Archive for ‘student loans’

August 21, 2014

Should the government enable every kid to go to college?

by Grace

If college is supposed to represent some sort of advanced or more demanding level of education, why has it become a national priority to send every kid to college?

Jim Geraghty asks this question in an article questioning the wisdom of our government’s expansive student loan policy.

Is it really in the country’s best interest to enable every aspiring college student to attend college? Right now the federal government is in the business of loaning money to young people to attend college, only to watch significant numbers — 600,000 or so last year — fail to pay the money back. College students are defaulting on federal loans at the highest rate in nearly two decades, with one in ten defaulting on their loans in the first two years. This is not merely one late check; to meet the Department of Education’s definition of default, a borrower’s loan must be delinquent for 270 days — nine months.

The college gets its money, the taxpayer loses theirs, and the deadbeat student can be left with all kinds of frustrating consequences — seized tax refunds, garnished paychecks or benefits, or a lawsuit. (Though the deadbeat student is often in this situation because their college education failed to prepare them to find a job in a mediocre-at-best economy and make a living, so there may not be much money in their wages to garnish.)

How many of those students really should go to college? If college is supposed to represent some sort of advanced or more demanding level of education, why has it become a national priority to send every kid to college? Wouldn’t the nation be better off if at some point it said to these young people, “you can go to college if you want, but we’re not paying for it”?

Remember the burst of the housing bubble?

 “If nothing else, the recent financial crisis should have taught us that it’s not in the country’s best interest to enable every aspiring homeowner to buy.”

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Jim Geraghty, “The American Dream Peddlers”, National Review Online, April 23, 2014.

July 24, 2014

Loans overtook grants as the main source of college financial aid in 1982

by Grace

In the early 1980s loans begin to exceed grants as the primary form of college financial aid.

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Figure 3 shows the amount of financial aid provided in each major category since 1980, in constant dollars (institutional grants are excluded, as they are treated as a discount off of tuition). In the early 1980s, federal, state, and private grants were the largest form of financial aid. But beginning in 1982, loans began to outpace grants, and since then they have remained the largest form of aid available to students to help them pay their costs of attending higher education.

The federal government had first stepped up its role in college financial aid in the 1960s.*

… The United States has long had financial aid for students, awarded in different forms (loans, grants or scholarships, government-subsidized jobs on college campuses, and tax benefits) and from different sources (federal government, state governments, higher education institutions, and private entities). The federal government first began provision of broad-based financial aid in the forms of grants and loans to students with the passage of the Higher Education Act of 1965. This Act also had a provision, the State Student Incentive Grant program, which encouraged states to create their own grant programs. These programs, along with the continued expansion of institutionally-funded scholarships, have helped to subsidize the price paid by students for attending college and have also served to lessen the impact of rising “sticker” prices, or the amount charged by universities before any discount is provided.

*The G.I. Bill began offering federal education benefits to veterans in 1944.

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Geiger, Roger & Heller, Donald. “Financial Trends in Higher Education: The United States” (Working Paper), Peking University Education Review, January 2011.

July 7, 2014

Student debt and net worth

by Grace

College-educated young adults with student loans have a lower net worth than those who did not graduate from college.

Nearly four-in-ten U.S. households headed by an adult younger than 40 currently have student debt and a median net worth of just $8,700.

That’s a stark contrast to the median net worth of $64,700 that young college graduates without student debt have accumulated. Additionally, consumers without a degree and without student debt have a net worth of $10,900, once again greater than that of degree holders with debt.

While student loan debt does play a large role in the low median wealth of college graduates with student loan obligations, Pew found these consumers were more likely to take on other debts that contributed to the wealth gap.

College graduates are making more money.

… College-educated student debtors typically have a household income of $57,941, nearly twice that of homes in which the heads do not have bachelor’s degrees.

And their debt load is greater.

… Among the young and college educated, the typical total indebtedness (including mortgage debt, vehicle debt and credit cards, as well as student debt) of student debtor households ($137,010) is almost twice the overall debt load of similar households with no student debt ($73,250)….

It is reasonable that college-educated young adults, with their higher incomes, are able to take on more debt.

Though student debtor households tend to have larger total debt loads, indebtedness needs to be assessed in the context of the household’s economic resources. In other words, households with greater income and assets may be able to take on more debt. Using the conventional total debt-to-income ratio, where debt is measured as a share of income, college-educated student debtors are by far the most indebted.2 The median college-educated student debtor has total debt equal to about two years’ worth of household income (205%). By comparison, college-educated households without student debt and less educated households with student debt have total debts on the order of one year’s worth of household income (108% and 100%, respectively).

The hope and expectation are that their income will keep pace with inflation, and continue to grow at a rate that will enable them to manage their debt.

These young adults should also start saving for retirement, since the “power of compounding is a reason to start saving for retirement as early as possible”.

Saving “$5,000 per year only from ages 25 to 35 (10 years)” will generate a larger retirement nest egg than saving “$5,000 per year, but from ages 35 to 65 (30 years)”.

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Ashlee Kieler, “College-Educated Consumers With Student Debt Have Median Net Worth Of Just $8,700″, Consumerist, May 14, 2014.

Richard Fry, “Young Adults, Student Debt and Economic Well-Being”, Pew Research Center’s Social & Demographic Trends, May 14, 2014.

July 1, 2014

Student debt: not a crisis but certainly a growing problem

by Grace

A recently published study by the Brookings Institution, supported by David Leonhardt’s commentary in the New York Times, downplays the growing student loan problem.  But other commentators have raised issues about the study’s data, and even questions about conflicts of interest have surfaced.

The Brookings report asked “Is a Student Loan Crisis on the Horizon?”, and the authors found that “the impact of student loans may not be as dire as many commentators fear”.  Fair enough, but criticisms about the study’s sloppy data analysis include:

  • The statistic that only 7% of borrowers have student debt balances greater than $50,000 is challenged by findings from the New York Fed.
  • Measures of student debt exclude borrowers living in households “led by anyone over 40″, effectively missing young borrowers living with their parents.
  • Borrowers who were not making payments on their student debt were also excluded from the findings.  Interesting, since this would include cases where loan payments were postponed as a way to avoid defaulting.

The role of the Luminara Foundation’s donations to Brookings and to the study’s authors looks a little suspicious to Malcolm Harris .

… When the Obama administration nationalized 85 percent of higher education lending in 2010, executives like the ones who now sit on the Lumina Foundation board were the big losers. Since then, college costs have continued skyrocketing, but the tens of billions in profits have gone to the Department of Education instead of private lenders. If you were them, and you were angling to get back in the game, the first step would be to edge the government out, either by getting the feds to withdraw or by keeping costs rising faster and higher than DoE loan limits. Graduate loans are a great place to start in a divide-and-conquer strategy, so it’s no surprise that Delisle concludes in favor of shrinking the government’s role. Nor is it surprising that Akers and Chingos can’t find a cost crisis, even though theirs is a fringe minority opinion among higher education analysts and investors.

Most people probably agree that the student loan issue is a not a crisis, but is a slowly growing problem.

… The student debt bubble isn’t going to explode like the housing bubble. Instead, it’s going to fill slowly as it grows over decades, burdening borrowers further and further into the future….

It’s certainly worth paying attention to it, and trying to find ways to diminish its negative effects on college costs and on the economy in general.

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Beth Akers and Matthew M. Chingos, “Is a Student Loan Crisis on the Horizon?”, Brookings Institution, June 24, 2014.

Choire Sicha, “That Big Study About How the Student Debt Nightmare Is in Your Head? It’s Garbage”, The Awl, June 24, 2014.

Malcolm Harris, “The college-cost denial industry”, Al Jazeera America, June 27, 2014.

June 17, 2014

Proliferation of master’s degrees produces wasteful ‘credential inflation’

by Grace

The master’s degree is the fastest-growing college credential in this country, but is that a good thing?

20140613.COCGrowthAllDegree1

Eight percent of the population now holds Master’s degrees, the same percentage that held bachelor’s degrees (or higher) in the 1960s, reports Vox. Master’s degrees in education were by far the most popular, holding at around a third to a quarter of all such degrees from 1971 to 2012, though MBAs had taken the top spot by 2010. In fact, the increase in the number of MBA degrees is astonishing: Only 11.2 percent of master’s degrees were in business in 1971, but in 2012, they were a whopping 25.4 percent.

This “credential inflation” is “in large part driving the student loan crisis”.

The rise of the master’s degree is likely a product of credential inflation. As more and more people acquire bachelor’s degrees, those who wish to make themselves stand out go on to get the MA. And as Vox points out, while a Master’s degree does have a positive impact on earnings, the overall debt of people with undergraduate and Master’s degrees has grown markedly in the past decade. In fact, as we recently noted, graduate student debt is in large part driving the student loan crisis.

The recently expanded loan forgiveness program is “tailor-made for graduate students”.

Students who took out big loans for graduate school and those with higher incomes stand the most to gain financially under President Obama’s expansion of the federal government’s loan forgiveness program.

Lawyers, doctors and other highly trained professionals who utilized federal loans throughout their post-high school education could walk away with most or all of their graduate school debt forgiven by the federal government under the program, say experts.

Is this good for our economy?

… But we shouldn’t want an economy that favors people with polished résumés over people with good ideas. This data is not a good sign for our economic health.

It seems to be another case where excessive government intervention has created inefficiencies resulting in unintended consequences

Public support for higher education helps to create unnecessary barriers in many fields where advanced degrees are now required credentials. … Neal McCluskey argues that “cheap college has almost certainly fueled credential inflation, not major increases in knowledge or skills.”

ADDED 6/17/14:

Advanced degrees don’t generally improve student achievement levels.

A number of studies have shown that teachers with advanced degrees don’t, necessarily, produce higher student achievement than teachers who hold only a bachelor’s….

One study from the Center for American Progress reported “that states waste money by giving salary increases to teachers as a reward for getting a master’s degree, spending nearly $15 billion annually on such pay hikes”.

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Randy Olson, “College degrees awarded per capita in the U.S.A.”, Randal S. Olson, June 12, 2014.

Walter Russell Mead, “The Rise of the Master’s Degree”, The American Interest, May 22, 2014.

Susan Ferrechio, “The surprising winners of Obama’s student-loan program”, Washington Examiner, June 12, 2014 .

Tyler Durden, “Unintended Consequences Of Obama’s Student Loan Policies”, Zero Hedge, June 13, 2014.

Ida Lieszkovszky, “Liberal Think Tank says Advanced Degrees Don’t Make Better Teachers”, StateImpact Ohio, July 18, 2012.

June 13, 2014

President Obama expands the ‘fat-cat MBA tuition assistance program’

by Grace

President Obama’s executive order to expand student loan forgiveness could be called the “fat-cat MBA tuition assistance program”.

Students who got expensive degrees, even of the type that tend to yield lucrative jobs—like MBAs—stand to gain from these changes. At least, certain ones do.

20140611.COCLoanForgivenessMBA1

Jason Delisle of the New America Foundation calculated a scenario where taxpayers would pay $208,259 to forgive part of an MBA graduate’s student loan.

We have one example of someone who might look similar to an MBA student. He starts out with a starting salary of $90,000 and, by the end of 20 years, is making $243,360. Under the old IBR program, he’ll have paid $409,445 by year 25 and be forgiven $23,892 of his loan balance. Under the new [PAYE] plan, he’ll pay less than half of that, or $202,299, and be forgiven $208,259 by year 20.

Better yet, this MBA graduate could start his career in the public sector, and have his loan balance forgiven after ten years under the Public Service Loan Forgiveness Program (PSLFP).

“If you plan on doing any kind of public service, nonprofit or government work,” said Delisle, “then you should borrow as much money as [your school] will possibly let you.”

Here’s an example of a veterinarian who can get taxpayers to pay off a substantial amount of his student loan.

Consider a vet who earns a salary over the next 20 years that is greater than 75 percent of vets in his age group. Once he accumulates $105,000 in debt while in school, any additional amount he borrows is forgiven under the New Income Based Repayment program after 20 years of payments. He could borrow $150,000, $190,000 or more, but he makes the same monthly and total payments over the next 20 years had he borrowed only $105,000….

Here is the kicker. According to the American Veterinary Medical Association, 70 percent of graduates leave school with more than $105,000 in debt today. And remember, the point at which a vet student stops incurring a cost for borrowing more in federal loans – $105,000 – was calculated for high earning vets, those making more than 75 percent of their peers, not the average.

Sweet deal.

Related:

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Cory Weinberg, “What Obama’s Plan to Lighten Loan Burdens Means For MBAs”, BloombergBusinessweek, June 10, 2014.

Karen Weise, “Grad Students Could Win Big as Obama Slashes Debt Payments”,  BloombergBusinessweek, June 9, 2014.

Jason Delisle & Alex Holt, “Income Based Repayment Is One Sick Puppy”, New America Foundation, August 28, 2013.

June 11, 2014

President Obama expands student loan forgiveness program

by Grace

President Obama has signed an executive order forgiving repayment for millions of student-loan borrowers.

The president announced Monday the expansion of 2010’s “Pay as You Earn” program that caps some graduates’ repayments at 10% of their monthly discretionary income. The executive order increases eligibility of the program to include those who took out loans before October 2007 or stopped borrowing by October 2011, a move the White House says will expand payment relief to nearly five million people.

Sweetening the pot of loan forgiveness

The federal government offers different repayment plans to help cash-strapped borrowers, including income-based repayments, the graduated repayment program, and forgiveness programs for on-time payments and public-sector employees.

Under many of the plans, low-income borrowers can have their balance canceled after 25 years of on-time payments. The president’s plan moves the forgiveness date to 20 years or 10 years for those in public service jobs.

It’s not likely to boost the economy, which is suffering from the effects of rising student loan amounts.

“It will slightly increase the amount of debt that is forgiven, but it’s not going to be enough to stimulate the economy,” says Kantrowitz. “If the government were to forgo all student loan debt immediately, it would have a 0.4% impact on the GPD. It wouldn’t really move the economy.”

But it my “unintentionally” push college costs higher.

Beth Akers, a fellow in the Brookings Institution’s Brown Center on Education Policy, says the move could also unintentionally push college tuition prices higher.

“The income piece is a necessary safety net for borrowers. It gives security to not be afraid to take on debt to go to college, but the forgiveness part isn’t always necessary. It induces people to borrow more than they need to, which can have a negative impact on college prices.” She says students are still getting a positive return on their college education investment—but too often, people are borrowing more than necessary. “We need to be careful when granting aid to borrowers because it can raise the prices on the front end.”

Joanne Jacobs seems to agree.

The big winners are people who borrowed for graduate school and private colleges, which can keep raising tuition without fear of scaring away students.

Related:  “Federal student loan programs create perverse incentives” (Cost of College)

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Kathryn Buschman Vasel, “Obama Announced Student Loan Changes–What it Means for Borrowers”, FOXBusiness, June 09, 2014.

June 4, 2014

Home equity loans regain popularity as college costs continue to rise

by Grace

A rebound in house prices and near-record-low interest rates are prompting homeowners to borrow against their properties, marking the return of a practice that was all the rage before the financial crisis.

College costs continue to rise, so home equity loans may rebound in popularity as a tuition-funding vehicle.

Ian Feldberg planned to open a $200,000 Heloc this week with Belmont Savings Bank to help pay his son’s college tuition. The medical-device scientist purchased his home in Sudbury, Mass. for a little over $1 million in 2004, and estimates that its value dipped as low as $800,000 during the financial crisis. However, after applying for the line of credit, he found that its value had completely recovered.

“I’m very pleased about that. My options for tuition fees were either that or to cash in on my pension prematurely,” he said.

A too-big-to-fail bank steps up home equity lending, and Tyler Durden of Zero Hedge expresses some concern.

The Wall Street Journal reported yesterday that home-equity lines of credit (Helocs) had increased at a 8% rate year-over-year in 1Q14. Some banks are more aggressive than others, and perhaps we shouldn’t be surprised to see TBTF government welfare baby Bank of America leading the charge, with $1.98 billion in Helocs in the first quarter, up 77% versus 1Q13.

What could possibly go wrong?

As HELOC delinquencies are off their highs (for now) but remain elevated… (we are sure this renewed ATM usage on the back of created wealth and stagnant wages won’t harm that downward trend at all…) – will we never learn?

20140602.COCTypesLoanDelinquincies1

And then there’s this.

Think about that for a minute. A “medical-device scientist” can’t send his kid to college without either a Heloc or cashing in on his pension.

Life goes on.

Related:  “Federal Direct PLUS or home equity loan for college costs?” (Cost of College)

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Tyler Durden, “Home Equity Loans Spike As Americans Scramble For Cash”, Zero Hedge, 05/31/2014.

May 26, 2014

2014 college graduates are ‘the most indebted class ever’

by Grace

The average Class of 2014 graduate with student-loan debt has to pay back some $33,000 … Even after adjusting for inflation that’s nearly double the amount borrowers had to pay back 20 years ago.

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… A little over 70% of this year’s bachelor’s degree recipients are leaving school with student loans, up from less than half of graduates in the Class of 1994.

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 … According to a new Pew Research report, a record 37% of young households had outstanding student loans in 2010, up from 22% in 2001 and 16% in 1989….

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Related:  ‘Growing student debt may be a reason for weak housing market’ (Cost of College)

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Phil Izzo, “Congratulations to Class of 2014, Most Indebted Ever”, Wall Street Journal,  May 16, 2014.

Richard Fry and Andrea Caumont, “5 key findings about student debt”, Pew Research Center, May 14, 2014.

Richard Fry, “Young Adults, Student Debt and Economic Well-Being”, Pew Research Center, May 14, 2014.

May 19, 2014

Democrats want to lower interest rate for refinancing student loans

by Grace

Democratic Senator Elizabeth Warren is leading the charge to allow refinancing of student loan debt at a lower interest rate.

Democrats said their measure would let holders of both federal and private undergraduate loans – some with rates of 9 percent or higher – to refinance at 3.86 percent.

Drafted in coordination with the White House, the bill is part of Senate Democrats’ 2014 legislative agenda aimed at giving all Americans “a fair shot” and rallying the party’s liberal base in advance of the November elections.

But like earlier rejected measures to raise the minimum wage and renew expired long-term jobless benefits for millions of Americans, it faces Republican opposition that could kill it.

“This bill would be hugely expensive,” said Republican Senator Jeff Flake of Arizona. “I don’t think it will be seriously considered.”

Democrats are sending a message to the middle class and attempting to bolster voter turnout.

The effort is part of of a broader messaging battle meant to portray Republicans as out of touch with the middle class. It goes part and parcel with the Democratic push to raise the minimum wage.

It also comes as Democrats seek ways to bolster turnout among their core supporters for the midterm elections, when an older and whiter electorate generally shows up to vote.

Let the rich pay for it.

The bill would cover the costs of those refinancings by enacting the “Buffett Rule,” a Democratic policy prescription that would ensure the wealthy pay some minimum amount of tax.

The costs are unknown, but taxes would be raised as much as needed.

Lawmakers still do not know how much the refinancing plan would actually cost, but they say they will adjust the terms of the Buffett Rule to fully cover the expenses of letting people refinance down to lower rates.

‘It’s the economy, stupid.’

They also argued that letting borrowers refinance at lower rates would be good for the overall economy. For example, freeing up funds that would have gone to pay higher interest could enable younger people to save money to buy a house or a car.

A study from the New York Fed released Tuesday found that 25-year-olds have an average of $21,000 in student loan debt. And young Americans with student loan debt are taking on mortgages at the lowest rate in a decade, and lag behind their peers who do not have college loans.

Schumer said student loan debt, which has grown in recent years to more than $1 trillion and is now the largest type of consumer debt, is “one of the major reasons our housing market is down in the dumps.”

“The whole economy has been weighted down by the huge debt burden on 40 million Americans aged 22 to 42 or so,” he said.

Related:  Federal student loan programs create perverse incentives (Cost of College)

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Thomas Ferraro, “U.S. Senate Democrats offer student debt refinance bill”, Reuters, May 14, 2014.

Peter Schroeder, “Dems ready student loan push”, The Hill, May 14, 2014.

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