NOVEMBER 18, 2013
Resources for Managing Student Loans
Paul Combe, American Student Assistance (7:02)
Interview with Paul Combe (12:58)
Vicki Jacobson, Center for Excellence in Financial Counseling (5:46)
Marilyn Landrum, Missouri Department of Higher Education (3:58)
Resources for Economics and Personal Finance
Mary C. Suiter, Federal Reserve Bank of St. Louis (3:10)
What We Know About Student Loans in the Eighth District and Nationwide
MODERATOR: William R. Emmons, Federal Reserve Bank of St. Louis (4:14)
Bryan J. Noeth, Federal Reserve Bank of St. Louis (13:53)
Kelly D. Edmiston, Federal Reserve Bank of Kansas City (9:17)
Caroline Ratcliffe, Urban Institute (14:22)
Research Panel Discussion (35:46)
The Future of Student Loans and Financing Higher Education
MODERATOR: Ray Boshara, Federal Reserve Bank of St. Louis (7:32)
Sandy Baum, Urban Institute and George Washington University (11:06)
Interview with Sandy Baum (7:23)
William Elliott III, University of Kansas (13:12)
Jen Mishory, Young Invincibles (8:37)
Interview with Jen Mishory (8:01)
Gary A. Ransdell, Western Kentucky University (11:35)
Roundtable Discussion (40:21)
Below is a full transcript of this video presentation. It has not been edited or reviewed for accuracy or readability.
Sandy Baum: Thank you. It’s great that we are turning to a policy discussion because I think that a lot of the conversation about student loans these days is sort of, panic, this is terrible. And then that’s it. And the idea seems to be this is terrible. And I don’t know if student loans should go away. Exactly what the solution is. But what we really need to do, of course, is we need to figure out what are the problems. And there certainly are problems. What are their causes and what are the appropriate solutions? Because the solutions really depend on what the problems are. And I think that it’s just really important to look at the facts from the policy implication’s perspective.
So, I am going to say a few words about background just because I think they are important for finding solutions. One issue is, you know, the ‘who benefits’ question. And this is the question, you know, that just came up. People keep saying, but this is a public good so why are we making students pay? And the reality is that it’s not a public good. It is something that, part that students get the biggest benefit from their education. But there are certainly positive externalities for society. And part of that is that we live in a society where we think it’s really unfair to deny people the opportunity for education. But also, you know, the wages that you get don’t represent the full benefit to society of you getting an education. So, certainly society should help. Society should bear part of the risk. But people who go to college have higher earnings than other people. And they get a lot of the benefits themselves. And they really can and should pay a reasonable portion of the cost. The question is, what portion?
And I think when we talk about this we have to remember, just, I’m not going to go into detail what these, these couple graphs say. But this is college enrollment rates by family income for young recent high school graduates. If you grow up in an affluent family you are much more likely to go to college than you are if you do not grow up in an affluent family. So, we think about, you know, you take a student loan only if you go to college. So, the higher your income the more likely you are to go to college. The more likely you are to stay in college also. And the persistence rates depend much more on income than enrollment rates do. So, very few people who grow up in low income families earn bachelor’s degrees. People who grow up in middle and upper income families are much more likely to go to college and to go to college for a long time. And so we really have to remember that when we think about what the solution is to paying for college.
So, the problem though is that on average college graduates earn a lot more money than high school graduates. But there’s a lot of variation. And this shows the variation in earnings in the 35 to 44 year old bracket by education level. So, the reason that it’s really hard for many people to pay off their student loans is because even though on average people with associate degrees earn more than people with high school diplomas. And people with bachelor’s degrees earn more than people with less education. There are still people who don’t make it even if they have a college education. And clearly some of that is because of choices they’ve made or characteristics that they have. But some of it is through circumstances totally beyond their control. And if we want people to invest in college we certainly have to protect them against some of those risks.
When we look at the debt, we saw a lot of figures about debt before. The distribution of debt levels is really important. And again, this just really emphasizes that very few people have very high levels of debt. And a lot of people have debt. And it doesn’t mean a low level of debt is manageable. But it does mean that the focus on the 100,000 dollars or even the 50,000 dollars is not difficult. So, I think that, that, that that kind of background in terms of who should pay is really important.
We have to remember that people from low income families and the people who are currently low income, they pay taxes. But they aren’t going to college and they aren’t getting their primary benefits. So, we really have to think about what is causing the problems and who’s struggling. So, if we think about where are the problems? The problem is not really the trillion dollars. The problem is individual students who borrow amounts of money and then struggle to repay those amounts of money. If the problem is that they are going to institutions that don’t serve them well, if they are studying in programs that don’t get them to the jobs that they anticipated, they are borrowing more than they would have to borrow to go into those programs, then we need to do a couple of things. One is we need to restrict the federal student aid so that it doesn’t allow students to go to schools and programs that aren’t going to serve them well, that don’t serve anybody well. And another is we need to give them more information and not just a website they can go to but more guidance. Personalized guidance about how to choose those programs. And that will diminish a significant part of that extreme outlying borrowing that doesn’t pay off. Because we really have to deal with, I mean, it’s not student loans in general cause people problems. It’s that there are too many students borrowing too much money to do things that don’t pay off. People not getting jobs. We have huge macroeconomic problems. We have to solve those macroeconomic problems if we want to help students repay.
But then in terms of student loans, obviously as people have set up until now the repayment problem is different from the debt problem. And to the extent that the problem is that young people start out and don’t have reasonable earnings in the labor market. It takes them awhile. We know that the pay off to a college degree increases as people age because the earnings profile is steeper for college graduates. Then what we need to do is let them time their payments in consistently with their earnings. Income based repayment plans allows students to do that. And so the earlier question, should we make income based repayment plans the default option? Yes. That’s what people should do. You shouldn’t have to get complicated information. It should be automatic that you go into a program like that. That said, we have a lot of work to do to design those programs so that they both protect borrowers and protect tax payers. And too many of the solutions that sort of, we see students with problems, let’s just help them all.
And we have to remember that there are students who are struggling to repay because they borrowed 200,000 dollars for law school and then it didn’t pay off. There are students who are struggling to pay, to repay because they decided actually they didn’t like what they were doing and they’re just going to, you know, give ski lessons in the winter and not do anything else. I mean, we have to be careful about assuming that everybody who’s not repaying their loan is not repaying because they can’t afford it. We have to think about how to structure those income based or payment programs in. And I have a lot of thoughts about that but we can’t go into detail about them.
But if we want to think about how to finance higher education, student loans can, should, and will be an important part of it. But we have to make sure that student loans aren’t ruining people’s lives. And they are ruining some people’s lives in ways that we could absolutely correct. What could we do to make lesser alliance on student loans? Obviously an obvious answer is that college prices could be lower. That’s a complicated question and we could talk about what causes college prices to go up. But as long as states are not more generously funding public higher education, college prices are going to be higher.
We also have to remember that a big part of the costs to students of going to college are not tuition and fees at all, but living costs. A much more complicated issue. If you go to a community college or even a public four year, more than half of your budget is your living cost. But were going to eat anyway. You were going to live anyway. We have to think hard about how we help students finance their living costs when they’re out of the labor force. We could obviously have more generous granting. But that’s not going to happen tomorrow. The federal government and the state governments are not suddenly going to provide a lot more money for those programs. But we could do some restructuring of those programs that would make them work better for students.
So, we could, for example, make sure that students have enough money to take the courses that they need to take when they take them so that they’re not having to worry about when is the calendar year ending? And are they eligible for another Pell Grant? We could make sure that the programs are designed, really to help students make better decisions, both about where and when to study and about how to progress through their studies. And we can also help student—I mean, the other thing is that, you know, students could, people, parents could plan better. Those who have the resources to, to have the possibility of planning better. People could save more money. There are ways to help students prepare earlier on. For some it’s helping them save. For some it’s letting them know early on that the money will be there.
So, if you’re in middle school and you’re in a family, most of the families represented in this room, you know, if you have kids your kids know that the money will be there to go to college. But if you grow up in a really low income first generation family, they don’t know that. And there are things we can do to provide them with funds early on, to provide them with the promise of funds so that they know that the money will be there and they’ll be more likely to prepare academically. Because preparing academically means that you have a better chance of getting through college.
Of course, we could have higher taxes. We could have a much higher tax rate and a very progressive tax structure that would help us to fund higher education more generously. But I don’t think we should wait for that in terms of thinking of solutions to this problem. The solution is going to rely partially on student debt. And that’s okay because students get the benefits. And because not only is it the most affluent students who go to college but when they graduate, despite all of the people in the front page of the paper working at Starbucks, earnings are much higher for people who go to college. Employment is higher. There is much more financial security in many ways.
And I think, finally, one of the issues we have to think about is the counter-factual. When you say, what, how are student loans affecting your life? The way people think about it is, I have this job. I have this income. Think of what I could do if I didn’t have to pay off those student loans. Surely they could consume more. They could save more. Life would be better. But that’s not the counter-factual. The counter-factual is, what if they hadn’t borrowed that money? What if they hadn’t gone to the college they went to? What if they had worked more while they were in college? Where would they be? And for most people who relied on student loans, they would not be where they are today if they hadn’t had those student loans. And we have to think about that as the counter-factual. Remembering that too many people are taking student loans that they shouldn’t take that are not helping them. And we need to avoid that problem in addition to protecting them once they get into trouble. Thank you.