Tag: student loans

What Trump’s First 100 Days Might Mean for Education Policy

President-Elect Donald Trump has released his plans for his first 100 days in office. After outlining proposals for term limits, a trade war, and mass deportations, the plan includes the following paragraph on education policy:

School Choice And Education Opportunity Act. Redirects education dollars to give parents the right to send their kid to the public, private, charter, magnet, religious or home school of their choice. Ends common core, brings education supervision to local communities. It expands vocational and technical education, and make 2 and 4-year college more affordable.

The details are far from clear, but it appears that his education policy will focus on three areas:

1. School choice

Trump has the right instinct on school choice, but if he is planning to promote a national voucher program, then he’s going about it the wrong way. He has previously pledged to dedicate $20 billion in federal funds to school choice policies, and stated that he would “give states the option to allow these funds to follow the student to the public or private school they attend” as well as using federal carrots to get states to expand choice policies even further. Expanding educational opportunity is admirable, but using the federal government to do so is misguided. As David Boaz explained more than a decade ago in the Cato Handbook for Congress, the case against federal involvement in education:

is not based simply on a commitment to the original Constitution, as important as that is. It also reflects an understanding of why the Founders were right to reserve most subjects to state, local, or private endeavor. The Founders feared the concentration of power. They believed that the best way to protect individual freedom and civil society was to limit and divide power. Thus it was much better to have decisions made independently by 13–or 50–states, each able to innovate and to observe and copy successful innovations in other states, than to have one decision made for the entire country. As the country gets bigger and more complex, and especially as government amasses more power, the advantages of decentralization and divided power become even greater.

A federal voucher program would very likely lead to increased federal regulation of private schools over time, especially after a new administration takes over that is less friendly to the concept of school choice. As we’ve seen in some states, misguided regulations can severely undermine the effectiveness of school choice and induce a stifling conformity among schools. Moreover, as I’ve explained previously, those regulations are harder to block or repeal at the federal level than at the state level and their negative effects would be far more widespread:

When a state adopts regulations that undermine its school choice program, it’s lamentable but at least the ill effects are localized. Other states are free to chart a different course. However, if the federal government regulates a national school choice program, there is no escape. Moreover, state governments are more responsive to citizens than the distant federal bureaucracy. Citizens have a better shot at blocking or reversing harmful regulations at the state and local level rather than the federal level.

That said, the Trump administration can promote school choice in more productive and constitutionally sound ways. The federal government does have constitutional authority in Washington, D.C., where it currently operates the Opportunity Scholarship Program (OSP). The OSP should be expanded into a universal ESA that empowers all D.C. families to spend the funds on a wide variety of educational expenses in addition to private school tuition, including tutors, textbooks, online courses, curricular materials, and more, as well as save unused funds for later expenses, such as college. The Trump administration should explore similar options in areas where the federal government has jurisdiction, such as on Native American lands and military bases.

Good Question: What to Do Before Major Change

“Dean Dad” Matt Reed has responded to my rebuttal to him Tuesday, and I appreciate his engaging me in discussion. His main point now: The student loan default problem is not mainly about big total debts, but smaller debts that are hard to pay off because the students dropped out before getting a degree.

I agree. Indeed, that was pretty much the point of my Wall Street Journal article that kicked off the exchange. As I wrote:

Many dropouts have loans, which are much harder to repay when one fails to finish, or gets a worthless degree. Borrowers on the academic margins, who often attend community colleges and for-profit schools, likely struggle the most to repay even though their debts tend to be relatively small. The Federal Reserve Bank of New York found that 34% of borrowers with debts between $1,000 and $5,000 defaulted, versus only 18% with debts in excess of $100,000, a level of debt associated with advanced degrees.

Where the confusion might lie is that I thought in his response to me Reed was suggesting that a major problem for anyone coming out of community college was that the minimum wage was too low and, connected to that, so were the wages of entry-level jobs. This was based on the following:

Why are former students having a hard time paying debt back? Mostly because entry-level jobs don’t pay very well. But McCluskey never addresses either the supply of entry-level jobs, or the minimum wage. 

Knowing that Reed did not mean to include graduates among “former students” makes his comments about low wages less alarming. Still, his solution – raise low wages instead of requiring evidence of college readiness – seems a broad, slow, and dubious way to deal with the debt problem. “Broad” because it calls for, essentially, overhauling a huge part of the economy as opposed to specifically reforming students loans; “slow” because doing that would take a pretty long time; and “dubious” because there is a lot of evidence that raising the minimum wage has substantial negative effects.

In addition to raising the minimum wage, Reed calls for “free (or much less expensive) community college.”

Free community college would probably solve the problem of community college noncompleters leaving with debt, depending on how one accounted for living expenses, but it comes with its own set of troubles. The first is that we would likely still have lots of people not finishing, only the costs would be borne more by taxpayers and less by students. The second is that, unless “free” were somehow focused on the poor, you would have taxpayers subsidizing well-to-do people. Recent data show about 39 percent of dependent undergraduate students at community colleges, and about 54 percent of independent students, are from the upper half of the income distribution.  About 16 and 28 percent are from the highest income quartile. Then there is the question of how to pay for this, especially if making it free leads to even more people enrolling. And will community colleges be able to handle all of the new students, or will they have to ration spots? What will encourage students to complete their studies as quickly as possible?

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.

 

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