The Economics of Higher Education Policy. Carly Urban Montana State University Presidential Seminar Series

Transcription

1 The Economics of Higher Education Policy Carly Urban Montana State University Presidential Seminar Series

2 Cost of College is Increasing

3 Student Loan Debt is on the Rise, Second only to Mortgage Debt

4 Student Loan Debt Statistics Outstanding student loan balances roughly $1.259 trillion as of June 30, 2016 Comparison: Mexico s GDP in 2013 was $1.14 trillion USD. Down by $2 billion from 2016.

5 Student Loan Debt Is that too much? What should it be? Investment in human capital? Returns to college suggest college is still worth the investment according to recent reviews of extensive literature (Oreopoulos and Petronijevic) for both the average and marginal student 11.1% of student loan debt was 90 or more days behind

6 Current Student Loan Policy Before College Fill out FAFSA for: Stafford Loans (Subsidized-up to $3,500 and Unsubsidizedup to $2,000 for freshmen annually) Pell Grants ($5,775 max for those with income <$30,000) Perkins Grants (vary by state, for very disadvantaged) Work Study Parent PLUS Loans Other types of aid: Private Loans (small, higher interest) Other grants (state, institution, scholarships, etc.)

7 Current Student Loan Policy After College Standard Plan Fixed amount for up to 10 years of at least $50/month Income-based repayment (IBR) 10% of income for new borrowers, never more than 10 year standard repayment plan REPAYE and PAYE plans are also this 15% of income for older borrowers (pre 2014), never more than 10 year standard repayment plan Income-contingent repayment (ICR) Lesser of following: 20% of income or what you would pay on a repayment plan with a fixed payment over 12 years

8 Percent of Balances 90+ Days Delinquent by Loan Type

9 Beyond Delinquency is Non Payment

10 but what if you don t pay? 1. Bankruptcy? Nope. Lose Social Security, Tax Refunds, Professional Licenses, etc. 2. Consolidation Extends period to years depending on current loan amounts (i.e., >$60k, 30 years). 3. Work in public sector? Forgiven after 10 years 4. What if my loans are forgiven? You get to pay tax on the amount forgiven!

11 Why Do We Need Tax Dollars to Support Higher Education? Education is a public good! Otherwise, individuals will under-invest based on their own preferences, and not for the societal optimal. D(private MB) D' (social MB) S' (social MC) $ Quantity (enrolled stuents per year)

12 Should All Higher Education be Free? Think about Willingness to Pay. Subsidize students who would be willing to pay anyway.

13 Other Market Failures? Moral Hazard? Get loans and use living expenses on beer Adverse Selection? Choose loans because interest rates are low without thought of ever going to school (especially post- Recession)

14 Anecdotes Sandy Baum, Beth Akers, and Matt Chingos: There is no student loan `crisis a huge number of Americans are not buried under piles of debt. 100 news stories in 2014 profiled students with over $85,000 in debt. Only 7% of borrowers owed more than $75,000, most of which had graduate degrees. 2/3 of borrowers owed less than $25,000.

15 Institutions Who Owe the Most (2009)

16 Increase in Default Rates Among Whom?

17 Poor Labor Market Outcomes of Non-Traditional Students

18 Borrowers at Selective Schools have Higher Loan Amounts but Balances at Non-Selective Schools Grew Faster

19 Student Loan Policy Similarities (ish) Clinton Free community college education & if Income<$85,000 =>free instate public school tuition Cut student loan interest rates, so government does not profit Borrowers can refinance loans at current interest rate Crack down on predatory lenders, schools, and bill collectors Trump Opportunity to attend a 2 or 4-year school or trade school will be easier to access, pay for, and finish Government shouldn't make money off of student loans. Private lenders enter market. Work with Congress to ensure universities are making good faith effort to reduce cost of college and student debt in exchange for federal tax breaks Colleges should have skin in the game (change access and disincentivize default)

20 Other Clinton Proposed Policies No repayments after 20 years Never have to repay more than 10% of income Aspiring entrepreneurs in distressed communities can defer interest for up to 3 years and be forgiven up to $17,500 3-month moratorium on student loan payments to all federal loan borrowers. (For refinance, consolidation, etc.) Student parents get extra support $25 billion for historically minority-supporting colleges

21 Other Trump Proposed Policies Repayment plan reaching up to 12.5% (15%?) of income, if pay for 15 years, forgiven. Has also said no loan forgiveness

22 How to Pay for It? Clinton: Paid for by limiting tax expenditures for high income taxpayers Trump:??

23 Economic Questions What does student loan debt do to borrowers? Entry into homeownership? Household formation? Entrepreneurship? Forgiveness? Grants? Access? If loan forgiveness is on the table, do students do better with grants or with loans? Invest in students or accountability? Rothstein and Rousse: more likely to enter public sector employment with grants Denning, Marx, and Turner: Pell grants improve probability of graduation

24 Other Policy Responses College Scorecard Accountability and transparency of colleges to disclose data on salaries, graduation rates, and default rates State-University Shutting down for-profit schools Gaming the system with low graduation rates, low jobseeking rates, and high default rates Is this selection (poor pool of students?) or sub-optimal? Market failure?

25 Who Pays? Grants and forgiveness are born by taxpayers. If grants increase the probability of completion, more likely students will have broader impact on economic growth. If grants increase probability students start school, might be less likely to finish if new students enter.

26 Designing a Private Market When getting a mortgage, screen applicants based on observable characteristics: credit score, income, assets, etc. If fail to repay, they take your house. How do we do this for student loans? Screen based on observable characteristics? Those likely to finish based on major, potential future salary (given school choice, major), or probability of repayment (based on parental income)? Is this equitable?

27 Economist Perspective Sue Dynarski: Make payments more like a mortgage, based on income over 30 years instead of 10 to reflect the life of the loan. Similar to other countries with student loans

28 What to Take Away Student Loans are Complex Investing in Higher Education is Complex Hard to Say what is Optimal Incentives at Play at every Angle Hard to design a private market that is equitable