Tag: student loans

In Washington DC, the Tax Consumers Always Win

Politicians typically try to win votes by giving away money. Being a political Santa Claus usually is seen as more rewarding than being a federal Ebenezer Scrooge. Which is why there’s now a $1.2 trillion federal student loan program which, the New York Times politely observed, “has been removed from the norms and values of prudent lending.”

Federally subsidized student loans have become a political favorite, as Uncle Sam added $82 billion to his loan portfolio in 2015. An incredible 42 million Americans have outstanding debt; 6100 schools have collected subsidized loans. Congress has created an educational “entitlement” akin to Medicare and Social Security, only for the young.

A lot of that cash will never be repaid. As of 2014, 28 percent of those whose loans became due in 2009 were in default. Anticipated lifetime default rates for cohorts 2007 through 2011 steadily increase from 15.9 percent to 18.4 percent. The Huffington Post’s Shahien Nasiripour warned: “Federal student loans made in recent years resemble the toxic subprime mortgage loans that helped cause the Great Recession.”

Who Could Have Seen That Coming?

Several recent news stories report information that was hardly surprising to anyone who has studied economics or read Cato at Liberty. We talk a lot about unintended or unanticipated consequences around here, but in these cases the consequences were anticipated and even predicted by a lot of people.

First, consider this front-page story from the Washington Post on Monday:

The [fast-food] industry could be ready for another jolt as a ballot initiative to raise the minimum wage to $15 an hour nears in the District and as other campaigns to boost wages gain traction around the country. About 30 percent of the restaurant industry’s costs come from salaries, so burger-flipping robots — or at least super-fast ovens that expedite the process — become that much more cost-competitive if the current federal minimum wage of $7.25 an hour is doubled….

Many chains are already at work looking for ingenious ways to take humans out of the picture, threatening workers in an industry that employs 2.4 million wait staffers, nearly 3 million cooks and food preparers and many of the nation’s 3.3 million cashiers….

The labor-saving technology that has so far been rolled out most extensively — kiosk and ­tablet-based ordering — could be used to replace cashiers and the part of the wait staff’s job that involves taking orders and bringing checks. 

Who could have predicted that? Well, Cato vice president Jim Dorn in his 2014 testimony to the Maryland legislature. Or Bill Gates around the same time.

Then there’s this all-too-typical AP story out of California:

Yet More Empirical Evidence That Yes, Federal Student Aid Fuels College Price Inflation

For a few years, I have been posting an evolving list of empirical studies that have found that federal student aid programs help fuel rampant college price inflation. Why? Because I continually encounter people, often who work for or in higher education, who insist that there is no meaningful empirical evidence of big subsidies enabling big price increases, even if the possibility makes mammoth intuitive and theoretical sense.

A few days ago a new entry arrived for the list, a paper from the Federal Reserve Bank of New York. It finds that student loans have big inflationary effects, especially at four-year private schools not focused on top academic performers, and that Pell Grants have smaller direct effects, but also likely lead to reductions in aid funded by institutions. It is yet one more study that shows that, contrary to the hopes of the American Council on Education–the premiere higher ed advocacy group–the inflationary effect of student aid is absolutely a subject that should “play a major role” in discussions about college affordability.

And now, the updated list:

David O. Lucca, Taylor Nadauld, and Karne Shen, “Credit Supply and the Rise in College Tuition: Evidence from the Expansion in Federal Student Aid Programs,” Staff Report No. 733, July 2015.

Dennis Epple, Richard Romano, Sinan Sarpça, and Holger Stieg, “The U.S. Market for Higher Education: A General Equilibrium Analysis of State and Private Colleges and Public Funding Policies,” NBER Working Paper No. 19298, August 2013.

Lesley J. Turner, “The Incidence of Student Financial Aid: Evidence from the Pell Grant Program,” Columbia University, April 2012.

Stephanie Riegg Cellini and Claudia Goldin, “Does Federal Student Aid Raise Tuition? New Evidence on For-Profit Colleges,” NBER Working Paper No. 17827, February 2012.

Nicholas Turner, “Who Benefits from Student Aid? The Economic Incidence of Tax-Based Federal Student Aid,Economics of Education Review 31, no. 4 (2012): 463-81.

Bradley A. Curs and Luciana Dar, “Do Institutions Respond Asymmetrically to Changes in State Need- and Merit-Based Aid? ” Working Paper, November 1, 2010.

John D. Singell, Jr., and Joe A. Stone, “For Whom the Pell Tolls: The Response of University Tuition to Federal Grants-in-Aid,” Economics of Education Review 26, no. 3 (2006): 285-95.

Michael Rizzo and Ronald G. Ehrenberg, “Resident and Nonresident Tuition and Enrollment at Flagship State Universities,” in College Choices: The Economics of Where to Go, When to Go, and How to Pay for It, edited by Caroline M. Hoxby, (Chicago, IL: University of Chicago Press, 2004).

Bridget Terry Long, “How Do Financial Aid Policies Affect Colleges? The Institutional Impact of Georgia Hope Scholarships,” Journal of Human Resources 30, no. 4 (2004): 1045-66.

Rebecca J. Acosta, “How Do Colleges Respond to Changes in Federal Student Aid,” Working Paper, October 2001.

Student Loan Gifts Don’t Help

Today must be student loan day in President Obama’s “year of action” – also “year of midterm elections” – as the President announced he will expand eligibility for student loan repayment capping and forgiveness. In addition, this week the Senate is set to take up Elizabeth Warren’s (D-MA) bill to federally refinance student loans at lower interest rates, including truly private loans.

Let’s review the folly of such seemingly well-intentioned efforts:

  • Making student loans cheaper, which includes indicating that Washington will always soften your loan terms if politically possible, mainly encourages students to demand more stuff, and colleges to charge more. They’re called “perverse incentives.”
  • In the name of helping them, federal politicians, and many other people, massively oversell higher education to the detriment of students. Perhaps as much as half of people who enter college don’t finish; a third of people with a bachelor’s degree are in jobs not requiring the credential; underemployment is even worse for graduate-degree holders, and; cheap college has almost certainly fueled credential inflation, not major increases in knowledge or skills.
  • Decreasing what borrowers will repay means taxpayers – who had no choice in whether the loans were made – have to make up the difference. And there is a little matter of being nearly $18 trillion in debt already.
  • The Public Service Loan Forgiveness program encourages people to work for not-for-profit entities, especially government. As if government work were a major sacrifice, and things produced or operated for profit such as iPads, grocery stores, bicycles, door knobs, restaurants, books, airplanes, and on and on, didn’t make us better off.

Someday, I hope somebody’s “year of action” will finally deal with the crippling reality of federal student aid “help.” But that will only happen if the public gets tired of sweet-sounding “solutions,” especially in years of elections.    

No Big Deal. Just Taxpayers Getting Clobbered

According to Ben Jacobs at the Daily Beast, Sen. Elizabeth Warren (D-MA) will soon be introducing legislation to allow holders of federal student loans to refinance at lower interest rates. There’s no indication that the new rates would be in exchange for longer terms, or anything like that. Just lower rates because someone might have borrowed at 7 percent, rates for new loans are now at 3 percent, and, well, paying 7 percent is tougher.

According to Jacobs, the proposal “seems to encapsulate…free-market principles” because recent changes to the student-loan program connect rates on new loans to broader interest rates. Apparently, pegging interest rates to 10-year Treasuries is very free market-y.

Perhaps more concerning than the questionable use of the term “free-market principles,” however, is the article’s handling of my reponse to the author’s request for comment. Apparently, I was fine with Warren’s rough idea, except for one little thing. Writes Jacobs:

In fact, Neal McCluskey, a higher education expert at the libertarian Cato Institute, had difficulty finding objections to the concept of Warren’s bill though he cautioned that was without any legislation for him to read. Instead, he was agog at the issues involved with reducing government revenue through lowering interest rates because the lender has to pay for it and, in this case, the lender is the American taxpayer.

How much bigger an objection could there be to “the concept of Warren’s bill” than that such a move would leave taxpayers holding the bag? As I often try to emphasize, taxpayers are people, too. There are lots of other concerns – most centrally, easy aid fuels tuition inflation – but to gently paraphrase Vice President Biden, reducing revenue that’s already been budgeted is a big deal!

Let me rephrase that: It should be a big deal. But as proposals like this indicate, it’s not nearly as big as it ought to be.

 

A Big, Tiny Deal on Student Loans

After a bit of a false start last week, it sounds again like the Senate is on the brink of a bipartisan compromise that will link rates on federal student loans to overall interest rates. Given all the hubbub that’s surrounded the loans, that’s big news. Given the actual change that would take place, it’s tiny.

Based on reports so far, the plan seems to be to eventually peg all undergraduate loans – both the officially “subsidized” and “unsubsidized” – to 10-year Treasury bill interest rates, adding 2.05 percentage points. Today, that would make the interest rate 4.57 percent. However, it appears that the compromise would put rates at 3.85 percent this fall. That’s no doubt a sweetener to appease student interest groups, whose goal is to get the cheapest loans possible regardless of the rest of the economy, and who don’t think a deal pegging student loans to T-bills is so hot.

To be fair, the deal isn’t hot. It’s barely room temperature. But that’s because it still gives away far too much, not too little. Taxpayer-backed loans that go to almost anyone have been a sweet-sounding disaster, encouraging people to consume education they aren’t willing or able to complete; prodding people who are college-ready to demand things that have little or nothing to do with education; and fueling rampant price inflation throughout the system. And, like last week’s abortive deal, this one appears to eliminate the different rates for the “subsidized” loans – those geared to truly low-income students – and the “unsubsidized” loans that have no income cap. In other words, the student aid system that is already heavily skewed toward the better-off seems likely to become a bit more so.

If this compromise eventually gets signed by the president, it will likely be hailed as a big, bipartisan deal. And maybe politically it would be. But as policy? It would barely register.

“Crisis” Averted on Backs of Poor?

This morning, I was greeted with the news that the Senate has reached a compromise on student loan rates, likely averting the “crisis” of having rates on “subsidized” loans – those most targeted toward low-income students – double from 3.4 percent to 6.8 percent. Of course this wasn’t really a crisis. The increase would only have affected new loans, would have just added about $6 to monthly payments based on the average yearly subsidized loan, and might even have been slightly useful because the primary problems in higher ed are massive over-consumption and price inflation driven by cheap aid. If we want to fix those things, we should be phasing out price and consumption-distorting aid programs.

Suppose, though, you think federal aid is necessary to make sure college is affordable for the truly needy. I assume that most aid supporters – including those who voted for the compromise in the Senate – would say that that is the top goal. So why, then, does the compromise set the same interest rates for subsidized loans as unsubsidized, the latter being accessible to anyone regardless of income? Wouldn’t a top priority be to keep the subsidized rates lower? (Subsidized loans would, importantly, still have interest covered by the government while students are in school.)

Maybe information explaining this will come out as more news breaks, but it seems quite possible that the main objective is not, actually, to help the most needy, but to appear to help anyone who wants to go to college, regardless of income or need. Maybe it is to curry favor with as many voters as possible. That hypothesis not only seems to fit the current case, but overall federal involvement in higher education, which involves not just Pell Grants or subsidized loans largely focused on the poor, but unsubsidized loans that have no income cap; tax credit programs skewed toward the well-to-do; and a whole perverse aid process that favors those people who know when to buy homes, time raises, and other savvy tactics to maximize what they get from schools and taxpayers.

If the goal were really to help the truly needy, it seems the Feds would have a single grant or loan program aimed squarely at people earning, say, 200 percent of the poverty line. But, as this compromise seems to further confirm, that’s probably not the primary goal. Maximizing votes is, which is exactly what we should expect from politicians who, like all of us, want first and foremost to get what’s best for themselves. It’s also why, for everyone’s sake, we should demand that the Feds stay completely out of student aid.

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