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Alex Monge-Naranjo, Plenary Two Discussant: Student Loans

May 8, 2014

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   James Bullard, Federal Reserve Bank of St. Louis (5:54)

Keynote Address

- Introduction
   Ray Boshara, Federal Reserve Bank of St. Louis (4:05)

- Keynote Address
   Neil Howe, Founding Partner and President, LifeCourse Associates and President, Saeculum Research (36:03)

   Keynote Q&A (11:04)

   Extended Interview with Keynote Speaker Neil Howe (28:43)

Plenary One — A Micro and Macro Look at Younger Americans' Balance Sheets

- The State of the Balance Sheets of Younger Americans
   Lisa Dettling, Board of Governors, Federal Reserve System (14:25)

- Links Between Younger Americans’ Balance Sheets and Economic Growth
   William Emmons, Federal Reserve Bank of St. Louis (21:40)

- Discussant:
   Steve Fazzari, Washington University in St. Louis (18:14)

   Plenary One Q&A (15:06)

Plenary Two — Student Loans

- Student Loans and the Economic Activity of Young Consumers
   Meta Brown, Federal Reserve Bank of New York (21:12)

- Does Parents’ College Savings Reduce College Debt?
   Melinda Lewis, University of Kansas (18:11)

- Discussant:
now playing  Alex Monge-Naranjo, Federal Reserve Bank of St. Louis (19:01)

   Plenary Two Q&A (18:22)


   Michael Sherraden, Washington University in St. Louis (2:52)

   Clint Zweifel, Missouri State Treasurer (6:26)

   Tishaura Jones, City of St. Louis Treasurer (6:14)

Concurrent Session I

- Moderator:
   Julie Birkenmaier, Saint Louis University (4:36)

- Toward Healthy Balance Sheets: The Role of Savings Accounts for Young Adults’ Asset Diversification and Accumulation
   Terri Friedline, University of Kansas (22:23)

- Financial Decisions of Young Households During the Great Recession: An Examination of the SCF 2007-09 Panel
   Wenhua Di, Federal Reserve Bank of Dallas (19:00)

- Discussant:
   John Sabelhaus, Board of Governors, Federal Reserve System (14:38)

   Session One Panel Response (6:57)

   Session One Q&A (5:41)

Concurrent Session II

- Impacts of Child Development Accounts on Change in Parental Educational Expectations: Evidence from a Statewide Social Experiment
   Michael Sherraden, Washington University in St. Louis (13:09)

- Trends and Patterns in the Asset Holdings of Young Households
   Ellen A. Merry, Board of Governors, Federal Reserve System (15:19)

- Discussant:
   Trina Williams Shanks, University of Michigan (7:06)

   Session Two Q&A (28:58)

Plenary Three — Homeownership

- Moderator:
   Todd Swanstrom, University of Missouri–St. Louis (5:54)

- Homeownership and Wealth Among Low-Income Young Adults: Evidence from the Community Advantage Program
   Blair Russell, Washington University in St. Louis (15:57)

- Aggregate and Distributional Dynamics of Consumer Credit in the U.S.
   Don Schlagenhauf, Federal Reserve Bank of St. Louis (21:53)

- Discussant:
   John Duca, Federal Reserve Bank of Dallas (13:59)

   Plenary Three Panel Response (6:40)

   Plenary Three Q&A (8:46)

Plenary Four — Economic Mobility

- Moderator:
   Jason Purnell, Washington University in St. Louis (2:00)

- The Balance Sheets and Economic Mobility of Generation X
   Diana Elliott, Pew Charitable Trusts (17:58)

- Coming of Age in the Early 1970s vs. the Early 1990s: Differences in Wealth Accumulation of Young Households in the United States, and Implications for Economic Mobility
   Daniel Cooper, Federal Reserve Bank of Boston (17:11)

- Discussant:
   Bhashkar Mazumder, Federal Reserve Bank of Chicago (16:15)

   Plenary Four Panel Response (3:14)

   Plenary Four Q&A (19:02)

Closing Reflections: From Research to Policy

   Michael Sherraden, Washington University in St. Louis (15:59)

   Ray Boshara, Federal Reserve Bank of St. Louis (9:30)

Thank You / Adjourn

   Julie Stackhouse, Federal Reserve Bank of St. Louis (5:59)


Below is a full transcript of this video presentation. It has not been edited or reviewed for accuracy or readability.

Alex Monge-Naranjo: Thank you very much to the organizers. I'm an economist and I work on topics of student debt loan but more from the theoretical side. Needless to say I have tons of things to learn and really just the papers and the presentation so far have been very, very useful to get the big picture. Also I think I need to start saying that I speak for myself and not for the Federal Reserve Bank of St. Louis or the Federal Reserve System. That should be clear.

I think these two papers are very, very different. I learned a lot from both of them. So I'm going to try to start from the common theme that these papers bring, which I think I'm going to start from the big picture and then I'm going to start some comments. Some of them are minor. Some of them are I think more broad.

When we think about student loans many times we look at the unit of analysis as of the individual and I think that's missing a big part of what the decisions are coming from, which is we all grow in families, and families can be complex, can be simple, large. So both papers I think take serious the fact that parents are a big presence in those decisions and not only the student loans or going to college but many other aspects that can be related to the decision of how much to invest in college and how to finance it.

So in the previous discussions there was a theme I think was very successful that generations are different. So there are cohort effects. That's what the economist mentioned. And I think William also made the very clear point that well, generations are different but also there are very clear decision-making abilities and stages along the life of a typical individual. So I guess what I want to add to this is that economists are not completely oblivious of that. Last week one of the great economists ever passed away, Gary Becker. And he made a life of making the point that economics is not like such a boring science. I was his student. I was his [unintelligible 00:02:39] and if anything that guy had was a huge creativity to analyze a bunch of economic decisions including inside and outside the family.

So I want to just start using this opportunity I guess to try to think of how Gary Becker would try to start looking at it. I'm not going to claim that I'm going to get not even five percent of what he will say but a lot of his work was to think about dynastic problems and by that that means that different generations have a decision to be made in different points in time and there's an individual. So the decision that we were given by Neal, the first speaker, was that we normally think about individuals as an endowment preferences and something [unintelligible 00:03:32] in some markets. And certainly that is the case when we think about many of the particular dislocation problems there is a life cycle aspect. If we're going to go to college it's better to go early not late because then the returns are going to stay until we actively operate in labor markets.

There are other things that labor markets are not just a deterministic outcome. Perhaps in the '50s there was not so much risk but right now our generations are facing tons of risks and a bunch of decisions that involve uncertainty. We have to decide when and how many children to have and believe me from experience you expect the present value is not going to be small. And you have to think about how much money to transfer to your children, to yourself for the old age, and also one aspect that is in the first paper is that individuals are making decisions based perhaps on the transfer their own parents have made.

And of course how we take these decisions is very important, how we model the risk-taking, discount factors. I don't entirely agree with William that the recessions have not taken this seriously. I think they have, perhaps not too all the way.

One thing that is kind of missing in the discussions of student loan debt is why it matters. Why is it that student debt is different from other forms of debt and what is the interaction across different generations? We economists have the [unintelligible 00:05:11] theorem that says different compositions of the balance sheet might not matter if you live in a perfect world with no incentive problems. When we are thinking about financing education why is it that student loans have taken such a large permanent role and perhaps other forms of debt have always been there that are not being recognized as a student loan? So there's a question about issues of content but I do believe there are important incentive problems. It's not the same that the parent has the money or the children have the money. I think there are some interesting issues across generations inside the family. And of course the reason we're here is because we are thinking about government institutions, how well they are working because that's what we can try to do.

Now once we have a model, an economic model, a dynastic life cycle model with all these places of course that model is going to provide some implications. For example it could be that richer parents are going to have different decisions about the early education of the children and that will lead to different education choices later on. What to invest, how much to invest, how to finance, those are issues that an economic model is going to provide some descriptions. And as I said we invest in education regularly because we are after maximizing some utility that involves having resources but those investments are risky. When I got my PhD in economics first I went to Chicago. I didn't know if I was going to pass the core exam. Once I did I didn't know whether I was going to get a good job or a bad job. And then once I got the job I didn't know whether it was going to last. I don't know. There's all sorts of risks involved when you take in the decisions and that brings I think one interpretation. I think the point of view for me for the paper of Amita is that one important aspect of this labor market uncertainty is that you have an insurance mechanism: going and living with your parents. And to me it's not entirely that surprising to see that in the time of crisis that a lot of households are taking this option.

There is another aspect. I'll come back to this. But also we have a housing crisis. There was a boom and there is to me, my perception is that there was already investment in housing. So you have the combination of those things. There is another investment in housing and there is from the parents and now the children are also having a tough time in the labor market. So that seems to be not surprising to me that families are reorganizing themselves and having children living with them.

Well, also of course a standard economic model is going to have implications about how much to borrow, the standard life cycle theorists saying when I'm young I don't have assets but I expect to have earnings in the future so it's optimal to smooth consumption and that's why I'm going to start borrowing. I have a mortgage.

The other aspect is that well, I also don't want to only invest in housing but before that I want to invest in a career. If my parents don't have money I may have to borrow these resources and there are some expected returns. So both aspects are I think useful. These papers add light on that. We can also ask about issues. As I said it's not entirely clear that there is a neutrality result between who has the resources if the parents set aside some assets that can only be used for college education or they can hold their own money in Merrill Lynch or some wealth management company, whether there is a neutrality result. I don't believe that that is the case and it is useful to see the results that Melinda presented under her paper.

And I have a few things to say about how these each interact. Those are the lenses that the standard model, that's how I am going to present my interpretation of the papers. With the respect to the paper that Amita, the first paper, I think if you ask Americans, different Americans are going to tell you what is the American Dream. It always had a house. And depending on where you include it, it also has now an education. And there could be also some other aspects of lifestyle. So there seems to be a clear and I think very convincing evidence presented by Amita that there is kind of a conflict about the different components of the American Dream.

From my point of view there is also some other interesting conflicts or interactions between cycles. Education as I said the standard life cycle model will say educations are better made when you are young, when you are in the early stage of life and then you go out and work. So there is an aspect of life cycle. I'm young. I want to study. But I am interacting in a bad time for business cycles. So there could be a decision that well, labor markets are bad so I may want to go to college because the opportunity cost of going to college is rather low and I have access to student loans. I may not have access to other forms of loans and Amita has been very successful and pointed this out that well, households have been delivering—I know this I guess—delivering on other forms of credit. Student loans have been available. So if the credit markets do not improve or have not improved at the pace that we were expecting then you have a bigger problem.

There are I think other aspects that are worth exploring. I think in the paper the focus is on the student loans but there is another elephant in the room, which is there was a housing market. There are a lot of houses that people cannot sell, that they oversold. So you have on one side children who have debt and may not have a job and on the other hand you have a parent with a big, huge house that can be used. It will be interesting to see what has been the reaction in other countries that have experienced a housing boom. In particular when Amita was presenting that there was kind of a puzzle—why is it that economic conditions improving do not lead children to move out of their parents'— it could be that true, the market is improving but now houses are not affordable. If I just start working after a long spell of unemployment I don't have the money. And it could be that the parents cannot transfer wealth to them to pay for the down payment because they're stuck with a house that they can barely make the payments on. So I think there's more to housing than what the paper is exploring and it will be interesting to see more of that.

And as I mentioned it's not entirely spelled out why a student loan debt is different from other forms of debt. I know that there are some issues about declaring default. I'm going to come back later on in the discussion of the other paper and it will be useful to have why is it that we are singling out in the empirical results only students and not total debt.

In the case of the paper of Amita that seems to be more like fact-finding goals of here's some particular regularity. It will be interesting also to see why this empirical regularity is used before in terms of policy. That at least to me didn't go as much as it could. A cheap shot. Normally linear probability models are okay but it will be interesting to go beyond those: profits, logits, so on are standard issues.

Let me go to the other paper. Time is limited. I could talk more. The presentation was a little bit different than the paper. The paper that Melinda and [unintelligible 00:14:02] wrote, both papers have [unintelligible 00:14:05]. Hers is more like the landscaping for post-secondary education, at least that's the part that I read more successfully. And more than what they're trying to answer what their student loan parental savings can save students from debt, it seems like the papers are arguing that poor households are in fact kind of taken for a ride. On the one hand there is the perception that investments in education are going to provide returns and now that's starting to question. And on the other hand there is the sources for poor parents or for poor households to invest in education are drying up. So you have merit-based or you have student loans, but merit-based is mostly for richer or well-off households that send their kids to fancy elementary and fancy secondary schools.

So it would be I think if that is the argument that wants to be made I think it would be useful to before the presentation to be along those lines. Because if you are asking okay, we want protection from debt, well there would be an easy solution, just bomb the market. But that could be throwing the baby with the bathwater. So I think as I said the paper is clearer that what they are trying to make is perhaps the protection is to make this household go into debt to make investments that the at the end they are not going to pay off. If that is the case I think it would be easier for me if that is stated more clearly and somehow the form of market imperfection that they are preferring is also cleared up.

As Melinda mentioned I have serious questions about issues of selection of unobservables because we can ask why is it that some parents put money for savings and some parents don't. So my kids go to Clayton [phonetic] and it seems to be a fairly, from the outside fairly homogeneous but then you talk to parents and there's a lot of heterogeneity. And then you talk about the expectations of what is it that we are expecting from our children. There's a lot of heterogeneity. Also in this line what is exactly the proposal? Because on the one hand we can think okay, let's take more regulation. Let's put limits on the student decisions in debt taking. On the other hand we can work on a different margin. Let's try to work on the incentives of the schools and lenders to bear some of the responsibility of these investments made in projects that may not be as worthwhile so the incentive problems are not only on the side of the borrowers. I think that aspect, the message could be improved on.

Just to wrap up, one aspect that was very clear in the first presentation is that there is one generation that happens to be my generation. We are the ones who are in bad shape, 55 percent. The policies that work on parental savings perhaps are too late. So if there is some demand for targeting that segment of the population, working on college savings will only help the future generations, not the current one. So perhaps there are some issues there.

And then last but not least if we were thinking about policy one aspect that is missing in the paper is okay, if we change this policy there is also a clearer response. And the price of education, there is the argument made that a lot of the tax incentives for housing, and that be reflected in higher housing prices. It could be the change in the financing for education ends up just pumping up the cost of tuition, so that part has to be clear. And then if you're asking for changes in the funding it has to be said okay, where is the money coming from? Who are we going to tax? Because if it's [unintelligible 00:18:41] it's a different thing. If it's that someone gets free education but later on would be financed through taxes then you have to ask about what are the distortions that those taxes will have. Thank you.