funds at a time when budgets are least flexible.

Thus, the government’s budgetary estimate reflects only part of the fair value cost of offering a student loan. Additional cost comes from the risk that loan repayments will be lower than expected.[6] The federal government should use a higher discount rate to reflect the risk that expected loan repayments will not materialize.[7]

This reminds me of how state governments consistently underfund pension obligations, inflating discount rates to hide true taxpayer liability.

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High school PE classes focus more on activities that will continue through to adulthood, including work-outs at fitness centers.

High schools are installing gyms for PE.

Forget dodge ball, squat thrusts and being picked last for the team. Today’s high-schoolers are more likely to get a workout in what’s becoming a must-have tool in physical education: a state-of-the-art fitness center.

Less focus on team sports and more emphasis on developing fitness habits that will last a lifetime

“There’s a lot of people who aren’t on the Scarsdale High School football team, and yet they want to be healthy,” he said. “I would anticipate using the treadmill and the machines for gaining muscles.”

There’s a new crop of physical education teachers coming out of college who are preparing to reach students, such as Gale, who don’t just want to learn to play a sport, said Robert Schmidlein, a professor of physical education at Manhattanville College.

“It’s a paradigm shift,” Schmidlein said. “People don’t play team sports when they get older. Less than 1 percent of the adult population plays team sports. Seventy percent of kids drop out of youth sports by age 13. No one should be teaching team sports at the high school.”

“Fit for Life”
Our local high school offers PE students a choice between two options for each class unit, with one usually involving a team sport and the other involving a fitness activity like yoga or running.  While we don’t have a Scarsdale-level fitness center, we do have a small selection of treadmills and elliptical machines.

‘Pell Grants Shouldn’t Pay for Remedial College’

Michael Petrilli argues that Pell Grants should not be used to pay for remedial college courses.

 … A huge proportion of this $40 billion annual federal investment is flowing to people who simply aren’t prepared to do college-level work. And this is perverting higher education’s mission, suppressing completion rates and warping the country’s K-12 system.

Current Pell Grant spending is wasteful.

About two-thirds of low-income community-college students — and one-third of poor students at four-year colleges — need remedial (aka “developmental”) education, according to Complete College America, a nonprofit group. But it’s not working: Less than 10 percent of students who start in remedial education graduate from community college within three years, and just 35 percent of remedial students earn a four-year degree within six years.

A proposed solution

What if the government decreed that three years hence, students would only be eligible for Pell aid if enrolled in credit-bearing college courses, thus disqualifying remedial education for support?

Possible positive effects:

• More resources could go to ambitious students, giving them an incentive to work hard to prepare for college-level work.
• K-12 schools would become more accountable if they knew their graduates would only received college assistance if they were ready for college.
• Colleges would become more selective, rasing their standards of learning.
• Pell Grant money could be focused on the most qualified students, improving their chances of graduation.

In sum, disqualifying the use of Pell grants for remedial education would substantially reduce the gap between the number of students entering higher education and the number completing degrees.

Possible negative effects:

Yes, there are obvious downsides. Most significantly, many students wouldn’t be able to afford remedial education and thus would never go to college in the first place. Millions of potential Pell recipients — many of them minorities — might be discouraged from even entering the higher-education pipeline. Such an outcome seems unfair and cuts against the American tradition of open access, as well as second and third chances.

Then again, it’s not so certain that these individuals are better off trying college in the first place. Most don’t make it to graduation….

Perhaps the greatest risk is that colleges would respond to the new rules in a perverse manner: by giving credit for courses that used to be considered “remedial.”  …  would further dilute the value of a college degree.

Petrilli suggests the potential upside is sufficiently compelling to warrant a pilot program that would limit Pell Grants only to students ready to do college-level work.  

Perhaps offer the deal to an entire state. Study what happens. My guess is that it would have a salutary effect on the K-12 system, on higher education and on college-completion rates. Let’s find out.

Related:

• ‘Sending the wrong students to college’ (Cost of College)
• We spend $40 billion yearly on Pell Grants, but we have no idea about results (Cost of College)

Career and money advice for new college graduates

If you’re a millennial, do these things, or else risk remaining unemployed for a long time.

1. Wake up early. Job seeking is a full-time job.
2. Don’t pass on everything. No entry-level job is ideal.
3. Stop relying on mom and dad.

Career advice from Aol Jobs, summarized by FINS Morning Coffee

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With two out of three college graduates averaging more than $24,000 in student loans, Fox Business steps in with this financial advice.

Step 1: Create a Budget

Even if grads don’t have a concrete post-grad plan just yet, creating a budget of projected expenses such as bills, rent and discretionary spending can help them better understand their cash flow situation, suggests John Bucsek, managing director with MetLife Solutions Group. …

Making a budget doesn’t have to be an overwhelming prospect—grads can easily keep up with their expenses using sites like Mint.com or creating a simple spreadsheet….

Step 2: Figure Out Student Loan Terms

Grads typically only have a six-month grace period before having to start repaying student loans, making it essential to secure a job and stay on top of other expenses.

Unemployed or financially-strapped grads should consult with their lender to determine repayment options available to them such as deferment, forbearance, and Income Based Repayment plans should they have issues making payments on time….

Step 3: Get High Interest Debt in Check

Whether grads are an authorized or co-signed user on a parent’s card or have their own account, they should  focus on getting the debt with the highest interest rate paid down first.

Understanding how debt impacts future goals and how credit score plays into every major purchase can help them stay on top of making steady payments and monitoring credit history health, says Bucsek.

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A variation on the expert’s advice

Since the percentage of young adults living with their parents has risen to 22% today, from 11% in 1980, it appears the recommendation to “stop relying on mom and dad” is being ignored by many.  Here’s my variation on the preceding advice.

1. Get up early every day to find a job, or to hone your skills to make yourself more employable.
2. Even if you can’t find a job in your field, work somewhere, even if it’s part-time.  Earn some money.
3. If you’re living at home, use the opportunity to save aggressively and/or pay down student loans.

 Related:  Parents have lower expectations for kids becoming financially independent (Cost of College)

‘teaching is not yet a profession’

Teaching in American K-12 public schools is different from many other professions.  Linda Darling Hammond argues that “teaching is not yet a profession”, with one reason being that teachers lack mastery “of a common knowledge base”.

At the heart of the issue are schools of education, according to Kate Walsh, president of the National Council on Teacher Quality (NCTQ).

Arne Duncan, the Obama administration secretary of education:

 … “By almost any standard, many if not most of the nation’s 1,450 schools, colleges, and departments of education are doing a mediocre job of preparing teachers for the realities of the 21st-century classroom,” and “America’s university-based teacher preparation programs need revolutionary change, not evolutionary thinking.”

Much criticism targets specific problems that afflict schools of education.

… lack of selectivity, an imbalance between content and pedagogy, or the lack of value delivered.

Actually, ed schools do not “train” teachers; they “prepare” them to travel “on a lifelong path of learning, distinct from knowing, as actual knowledge is perceived as too fluid”.

Though those two terms—train and prepare—appear to be interchangeable, they are not….

It is because training a teacher is viewed (if the AERA volume is accurate in its summation) as “an oversimplification of teaching and learning, ignoring its dynamic, social and moral aspects.”…

Harking back perhaps to teacher education’s 19th-century ecclesiastical origins, its mission has shifted away from the medical model of training doctors to professional formation. The function of teacher education is to launch the candidate on a lifelong path of learning, distinct from knowing, as actual knowledge is perceived as too fluid to be achievable. In the course of a teacher’s preparation, prejudices and errant assumptions must be confronted and expunged, with particular emphasis on those related to race, class, language, and culture. This improbable feat . . . is accomplished as candidates reveal their feelings and attitudes through abundant in-class dialogue and by keeping a journal. From these activities is born each teacher’s unique philosophy of teaching and learning.

Not many other professions, medicine for example, follow this model.  (Thank goodness.)

Social justice activism is often considered more important than academic instruction.

There is also a strong social-justice component to teacher education, with teachers cast as “activists committed to diminishing the inequities of American society.” That vision of a teacher is seen by a considerable fraction of teacher educators (although not all) as more important than preparing a teacher to be an effective instructor. This view of a teacher’s role as transformational is not wrong, as teachers often serve as the means by which children overcome challenges inherent in their backgrounds. But it is one that is often taken to absurd extremes in practice. For example, a textbook used in a math course for elementary school teachers is entitled Social Justice through Mathematics, which explains why the view is so often disparaged.

Best practices?  There is minimal agreement on best methods for instruction, and education schools want future teachers to find ‘the “how to” on your own and  own your teaching style’.  According to AERA, an education methods course in college is not actually meant to teach the best methods.

… “A methods course is seldom defined as a class that transmits information about methods of instruction and ends with a final exam. [They] are seen as complex sites in which instructors work simultaneously with prospective teachers on beliefs, teaching practices and creation of identities—their students’ and their own.”

One of the most harmful examples of this do-your-own-thing approach is in reading instruction, where the NCTQ found the most common recommendation among ed schools is that the teaching ”candidate should develop her own approach to teaching reading, based on exposure to various philosophies and approaches, none more valid than any other”.

One step in addressing the ed school problem:  The NCTQ plans to introduce an objective measure of quality and performance.

The NCTQ Teacher Prep Review, slated for initial release in June 2013,  is rating teacher-preparation programs across the country. By examining the fundamental requirements of each program—admissions standards, course requirements, coverage of essential content, preparation in the CCSS, how the student teaching program operates, instruction in classroom management and lesson planning, and how teacher candidates are judged ready for the classroom—the Review will capture the information that any consumer of these programs would want to see, including aspiring teachers and school districts looking to hire the best teachers….

Good teachers often have to fight the system   I’ve been fortunate to know many excellent teachers, but I suspect many have had to work against barriers imposed by poor training and mediocre curriculum.  Perhaps this NCTQ review of education schools will be one step on the way to Duncan’s “revolutionary change”, but I’m not holding my breath that change will happen quickly.

Related:

• Schools of education focus on fads, not knowledge and skills’ (Cost of College)
• Want a high GPA in college? (Cost of College)

Tuition discounting grows to all-time high at private colleges

Tuition discounts continue to climb at private colleges.

The average “tuition discount rate”—the reduction off list price afforded by grants and scholarships given by these schools—hit an all-time high of 45% last fall for incoming freshmen, according to a survey being released Monday by the National Association of College and University Business Officers.

Rising discounts along with the smallest sticker price increases in years have combined to make college more affordable for many families.

“It’s a buyer’s market” for most colleges ”as more families focus on cost and value”.

Some facts and figures:

• 65% of private colleges increased their discount rate in the fall of 2012.
• About one in eight U.S. undergraduates is enrolled at a private nonprofit college, which provided 70% of all grant aid to undergraduates in 2009.
• “The average discount rate at private colleges has climbed for seven years in a row.”
• The median sticker price at about 280 private schools rose 3.9% last year, the smallest increase in about 12 years.
• At four-year public colleges and universities, in-state tuition and fees rose 4.8% last year, also the smallest increase in about 12 years.
• “The discount rate for public universities fell modestly in 2012 … after rising from 2007 to 2011.”
• Last fall, enrollment fell at about half of 400 private colleges surveyed as the number of high school graduates dropped.

Both need- and merit-based aid appear to be part of this trend of growing discounts.

The economic downturn boosted the number of families who qualify for aid. In addition, even those earning too much to demonstrate need under aid formulas “expect to see some sort of merit aid,” unless the school is highly selective, said Trey Chappell, a college adviser in Scottsdale, Ariz.

Is it a “fundamental shift”, or simply the result of a weak economy?

The question of whether the revenue problems facing colleges and universities are a result of a fundamental shift in the country’s attitude toward paying for college – the so called “college bubble” – or whether it’s simply the result of several years of weak economic growth will only be answered if families begin to experience the kind of economic growth they were accustomed to prior to the recession.

Related:  Tuition Discounting: Not Just a Private College Practice (CollegeBoard)

Quick Links – Public pension problems round-up

IN NEW YORK, PENSION COSTS ARE OVERPOWERING THE PUBLIC SCHOOLS’ ABILITY TO MAINTAIN STUDENT SERVICES.

Our local public schools must cut student services to pay soaring pension costs.

The budget numbers tell the story:

• Total school costs will increase 3.3% over last year.
• Cost of teacher pensions alone will increase 42%.
• Pension costs account for at least 75% of the total budget increase.*
• To pay for the 42% increase in teacher pension costs, the school will cut teaching staff and increase class sizes.

Public schools throughout the state are in a similar situation.   “Retirement and insurance costs continue their relentless climb”, causing a nearby district to cut 30 jobs.  Another local school administrator explains their pension costs:

Almost 80 percent of the hike comes from a $3.5 million rise in state-mandated retirement expenses, Purvis said.

* Total employee benefits costs account for 96% of the total budget increase.

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A SPECIAL EXEMPTION ALLOWS TAX INCREASES THAT EXCEED TAX CAP LIMITS AS LONG AS THOSE PAYMENTS ARE USED TO PAY FOR PUBLIC EMPLOYEE PENSIONS.

The New York property tax cap introduced two years ago includes a carve-out created to allow tax increases that pay for teacher pensions to be exempted from the cap.  As it turns out, this exemption has been the main reason for the average tax increase more than doubling above the 2% statutory base cap up to 4.6% .

The additional increase is driven entirely by a provision of the 2011 tax cap law that excludes a portion of increased employee pension costs from the limit on tax levy increases. Without the pension-related increase, the 2013-14 levy limit statewide would average 2.7 percent, including all other district-specific exclusions and allowances for voter-approved capital expenses and physical additions to the local tax base, along with factors such as growth in the tax base and net changes in the value of payment in lieu of tax (PILOT) agreements.

The pension exclusion hurts poor school districts the most because the calculation method especially affects communities with lower property values.

… the pension exclusion in the tax cap law effectively makes it easier for school districts to raise taxes on property owners who can least afford it.

… The pension provision—added at the insistence of Assembly Speaker Sheldon Silver—diminishes the protection the law was supposed to provide for some of the state’s poorest taxpayers.

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NEW YORK’S ‘STOPGAP’ SOLUTION TO PENSION CRISIS CARRIES ‘LONG-TERM RISKS’.

A “pension-smoothing” provision was recently introduced in New York, allowing school districts to postpone full funding of pension liabilities.

Moody’s does not look favorably on this plan to kick the can down the road.

Moody’s Investors Services warned Monday that the state’s new pension-smoothing plan is “a stopgap with long-term risks” that could endanger the state’s pension fund and the credit of local governments.

The plan, part of the state budget approved last month, allows for local governments and schools to essentially pay a flat rate for pension costs over 12 years, avoiding the steep cost increases that the municipalities have faced.

Opening the door to future underfunding of pension liabilities

Moody’s says that the concern is the flat-rate payments could underfund the state’s roughly $150 billion pension fund, which provides benefits to 1 million retirees and current local and state workers. That could lead to higher costs for municipalities and schools in future years, the credit agency said.

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PUBLIC PENSION HORROR STORIES FROM ILLINOIS AND FROM CALIFORNIA CONJURE UP TROUBLING IMAGES.

 

 In Illinois, public pensions already gobbling up education funding

… Education funding is being strangled by the same python that is strangling the rest of state government’s finances: pension obligations….

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 “The pension costs really are the Pacman that’s eating our budget,” Shirey said.

‘Rich’ families get a sweet financial aid deal at the most selective universities

For students who win the college admissions lottery and get in to the most selective universities, high income may not be a barrier to receiving financial aid.  Here are some examples.

HARVARD

2011-12 School Year:  About 240 families earning $180,000-200,00 received financial aid.

Beginning with the Class of 2016, families with incomes between $65,000 and $150,000 will contribute from zero to ten percent of income, and those with incomes above $150,000 will be asked to pay proportionately more than 10%, based on their individual circumstances. Families at all income levels who have significant assets will continue to pay more than those in less fortunate circumstances.

PRINCETON

2011-12 School Year:  99% of families earning $180,000-200,000 who applied for financial aid received grants that averaged $23,600.

Applicants receive aid based on their families’ financial need. We do not use income cutoffs when determining whether to award aid.  Any student whose family feels unable to afford the full cost of attendance is encouraged to apply for aid.

YALE

2011-12 School Year:  99% of families earning $150-200,00 who applied for financial aid were approved.  Grants for those 505 families averaged $26,500 each.

• Families whose total gross income is less than $65,000 are not expected to make any financial contribution towards their child’s Yale education. 100% of the student’s total cost of attendance will be financed with a Yale Financial Aid Award.
• Families earning between $65,000 and $200,000 (with typical assets) annually contribute a percentage of their yearly income towards their child’s Yale education, on a sliding scale that begins at 1% just above $65,000 and moves toward 20% at the $200,000 level.
• There is no strict income cutoff for financial aid awards. Many families with over $200,000 in annual income receive need-based aid from Yale.

UNIVERSITY OF CHICAGO

2012-13 School Year:  59% of families with incomes above $120,000 who applied received financial aid.

The average University of Chicago aid applicant receives $37,500 in scholarships each year.

$160,000 income puts you in the top 10% of families in the United States.

Related:

• Can rich families qualify for college financial aid? (Cost of College)
• Berkeley will offer financial aid to ‘middle-class’ families (Cost of College)