issue: Education

The Student Debt Problem Is Bigger Than Interest Rates

Posted on by The Progressive Policy Institute

If you believe the recent blitz of student debt coverage, greedy private lenders  and high interest rates are to blame for the economic woes of recent college  graduates. Lending at what is seen to be excessively high interest rates, the  pressure on private lenders to restructure student loans, even at the expense of  public funds, is rising. At the same time, the government is taking concrete  actions to squeeze private lenders out of the student loan market. Now Sen.  Elizabeth Warren (D-Mass.) has followed in President Obama’s footsteps by  proposing to peg student loan interest rates to the government’s historically  low borrowing costs.

Tempting as it may be, attacking private lenders  alone will not solve the student debt problem. For one, private student loans  are an increasingly small fraction of total outstanding student debt. And while  overall student loan defaults have been rising, private student loan defaults  have been falling. Second, although not innocent, villainizing private lenders  misses the point: outstanding student debt is rising too much too fast. A  government-controlled student loan market will not solve the underlying problem  that recent college graduates are struggling in today’s slow-growth  economy.

Since the 2008 financial crisis, the Department of Education has  essentially taken over the entire student loan market. The federal guarantee  program was scrapped, and interest rates on subsidized Stafford loans were “temporarily” cut in half with another extension debate underway. New government  student loans increased 40 percent over 2008-2012 while new private loans fell  75 percent, to just $6 billion last year. The government now holds more than 85  percent of the $1 trillion in outstanding student debt. Meanwhile, just three  major private lenders remain active in the market. Continue reading “The Student Debt Problem Is Bigger Than Interest Rates” →

A Government Takeover of Student Debt Won’t Solve the Problem

Posted on by The Progressive Policy Institute

If you believe the recent blitz of student debt coverage, private student lenders are to blame for the economic woes of recent college graduates. Lending at what is seen to be excessively high interest rates, the pressure on private lenders to restructure student loans, even at the expense of public funds, is rising. At the same time, the government is taking concrete actions to squeeze private lenders out of the student loan market. Most recently, Senator Elizabeth Warren followed in President Obama’s footsteps by proposing to peg student loan interest rates to the government’s historically low borrowing costs.

Tempting as it may be, attacking private lenders alone will not solve the student debt problem. For one, private student loans are an increasingly small fraction of total outstanding student debt. And while overall student loan defaults have been rising, private student loan defaults have been falling. Second, although not innocent, villainizing private lenders misses the point: outstanding student debt is rising too much too fast. A government-controlled student loan market will not solve the underlying problem that recent college graduates are struggling in today’s slow-growth economy.

Since the 2008 financial crisis, the Department of Education has essentially taken over the entire student loan market. The federal guarantee program was scrapped, and interest rates on subsidized Stafford loans were “temporarily” cut in half. New government student loans increased 40 percent over 2008-2012 while new private loans fell 75 percent, to just $6 billion last year. The government now holds over 85 percent of the $1 trillion in outstanding student debt. Meanwhile, just three major private lenders remain active in the market. Continue reading “A Government Takeover of Student Debt Won’t Solve the Problem” →

How Much Does Student Debt Burden Young People?

Posted on by The Progressive Policy Institute

According to a new estimate by PPI, Americans under the age of 30 are spending an unprecedented $43.5 billion annually to pay back student loans.

This sum—large and growing—imposes a serious financial burden on young people. By our estimate, $43.5 billion amounts to over 7 percent of the total annual income for people under 30 with education beyond high school (using an average annual income).

Putting this into perspective, in today’s prices, here’s what $43.5 billion could buy:

155,413

 New Homes

339,076

 Audi R8 Etrons (Iron Man’s ride)

66,923,077

 New iPhone 5’s

488,764,045

 Tickets to Disney World

22,307,692,308

 McDonald’s Happy Meals

Our estimates also show how fast the income burden on young people from student debt is growing. If their outstanding student debt remained at 2004 levels, the income burden would fall from 7 percent to just 4 percent – a $19 billion difference (in constant dollars).

The increasing burden of student debt exacerbates the economic struggles facing young people. Young college graduates have watched their real earnings fall by 15 percent, or $10,000 annually, in the last decade. Those without education beyond high school are being squeezed down and out of the workforce altogether (something we call “The Great Squeeze”).

The examples above illustrate how student debt is affecting young people’s quality of life. But they also show that it’s not only young people that are negatively impacted by rising student debt. The rising burden of student debt on young people also has enormous implications for the entire economy.

Continue reading “How Much Does Student Debt Burden Young People?” →

“Cut and Invest” vs. Austerity

Posted on by The Progressive Policy Institute

President Obama’s new budget attempts to define a progressive alternative to conservative demands for a politics of austerity. Having just returned from a gathering of center-left parties in Copenhagen, I can report that European progressives are wrestling with the same challenge, and are reaching similar conclusions.

There was wide agreement that the wrong answer is to revert to “borrow and spend” policies that have mired transatlantic economies in debt, while failing to stimulate sustained economic growth. The right answer is a “cut and invest” approach that shifts spending from programs that support consumption now to investments that will make our workers and companies more productive and competitive down the road.

“You can only have a Nordic model if you’re competitive,” declared conference host Helle Thorning-Schmidt, prime minister of Denmark. “In this country, we cannot tax more; it’s that simple,” she added. “If you like the welfare state, if you want to sustain it, you have to take the tough decisions.” Continue reading ““Cut and Invest” vs. Austerity” →

The Great Squeeze Persisted in 2012

Posted on by The Progressive Policy Institute

New PPI research finds young people continued to be squeezed from the labor force in 2012 relative to people age 35 and over. More young people, facing limited job prospects in spite of a broader economic recovery, are being forced to leave or stay out of the workforce. This could have serious long-term implications for the economic well-being an entire generation.

Over 2000-2012, the labor force participation rate for young people aged 16-24 fell by 17 percent, a precipitous fall that was exacerbated by the recession but started well before. Similarly, in 2012 those aged 25-34 were still 4 percent below their labor force participation high in 2000. They are struggling to recapture lost jobs during the formative years of what determines one’s career and earnings potential.

The staggering fall of labor force participation rates for the youngest working age segment of the population cannot be explained solely by increased college enrollment. Had the labor force participation rate remained constant since 2000, I estimate there would have been an additional 4.1 million people aged 16-24 in the labor force in 2011. Meanwhile, BLS data shows college enrollment of people aged 16-24 was 3.2 million higher in 2011 than 2000, and more college students were in the labor force (although the participation rate fell).

Continue reading “The Great Squeeze Persisted in 2012” →

Student Debt Crisis and the Private Sector

Posted on by The Progressive Policy Institute

Does the government have a conflict of interest when it comes to student debt? On one hand, the government fills an important role in providing financial access to higher education. But on the other hand, it needs to deleverage a record-level debt that now amounts to over 70% of GDP.

This question may seem odd given the government’s move to bring the student loan market in-house over the last few years (ending its guarantee program in favor of direct loans). But it may be an important question if we want to develop a politically viable solution to the growing student debt crisis.

Bringing loans in-house saved interest and administrative costs, but it didn’t actually decrease tax payer risk: the government now has $850 billion in student debt exposure on its books, up from $381 billion in 2005. And as tuition keeps rising, public funding keeps falling, and more people pursue college, new debt issuance is growing fast – new government loans were over $100 billion last year. This is potentially problematic, especially given the recent rise in default rates, because it means fewer government assets are available to respond to future crises. Not to mention it leaves tax payers increasingly vulnerable.

Continue reading “Student Debt Crisis and the Private Sector” →

Solving the Student Debt Crisis-Deflate the Bubble

Posted on by The Progressive Policy Institute

PPI’s Student Debt Investment Fund (SDIF) policy proposal was picked up by Kay Steiger of The Raw Story:

A new proposal published last week claims that creating a new secondary market would to “deflate” the so-called student debt “bubble” by repackaging both public and private student loans for banks to buy and sell.

“The student loan bubble is about to burst,” the authors write in the proposal, released by the center-left think tank Progressive Policy Institute (PPI) last Tuesday. The authors warn that while this proposal wouldn’t tackle the problem of rising student tuition, they do insist this would help tackle the problem of student debt that’s already been taken out, which has recently reached the $1 trillion mark and surpassed both credit card and auto loan debt in America.

“Young college grads have been bearing the brunt of the declining real wages over the last decade, they’re taking jobs that are less skill for less pay, and there’s a hollowing out of those middle-skill jobs,” Diana Carew, an economist at PPI and the lead author on the proposal, told Raw Story. “At the same time, tuition has been rising very rapidly, so they’re less likely to be able to pay in the long term.”

Read the entire article.

Reuters Cites PPI Student Debt Data

Posted on by The Progressive Policy Institute

Writing for Reuters on the Student loan bubble, Chadwick Matlin cites PPI published data on the topic.

The New York Federal Reserve, always interested in brightening our days, released a slideshow last week on student loans. It had little good news, but it did offer a reminder that in 2013 fewer people are indebted to the American Dream. Instead, they’re in debt because of it.

College, we’ve long been told, is the great equalizer. (And, despite the doomsayers, there’s reason to think it still is.) But increasingly, people are graduating in vastly different economic situations. More than 40 percent of 25-year-olds now have student debt, and 35 percent of twentysomethings are more than 90 days delinquent on loans that are being repaid. All of this comes as the average income for a 25- to 34-year-old with a bachelor’s degree is the lowest it’s been in years, down about $10,000 since 2000.

Read the full article here.

Washington Monthly Covers PPI’s Student Debt Proposal

Posted on by The Progressive Policy Institute

Washington Monthly’s Daniel Luzer cites PPI’s new Student Debt Investment Fund (SDIF) proposal as a “potentially useful” plan to alleviate the growing student debt crisis. Luzer contends that a slow deflation of the bubble like that contained in the proposal might not be necessary as “the worst education debt is already deflating on its own.” He also says that PPI’s proposed solution also might not be the most structurally efficient. Overall however, Luzer thinks the policy idea is “interesting” and that it could indeed be part of a solution to a growing problem.

Read the full article here.

Student Debt: A Bubble More Like a Balloon

Posted on by The Progressive Policy Institute

There is an intense debate as to whether the student debt crisis is a bubble or not. The short answer: yes, but it’s more like a balloon. And the good thing about balloons is that they don’t have to burst; there is an option to deflate them slowly.

In some ways the ongoing student debt crisis has the classic symptoms of a bubble. There is an artificial inflation of value (here, tuition) that is in part fueled by low-cost funding (here, government-issued student aid). The latest Federal Reserve numbers show student debt is now a staggering $1 trillion and climbing. Yet the real earnings of young college grads are falling, down 15 percent since 2000. Already student loan defaults are at 11 percent and rising. Moreover, the true default rate is actually higher because of post-graduation grace periods. Not surprisingly, the Wall Street Journal reported earlier this week that student loan debt is now crowding out other borrowing and spending.

In other ways the student debt crisis is different—potentially worse—than the typical financial bubble. First, student debt is uncollateralized. There’s no home or property that can be reclaimed in default. Second, student debt cannot be discharged in bankruptcy, or restructured to meet the repayment ability of struggling debt owners. And most importantly, the majority (85 percent) of student debt is owned by the government. That means taxpayers are directly on the hook for $850 billion in potential losses. Worse, the government doesn’t really have the option to cut back on loan issuances or raise interest rates because that would go against equal access and opportunity.

The fact that the government holds the majority of student debt is what could transform this bubble into a controlled balloon—a balloon that can be deflated slowly. We know where most student debt is; it is not as spread out across unknown entities like subprime mortgage debt.

This week we released a preliminary proposal for the creation of private-sector student debt investment fund (SDIF) that would purchase existing student loans, refinance the debt at today’s historically low interest rates, and apply a discount to the loan amount. This could be the release valve that deflates the balloon, by reducing the financial burden to debt holders and transferring risk. That could free up government resources to address another important issue—rising tuition.

Student Debt Investment Fund (SDIF): A Preliminary Proposal for Addressing the Student Debt Crisis

Posted on by The Progressive Policy Institute

The Progressive Policy Institute proposes the creation of a new, private sector Student Debt Investment Fund (“SDIF”) that would address the student debt crisis. The proposed SDIF would act as a secondary market for student loan debt, capitalized by corporate profits currently held abroad. In return, participating U.S. corporate entities would receive tax credits. The SDIF would purchase existing student loans, apply a discount to the loan amount, and restructure the loan through refinancing the debt.

By matching need for financial relief with available investment funds, the proposed SDIF could be a private sector solution to a public problem. Without action, the student debt crisis will be the next financial disaster. One in five households is currently saddled with student debt, now over $1 trillion, which cannot be discharged in bankruptcy or refinanced at today’s historically low interest rates. At the same time, multinational U.S.-based companies are sitting on an estimated $2 trillion in cash reserves, much of it profits held abroad. Companies are unwilling to repatriate these profits under current tax law for fear of excessive financial penalties.

Societal benefits of the proposed SDIF include: (1) deflating the student debt bubble slowly, (2) facilitating economic growth by freeing financial resources for millions of young Americans, (3) enabling more young people to invest in their human capital, and (4) providing a way for U.S. corporate entities to invest their excess funds in America strategically and promote public well-being. The benefits to business include tax credits issued annually over the term of the investment and the potential for an annual return on investment depending on the success of the SDIF. The benefits to government include transferred risk to the private sector from reduced student loan exposure and potential tax revenue that would not have been received otherwise.

Download the policy proposal.

The Real Problem with Colleges’ Business Model

Posted on by The Progressive Policy Institute

In the Slate blog Money Box, Mathew Yglesias argues that the decrease of college graduates’ earnings is related to the irrelevant business model followed by most colleges. He uses Diana G. Carew’s graphs from her blog post “Is the Labor Market for College Grads Looking Up?”.

Below is an important chart from Diana Carew of the Progressive Policy Institute showing the falling earnings of college graduates in the 25-to-34-year-old bracket.

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And that right there is the simple problem with the existing higher education business model in the United States, which has involved aggregate per student spending that rises faster than inflation for a long time. This has relatively little bearing on the missplaced worry about whether or not college is “worth it” (the relative earnings of college gradatues are still high) or on the overhyped idea that online education is going to disrupt traditional learning. The real issue is simply that people can’t spend money they don’t have on tuition, nor will banks want to lend people money that they aren’t going to have.

Read Yglesias’s blog post here.

Is the Labor Market for Colleges Grads Looking Up?

Posted on by The Progressive Policy Institute

Young educated Americans are finally rejoining the workforce. According to BLS statistics, the labor force participation of Americans age 18-34 with a Bachelor’s or Associate’s degree is rising again. By comparison, young people without higher education are still dropping out of the labor force.

The chart below shows the divergence in labor force participation between young people with and without a degree. Having a degree makes a big difference in who shares in the labor market recovery and who is increasingly left behind. Interestingly, young people with a vocational Associates degree are having the best recovery in labor force participation, even better than those with a Bachelor’s degree.

To be sure, the news is not all good. College students are well aware of the challenges awaiting them, like rising average student debt and falling real earnings. Most young grads say their biggest ambition has come to finding a job that pays enough to cover rent.

Continue reading “Is the Labor Market for Colleges Grads Looking Up?” →

Funding Cuts Hit College Students Harder Than Faculty

Posted on by The Progressive Policy Institute

Fiscal cliff or not, the coming years are certain to bring cuts in public spending on higher education. The looming sequestration threatens to cut $500 billion in federal discretionary spending starting next year, leaving a multi-billion dollar hole in R&D funding at public universities. State governments have already begun higher education funding cutbacks. So as policymakers pledge austerity and deficit reduction, colleges and universities will be left in a financial pinch.

Students and university faculty and staff are the obvious targets to fill these budget holes. But who actually pays the price for cuts in university funding?

New PPI research suggests college students will bear the brunt of additional austerity imposed on colleges and universities. Looking at previous cuts in public funding, we found college students were unquestionably worse off relative to faculty and staff when it came to making up the difference. And the impact of this uneven allocation could be serious. If college students continue to pay the biggest price for austerity, the next generation of young people may think twice about the value of going to college.

That’s because college students paid a high price for cuts in university funding over the last decade, while faculty and staff were relatively unaffected.  As shown in this first graph, total tuition at four-year universities rose a staggering 35% over the last decade (in constant dollars). These rising prices are certainly behind the rising real average debt per graduate, up almost 30% over the same time.

Continue reading “Funding Cuts Hit College Students Harder Than Faculty” →

Young People Turned Out to Re-Elect President Obama. Now What?

Posted on by The Progressive Policy Institute

They defied the pundits: young people turned out to vote in numbers that rivaled their 2008 record. An estimated 23 million young people age 18-29 voted, even more than the highly coveted 65 and over cohort. And not surprisingly, for reasons I’ve previously pointed out, young people overwhelmingly supported President Obama by a margin of 60-40.

But President Obama’s work has really just begun. Now that TV advertising has returned to normal, young people are eager to know what’s next, what President Obama is going to do to help them get more jobs and more money.

Young people are struggling: they’ve had a worse recession and recovery than any other age group. The 18-34 year old cohort is still over 2 million jobs short since the recession began and real earnings continue to fall. But helping young people means understanding why they have been hit so hard in the first place relative to other age groups, why they weren’t the first to be re-hired as common theory dictates, and why the youngest and least educated are being squeezed out of the labor force. Continue reading “Young People Turned Out to Re-Elect President Obama. Now What?” →

Democratic Devolution: How America’s Colleges and Universities Can Strengthen Their Communities

Posted on by The Progressive Policy Institute

In the face of a deepening economic and political crisis, the U.S. political and governing system is deadlocked. We need a new way forward. The old and tired government versus markets debate is just that—old and tired. It’s time for a broader mobilization of America’s civic resources, including the nonprofit sector and especially our colleges and universities.

We see government as a catalyst that stimulates new forms of interaction and partnerships between all sectors of society. Based on our experience at the University of Pennsylvania, we believe government should challenge all institutions of higher education (public and private; community colleges, colleges, and universities) to contribute systematically to improving the quality of life and learning in their local communities.

When called to service (e.g., Peace Corps, AmeriCorps) young people have answered the call. Each year, more than 75,000 citizens serve through AmeriCorps alone. But it is not enough to simply call upon college students to serve. Rather, government should challenge institutions of higher education, as well as students, to make a greater contribution to the public good.

America’s colleges and universities represent immense concentrations of human and economic capital (with nearly four million employees, 20 million enrolled students, $400 billion in endowments, and $1 trillion in annual economic activity). As “anchor institutions,” they have the potential to be sources of stability and permanence in civic partnerships with government and the private sector to revitalize local communities. For colleges and universities to fulfill their great potential and more effectively contribute to positive change in their communities, cities, and metropolitan areas, however, they will have to critically examine and change their organizational cultures and structures and embed civic engagementacross all components of the institution. Through more effectively targeting existing resources, as well as utilizing both modest financial incentives and the bully pulpit, the federal government can stimulate colleges and universities to realize their stated—but not fully realized—mission of service to society.

To realize this potential, we recommend a five-part strategy:

First, Congress should create a new federal commission—comprised of local, state, and national government officials along with leaders from the private sector and higher education—to forge civic partnerships with the nation’s institutions of higher education;

Second, the commission should develop innovative strategies for integrating federal programs and funding streams, as well as aligning federal efforts with these new local civic partnerships that involve colleges and universities;

Third, the commission should promote regional consortia of higher educational institutions to significantly and effectively improve schooling and community life;

Fourth, the federal government should create prestigious Presidential Awards for outstanding Higher Education-Civic Partnerships, and;

Fifth, government should provide support to colleges and universities based on the “Noah Principle”—funding given only for building arks (producing real change), not for predicting rain (describing the problems that exist and will develop if actions are not taken).

Download the memo.