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William Elliott III, University of Kansas, The Future of Student Loans and Financing Higher Education

NOVEMBER 18, 2013

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view the conference agenda and presentation slides »

   Julie Stackhouse, Federal Reserve Bank of St. Louis (4:20)

   Rohit Chopra, Consumer Financial Protection Bureau (30:08)
   Keynote Q&A (8:06)
   Interview with Rohit Chopra (6:40)

Resources for Managing Student Loans
   Introductions (2:12)
   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)

Research Panel:
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)
now playing  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.

William Elliott III: So I don’t know if the slide will come up or not, but you do have with you a handout. And, basically, on the talk from this handout, my conversation will be—I don’t have anything to collect it, so thank you. This is it. And it’s kind of sad in some ways if you think about it. It’s 10 years of my work right here all crystallized in one page. But what we’re going to talk about here—and I’m going to just be more narrow in my conversation, because I am focusing on s specific type of intervention for helping with student loans, something about children’s savings accounts and how they might differ from student loans.

And so, first of all, I want to say that I think sometimes when we have this conversation about debt—and I understand some of the apprehension and some of the reasons for that, because what is the alternative, right? We don’t want to create a system—well, we don’t want to bash student loans. We don’t want to create problems with student loans, because we want to make sure that low-income people do have a way to college. Right?

So if the only thing we have currently is this idea of student loans and we take that away from them or we give someone the ability to take it away from them, then where are these children at? They won’t be able to go to college at all. And I know personally I’ve benefitted from having student loans like many of you have in the room that I’ve talked to, by having student loans allowing me to go to college. And so that is important. So I want to set that off in the beginning.

But I do wonder and I do ask the question, is America getting its money’s worth? Right? I think that’s also a question that we have to ask. Is this the only solution? Is this the only way to go about this? Or might there be better ways of going about this? And when I talk about better ways, I’m in total agreement that student loans are going to stay and they need to be a part of it and they can be a valuable part of it, but they need to work in a similar kind of way they work for wealthier individuals, and that is they’re a much smaller proportion of their overall—the way they finance college and the way they think about college. Right?

Student loans can be an effective part of a strategy. Okay, so that’s kind of my backdrop to that. And I also want to mention that—so I have this example and before I talk about the savings accounts that I’ve—if you’ve heard me talk before, I’ve used it several times. I have this friend named—well, I won’t give his name, but I had this friend when I was growing up. I grew up in a particularly low-income area.

However, this friend of mine, his father [unintelligible 00:02:26] go around town, all the parents and other people, we always his these conversations where he would talk about, “Well, my kid has money to go to college. He has a savings account. And I’ve been saving for him to go to college, and he’s going to go to college.” And so everybody in the community thought, “This kid’s going to college.” I thought about that. My only way out of there was playing football. That’s all I thought about was, “I’m going to play football. I’m going to get out of here.”

I didn’t even know about Gravity School or anything else until much later in life. But, for him, he had this savings account. And we all thought about him as different than the rest of us. He was going to college. At the time, it was just magical to me. I didn’t even understand it. I wasn’t researching it or even thinking about it until many, many years later. Right? And then I just even more recently drew the parallel to the things. But he knew this. His family knew this. Everybody in the community knew this.

And he ended up going on to a great college, Ivy League college. And, obviously, you know, his parents didn’t save enough money for him to go to college. But the point is that it had that effect on his mindset, that he’s going to college. His teachers thought about him as though he’s going to college. We as his friends thought, “He’s going to college.” Right? He has this money. He has this nest egg. And I think that’s a very important fact that many wealthy people grew up with. Right?

In this case it wasn’t a wealthy individual, but he was wealthy in our group of people, and he had this nest egg. And that thing is very, very important for people to have. I can’t underestimate that. I’m not even sure a promise of money does it the same as actually having some hardcore money in the bank for you, in a way. If you’re a low-income individual and you don’t have—your whole life is spent with, “Okay, it’s Christmastime. Mommy says she’s giving me this.” But you go to Christmas and you don’t get that. Right? It’s all these disappointments all the way along the line.

So actually having some sense of control, having your own accounts, having some money of your own, even though it’s not enough, it changes the whole mindset. And I think as we start digging into student debt and understanding its effects, a lot of what we’re going to find is that it’s not all about does it affect the credit rating, right? Reduces their ability to buy a house, no. But some of it’s psychological. It puts them in a state of mind where they think, “I can’t buy a house now. I can’t get married now,” as some of the research is showing. And so you delay that.

It’s not just about does it create this kind of, you know, actual effect, but it’s also the mental effect, which changes behaviors, which has these long-term outcomes, which is very important. Okay. I’m racing to some degree because I want to get everything in in the allotted time. So I do think that there is these two paths that we kind of have set up in our financial education right now, our financial ed system right now. And one is one about empowerment, empowering—wealthy and middle class people are empowered to go to college. It’s based on wealth.

Now, the findings I’m showing here aren’t all about people who have money. These are low-income families. When they are given access to savings accounts, their outcomes tend to change. But there is these two things. One group is based upon wealth, even though they use student loans. They use them in responsible ways, and it has a different effect on their psychology, I believe—I don’t know this—because they have some wealth.

And so taking on some debt when you have some wealth is different than taking on debt when you have no wealth, very different psychologically. And so I think that’s very important to think about. And then the other path is this debt-dependent path. And I don’t think it’s all about who gets student loans. That’s a part of the equation. But it’s also about how—how they’re financing college, and whether or not there’s a different option that exists.

So, what we can see here is that I think we need to think about a pipeline. It’s about transitioning from stage to stage. Typically, when we think about financial aid, we think about access—access to college at point of enrollment. But I think our financial aid system for the 20th century needs to be more. Right? It needs to think about each transition along the way and think about how it’s affecting each transition along the way. So, typically with student loans or a financial aid system generally, it’s about access.

And so we don’t think about how it might be affecting or not affecting early engagement in school. And does it positively change the way children think about school? Or is it negatively changing the way children think about school? Some studies suggest that some students are loan averse. Right? That means that they don’t want to take out student loans, that they might not enroll in college, they might not fill out the paperwork, they might disengage early on. And that’s a negative.

When we think about college loans and we think about college access or at the point of enrollment, I think the evidence is very mixed about whether or not—and I shouldn’t say “I think”—a lot of people that have done the large literature reviews on it suggest the same thing. At the very least, it seems to be weak evidence to suggest that it’s marginally improving particularly low-income children’s college access. Right? And so if it’s not improving readiness, it’s weakly improving access, there’s some use to it and utility to it for sure. So I don’t want to oversell that.

But it—okay, where’s our bar at? And, secondly, I’ve heard a lot of talk and there’s been a lot of talk in the media about the $100,000 mark. Right? Because there is these people out there—and I think the problem is oftentimes like we do, is it’s more glamorous to talk about the student that is $100,000 in debt than it is to talk about the student who is at $20,000 in debt who is still struggling. Right? And so I think there is some emerging research that at least raises the question that we need to do more research around the idea is, “Are student loans really increasing completion rates among students?”

So there has been some recent studies by Dwyer and others, colleagues, who have looked at student loans. And it suggests that maybe even way below $100,000, maybe even as low as $10,000, or in some cases, some studies show $3,000, these amounts of debt can have a negative effect on college completion rates. I think there’s much more research needs to be done on this. We can’t make any definitive statements about it. But if it at least raises the question, it’s something for us to think about.

And then there’s these studies that have just started to emerge around, thinking about kind of the post-college effects of student loans. And we see that it can reduce—and I think this is a very important issue to think about, particularly around assets. There have been some studies done by other researchers that look at marriage, and some suggest that they delay marriage if you have student loans because they put it off.

Other studies more recently looking at wealth, whether you have net worth, lower net worth, lower home equity, lower retirement savings. And there’s been several studies that have been done that are beginning to suggest this. And I think this is a very important thing to consider as well. And so if we look at that and then we juxtapose that to people who have wealth and who have savings, we see just the opposite. And I’m not going to go through that, but you see all of the opposite types of things occurring.

I don’t understand why the bar for student loans being a successful program is if they do no harm. Is that good enough in the end? Shouldn’t it be that they actually augment people’s ability to be successful, to reach the American dream? I mean, that really should be the goal, right? Not only that they—they’re not doing any harm, but that they actually are increasing and making students better off in the end.

And so I do think that—and I can understand kind of the complex nature of this, because we do—I mean, students do need money to go to college, and they do do some benefit—but we need to make sure that we’re asking the right questions. And so we’re talking about the counterfactual. I don’t think it’s simply whether or not a student is better off if they go to college. There’s also the equity question, to me in my mind.

It’s also a matter of if—and the American dream says to me that if I have equal ability and I work equally hard, I should have similar outcomes in the end. Right? If student loans affect those outcomes and they’re creating inequality in the system, the system that we have created—education system is the great path to the American dream. Right? It’s where we put most of our hope into. And so it’s more than just a welfare system.

We kind of can have a limited welfare system, because we believe that we have this public education system that we invest all this money into and so you can go to college and you can do all these things. But if it’s not producing the kinds of equity and the kinds of outcomes that we think and student loans are hurting that, then we really need to consider that, at least what level of debt might cause those problems. Right?

I’m not saying get rid of debt, but a certain level of debt, if it starts to affect whether or not people can have long-term positive outcomes, then it’s a real issue. It’s an issue if I go to college, I work as hard as you, and I look at you—you’re a doctor, you’re a lawyer, or you’re a social worker. And you have student loans. I don’t have student loans. And I do much better than you, right? How does that affect that individual in a work ethic, the return on college?

It also mean that in the end of the day, right, a lot of times economists talk—I have time yet—so they talk about that, okay, it’s one percent of your earnings over a lifetime. Right? Well, A, you don’t get all your earnings at once, do you? So lifetime earnings, so even if student loans is only one percent of your income over a lifetime, there is this point in which you need to be accumulating assets and you’re not doing it. And that puts—sets you behind long-term.

So we can’t think about just what it is over a lifetime, but what it—what effect is it having on our young students when they first get out of college and they’re delaying all these things? Are they in their 40s, are they in their 50s before they can begin to really save for retirement, before they can begin to buy a home? That’s a major problem, because that means in the long run, they can’t accumulate equity in their house. They can’t accumulate equity at the same level as other people, and it creates inequality.

And inequality, it destroys people’s desire to work and to move forward. Right? And so we want to make sure that we have a system that promotes that, and I think that student loans are a part of that system. But there is a real concern at what level, and what level is harmful? It might be something much lower than $100,000 that the media talks about so much. It might be something around the average debt. It might even be as low as the median debt. We need to figure that out, what that magical amount is.

And then we need to think about solutions that can help us not only just—I’m going to stop—not only that don’t do any harm, but actually can augment the ability of low-income students to achieve. And I think that one way to do that is through a savings account and helping people accumulate wealth. That’s the way the wealthy people do it, right? Why shouldn’t low-income people have the same opportunity and be given the same good financial aid system that augments their ability, that makes them better students? I think we should all have that opportunity.