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Plenary Two Q&A: 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:
   Alex Monge-Naranjo, Federal Reserve Bank of St. Louis (19:01)

now playing  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.

Male: Thank you, Alex, for those great comments. Meta or Melinda, would you like to respond to either? Either of you like to respond to the comments?

Meta Brown: Thank you very much, Alex, for all of those comments and the very thoughtful discussion. Briefly, I do appreciate and very much agree with the point that money is money. There’s not red money and blue money. And debt is debt. And so I agree with this question to the broader student loan conversation, why is this an important debt? Setting aside the sort of differences and default treatment. Why is student debt particularly very important? And so I’m sympathetic to that and I think it’s something that we should all think very carefully about. And the motivation behind this research, sort of, what we’re thinking about is more imperial motivation, theoretical motivation. And so, you know, money is money. Debt is debt. But for some reason we are seeing an unprecedented and unbroken upward trend in student debt reliance. Young people, old people alike. But in general there’s an explosion of the student loan market. And at the exact same time we’re seeing sort of an unprecedented upward, unbroken upward trend in living at home with parents. And so the first question was imperially this is what we see. What kind of relationships do we see between these two patterns? As at least one dimension of the project. But of course the question remains, why is student loan debt so special?

In terms of policy implications, you’re right. We have a real—I mean, this is sort of a first description, a first attempt to understand these trends at least from our perspective. So, why is this important? And the answer is these days I work at the Fed and why it’s important to me is consumption. Right? So, we’re interested in the recovery of the broader economy, the recovery of the housing market, consumption going forward. And if we see increasing and unprecedented student loan debts, what can we expect in the future from young people? And so the motivation is not sort of what policy can we come up with to intervene in this tendency to move home? But what does it mean for future consumption in housing purchase behavior? And that’s the kind of stuff that we’re after. And of course I agree about the linear probability models. We, kind of, sometimes you want to bring something easy to interpret with co-efficiency we can explain. But I should say it’s not very sensitive to that approach. Although, you’re right, maybe it’s not the best approach.

Melinda Lewis: Thank you. I’m looking at the time too. And so I want to address a few of the things that you said but then I know that we have some questions. And always acutely aware of standing between people and dinner. So, I want to make sure we have some time for some discussion. I mean, I think I kind of pulled out three main things. So, the first thing, you know, is the kind of argument essentially centering on the poor students and poor households are particularly, you know, ‘being taken for a ride’ I think was the language. You know, this particular evidence, certainly, a lot of our work is around educational inequities and how shifting to asset based approaches may facilitate the educational success of low income children. This particular evidence, one of the interesting findings was it was really those moderate and middle income folks. Those students who were particularly at greater risk of assumption of debt which suggests that, you know, we may need to think a little bit differently about where we’re creating or leaving gaps in policy responses. Particularly as the cost of college out paces what those families could finance and as means based financial aid is really target to those who are even more economically disadvantaged.

The question about what influences savings is huge, right? There’s relatively little evidence about what makes someone a saver or not. I mean I, like you, have had these conversations on the playground with other parents and been often surprised. And I think that, you know, in some ways the conversation, United States, the policy conversation has a bit shifted away from that. Really moving towards changing the defaults and funneling people into savings practices and savings institutions rather than focusing so much on what can make people make the active decision to save. But there’s clearly a need for that, particularly when then looking at, you know, studies like this. It’s quite possible that some of the characteristics that we know influence savings, parental education, for example. Previous savings experience may also have their own separate effects on how students in this case interface with college decisions and financial aid and financial institutions.

You know, in terms of what are the proposals then, you know, that’s where I’d really like us to have some conversation hopefully still this afternoon. We certainly believe that we can’t center interventions just on parents. And believe that we need to think not only about how we can have multi-generational strategies. And in fact, a lot of our work has been around children’s savings accounts or child development accounts and how we can tease out some of the asset effects on educational outcomes to help make the case for investing in asset development among very young children. This area of inquiry around college debt, in particularly around parental savings and college debt is actually quite new to us. It’s that other body of work, looking more at children’s and at child asset development that has been more a part of a ADI’s work specifically. But there’s a lot of exciting policy development and related examination that’s looking at those multi-generational effects. I mean, there’s research we’ll hear about more tomorrow about randomized control trials looking at the effects of child development account programs done by the Center for Social Development. It’s just going to be awhile before we can tell what those programs and those policies effects will be on college debt. And so we need to think then about multiple levels of intervention in financial aid and probably separately higher education and financial institution sectors.

Raj: Thank you. Questions from the audience. And reminder, please present your name and affiliation when asking the question. Yes, please?

John Sabelhaus: John Sabelhaus from the Federal Reserve. So, this is for Meta. Just a few more details on the specification. So, I know you have geographic variations. Is there a time variation as well? Are you using multiple years? And if so are you using year fixed effects? Because it seems we know there’s an upward trend. And the question is, is it just more acceptable to live at home? Which I think could be growing. And our historical demographer sort of made it clear. I get along better with my kids than I got along with my parents. I loved it when he said that. Is that part of what’s going on?

Meta Brown: Always with the tough questions, John. But, yeah. So, we can obviously run this eight ways to Sunday. That what I presented was kind of flows on flows. So, changes in the economic conditions, changes in living with parents, there’s the flow of home to parents. And we run that with fixed effects in the growth. Doesn’t seem to be sensitive to that. But, you know, so this isn’t just kind of a cross-sectional pulled static regression that’s going to reflect the trends. But instead sort of, if your town is getting better, and you’re an independent young adult. And, you know, housing is getting more and more expensive. Rents are getting expensive here. You react by going home. That kind of story. We have tried to do the kind of—we really first wanted to know, here’s the pulled cross sectional regression. Are places with stronger housing markets and stronger labor markets and the like experiencing more sort of independent living of young people? Or, is it the disadvantaged local economies that are stuck with kids at home? We ran immediately into this obvious problem after we ran a couple of things. Which is, you know, houses are nicer and more expensive where parents tent to live. And they’re cheaper and cruddier where young people tend to live. And so if you run that level’s regression—and I’m just taking the house price thing as an example, but you get this sort of spuriously big positive co-efficient on house prices that you might naively interpret as well, expensive houses drive kids home. Which makes a lot of intuitive sense. But actually it’s just, you know, for life cycle reasons parents live nicer places. And so that’s sort of the reason for looking at the flows framework. In just the cross sectional levels, framework, you know, module of these many problems that are very obvious once you try to figure out what in the heck is going on. We did sort of run with year of dummies and there’s a very steep upward trend in living at home just in this year of dummy. So, there’s plenty of evidence in the estimates that we come up with to support a claim, or just some sort of cultural shift. You know? These kids like their parents much more than our cohort like, our parents. And so there’s plenty of evidence to support that. But at the same time and the answer to the question in the title of the paper is it debt, jobs, or housing? We find plenty of evidence to support that student debt, housing, and jobs are driving kids home. And so it seems to be all of these things. A long answers.

Raj: Other questions? Yes, please.

Mark Miller: Hi. Mark Miller. I write about retirement for the Reuter’s news service. And my question has to do with this question of saving for college in the sense that—what the question I have is this: There’s only a certain amount of money available in the household, particularly when we look at middle and lower middle class households. And in my work when I hear people talk about the advice that is being offered to households on saving for retirement, the advice usually is save for retirement first because there’s always a debt option for your kids on the student loan side. Those debt options don’t exist really, when you arrive at retirement as a safety valve unless you consider something like a reverse mortgage which so fairly, you know, niched product and not widely used. So, I’m wondering if there’s any researcher evidence about how households are juggling all these competing needs. You know, all this talk about, there’s a retirement crises. The households we’re talking about have saved zero for retirement. Literally, zero. So, you know, they’re being advised to save for college. They’re being advised to save for retirement at the same time. And the two don’t seem to be able to co-exist.

Melinda Brown: I mean, I think where we would start with that is by saying that they aren’t separate questions. You know, the evidence that suggests that those households that have outstanding student loan debt have lower net worth and lower home equity and less retirement savings would suggest then that there is a cost to your retirement of failing to save for college and therefor depending more heavily on student loans to the extent to which you are then compromised in your ability to save for your children’s college. Repeating that cycle. Then, you know, it’s not so much, you know, looking at qualitatively how are households really making these decisions? I think that, you know, that’s certainly an area that deserves some examination.

But we’re trying to kind of pull back a little bit and get folks asking different questions about the potential implications of student loan debt. And thinking, you know, not just about can students afford this debt? Can they meet their payments? But, really, what are the long term costs of failing to build assets at critical points and time? How will essentially funneling your children to student loans as the model to pay for college because you made that calculation. How will that compromise their future ability to invest in their own retirement? So, you know, how then can we craft different policy responses that, rather than telling families you’ve got to borrow here because you need to save here can instead highlight some of the advantages to be realized from building assets as foundation for economic mobility at different points throughout the life span. And then create lifelong vehicles to help them accumulate those assets.

Raj: Yes?

David Stace: David Stace, University of Illinois. Question here about the conceit of college, if I may call it that. We know that there are different strata of higher education in the United States. And it’s pretty evident to me as a college professor that I see a lot of students who were way in over their heads in terms of debt. And I have to wonder whether or not they’d be better off in vocational school. And I know that with a good vocational certification, an apprenticeship, membership at a trade guild, you could be making more than I make. So, the question is whether or not you’re factoring in vocational education or breaking that out in your analysis.

Melinda Brown: It’s a great question. In this particular case, yes, we broke it out. But we didn’t look at other types of post-secondary education. That was entirely in order to avoid kind of founding the different types of post-secondary educational options. We actually have some analysis going on right now. We’ll be coming out with some papers this summer and early fall that look precisely at that. You know, is it true that students who pursue other types of post-secondary education other than a traditional four year education actually accrue less in college debts? There’s some evidence that that in fact may not be the case because they have such a longer path to degree. And because they may be in institutions that don’t have the same financial aid packages. In fact, many of those vocational programs are those for-profit institutions that we see at least in the four year model are associated with higher incidents of debt. But it bears the inquiry, certainly, because if what we’re thinking about is post-secondary education in large part as a conduit to greater prosperity and economic mobility, we need to look at what are the different avenues that are available. And what are the differential types of outcomes that students can realize? In this particular case we took those off the table to focus so that we could begin to explore these relationships between parental savings and college debt. But we have at least two, maybe three papers coming out that will look at that specifically.

Raj: Questions in the back.

Greg Housel: Greg Housel, FDIC in Kansas City. Melinda, I was just watching one of the chancellors in the Kansas City area and they stated that 85 percent of the low-income enrollees had to take additional courses to catch them up. And she said that’s a national trend that was causing those students to utilize a lot of their grant funding on the remedial courses. And I’m wondering if you take that into effect? And if you’ve seen those trends on a national standing?

Melinda Brown: I mean, this particular study didn’t look at time to degree. It looked at, you know, those who had graduated from a four year institution. So, controlled for institutional type. And then again separately by for-profit institution, non-profit institution in a public, so private or profit, non-profit and public. But, that is something that we certainly look at in terms of the potential asset effects on education. Some of Dr. Elliott’s research has focused on how helping children at young ages to build assets and to specifically have them geared towards post-secondary education may increase engagement in school, may improve educational attainment and achievement in a way then that may be correlated with greater readiness and potential for post-secondary success. There will be soon some really exciting new research coming out of the randomized control trials with SEED for Oklahoma kids and some of the experiments that are happening in other parts of the country around the development of child savings account programs that hopefully can explore a greater detail of what we believe to be one of the really significant advantages to asset based approaches to paying for college. Which is that unlike student loans helping families and children save for college begins to have effects long before the point of enrollment. And to the extent to which we can address preparation. We can, perhaps, increase the ability of disadvantaged students to compete effectively for merit based scholarships and certainly make them better positioned, we believe, to be able to succeed educationally as seen in the evidence that correlates asset holding with an increased likelihood of being able to graduate from college. Not just get in.

Raj: And the note is that we should wrap up here. So, I think that’s all the time we have. I’m sure these authors would be happy to talk more with you afterwards. But please join me in thanking them for their presentation.


Male: Again, I’d like to thank our presenters today and also to Alex as our discussant and also Raj for moderating that panel. So, thank you very much.