4/11 Show Notes - Preston Cooper on Student Loan Debt

General notes:

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Mention The Bubble: How Higher Education Abandoned its Mission and Became America's Most Overrated Product - available on Amazon: https://www.amazon.com/dp/1795599847

Notes from planning call:

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Student loan debt crisis is not what people think it is... [Question: identify the most common myths floating around, and explain why they are dead wrong?]
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IDRs - who benefits? who actually pays? Why the current system of forgiveness is regressive - helping those who don't need help, while those who do don't know about the relief programs.
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Moral Hazard - enabling colleges to continue the practice of selling a worthless product (a la Junk bonds or something, but without the CFPB regulation) that wouldn't be legal in the banking industry.
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Ask Preston about the history and origins of student loans (the race with the Soviet Union to get ahead)

Blurb

Preston Cooper is a PhD student in George Mason University’s economics program and a visiting fellow at The Foundation for Research on Equal Opportunity, whose studies have led him to a number of under-publicized conclusions about the so-called student loan crisis.

First of all, blanket forgiveness of student loan debt would be far more costly than most people imagine – totaling more than all spending on antipoverty programs over the past several decades.

Second, those with the largest sums of debt are generally those who have graduated with reasonably valuable degrees, who are on their way to paying those debts down. The people most likely to be in default are those who incurred smaller debts from one or two semesters of college before dropping out, and failing to find well-paying work.

Finally, for those in this latter category, there are already programs available to alleviate the often crushing burden of student loan debt. These programs, including so-called IDR (income-driven repayment) plans, are much more helpful than the kinds of “debt forgiveness” being proposed by the Biden administration ($10,000 per student). In other words, call off the student loan debt jubilee.

Cooper joins me this Sunday to discuss how we got to the point where the educational system produces so many poor debtors, and what we can do to resolve this problem going forward – without breaking the bank or benefitting the relatively privileged at the expense of the poor American taxpayer.

BIO

Preston grew up in Washington, D.C., and majored in economics at Swarthmore College, where he learned firsthand about the rising cost of a college degree. “While I was in college, I kept thinking: ‘I love learning. I love building my skills. But there has to be a cheaper way to do this.’”

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After graduation, Preston joined the think tank world, working for two years each at the Manhattan Institute and the American Enterprise Institute. In 2016, he joined Forbes as a Contributor, and in 2019, he began working on his Ph.D. in Economics at George Mason University in Virginia.

At FREOPP, Preston is a Visiting Fellow, where he continues his work on making postsecondary education affordable for every American. “I’m so proud to be part of a community like FREOPP’s that believes in unleashing the potential of every person through creative reforms.”

About FreOp:

The Foundation for Research on Equal Opportunity conducts original research on expanding economic opportunity to those who least have it. FREOPP is committed to deploying the nation’s leading scholars and the tools of individual liberty, free enterprise, technological innovation, and pluralism to serve this mission. All research conducted by FREOPP considers the impact of public policies and proposed reforms on those with incomes or wealth below the U.S. median. FREOPP is an independent, non-profit, non-partisan organization financed by tax-deductible contributions from individuals, foundations, and corporations.

Main topics

Student Loan Debt

fundamental causes of tuition growth
To address this problem, policymakers should attack the fundamental causes of tuition growth. While this agenda should include reining in federal financial aid programs, the federal government should also overhaul the accreditation system and increase price transparency, which will encourage more vigorous competition between schools to lower costs. Promoting alternatives to traditional higher education, such as apprenticeships and industry certifications, can also play a role in reducing tuition.

The returns to higher education are falling along with the "wage premium" for college grads.

Costs have exploded:

At both public and private nonprofit four-year schools, published tuition rates have quintupled in real terms since 1970.

Most students pay less due to financial aid, including "institutional aid" (accounting fiction) from the college itself.

Many modern universities are “Christmas trees” that provide a number of non-academic products in addition to the core academic experience. On top of core spending, non-core functions accounted for nearly $15,000 in per-student expenditures in 2018. Non-core enterprises include dormitories, dining halls, self-supporting athletic teams, hospitals, and independent research centers.

What drives costs?

Plushy experience, more administrators.

A fiscally responsible agenda to help borrowers in financial distress
• Reduce administrative fees and seizures for borrowers in default on their loans, and create a clear pathway for defaulted borrowers to return to good standing. • Simplify income-driven repayment plans and ensure that low-income borrowers will never face an unaffordable monthly payment. • Guarantee that the 25 million borrowers who owe less than $20,000 will never “move backward” on their loans, so long as they make their payments on time. • Penalize colleges where loan outcomes are poor, and limit excessive student lending in the future.

Calls from democrats to forgive $50,000 in debt per borrower.

But government loans themselves are to blame for the crisis – many low-level programs only exist because of student loans.

Canceling all or most of the outstanding federal student loan portfolio is an expensive, irresponsible, and blunt solution to the problems facing student borrowers.

The best predictor of default is whether or not the student finished school.

Over three-quarters of student loan defaulters did not earn a degree, and 50% only attended college for a year or less. According to the Brookings Institution, at least 45% of college dropouts will default on their loans, compared to just 8% of college graduates.

Most defaults are on very low levels of debt, from only attending a semester or two before dropping out.

Those with high balances from having actually graduated tend to eventually repay them, often earning advanced degrees.

Student loan relief should be narrowly targeted to those whose financial distress is the result of student debt, which includes many defaulters. However, the student loan program is a poor vehicle to deliver general financial assistance to needy households. The poorest and least-educated Americans have no student loan debt at all.

IDR (income-driven repayment) plans are available to many borrowers, who don't know that they are eligible to pay less if their income is super low.

Cooper proposes making up the difference between the IDR payment and the interest amount if the IDR payment is < interest, so that debtors don't go further and further into debt.

How to prevent the next crisis

colleges which participate in the federal loan program should be assessed a $1,000 penalty for every student who 1) defaults on their loans within five years of entering repayment, 2) is at least ninety days delinquent on their loans five years after entering repayment, 3) has a higher balance five years after entering repayment than they did upon leaving college, or 4) requires interest subsidies on their loans for at least 30 of the first 60 months of the repayment cycle.
March 30, 2021, by Preston Cooper and Jason Delisle

The crisis is overstated due to the existence of programs like IDR.

We don't need a debt jubilee:

Most people with federal student loans have access to the program and therefore can elect to cap their monthly payments at 10% of discretionary income. This significantly reduces payments even for borrowers with average amounts of debt. A single adult earning $35,000 per year would normally pay $304 a month on a $30,000 loan on the standard repayment plan. But enrolling in IDR lowers her monthly payments to just $131.

Many borrowers have $0 monthly payments based on 0 discretionary income.

Graduates and advanced degree recipients are more likely to take advantage of the IDR program even though they are the lease needy.

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PODCAST - featuring Cooper and two others.

The vast majority of student debt is held by people who are above median income and people with very high earnings potential over their lifetime. The low-income people, most of the people who have lost their jobs during this pandemic, don't have student loan debt at all. The government has finite resources to spend on relief, and student loan forgiveness is not the best use of that money.

Dec. 2020, by Preston Cooper
Most conservatives are rightly skeptical of mass student loan forgiveness, which would be an expensive and unfair transfer to mostly high-income college graduates.

Cooper proposes a new borrower-centered plan for student loan relief that focuses on low-income and defaulted borrowers. He says the plan will achieve three goals: target relief to borrowers most in need, avoid spending on borrowers who don't need financial help, and stop the next student loan crisis before it happens.

As an answer to calls for student loan forgiveness, conservatives should focus their attention on the people whom the federal government’s reckless lending has hurt the most: low-income and defaulted borrowers.

Senators Chuck Schumer and Elizabeth Warren are calling on President-elect Biden to use his executive authority to cancel $50,000 in federal student loan debt per borrower. At a cost of roughly $1 trillion, that might be the most expensive policy ever enacted by executive order. Biden himself favors a smaller loan cancelation of $10,000 per borrower, but this would still cost upwards of $370 billion. The most straightforward argument against mass loan forgiveness is that its benefits are skewed towards the rich. The top fifth of households holds $3 in student loans for every $1 held by the bottom fifth.

Student loan forgiveness is the wrong way to kick off the Biden administration: it is regressive and unfair, won’t stimulate the economy, and creates perverse incentives to borrow more in the future.

Bob interviewed for Gold Newsletter

Alternative Financing to Loans

Income-share agreements promise to eliminate unaffordable student debt by tying repayment to income. But a new study has found that income share agreements can also mask race-based inequalities. The study released by the Student Borrower Protection Center found that borrowers at schools that focus on minority students can end up paying more than their peers at largely white campuses.

The market is opaque and lightly regulated, making it challenging for borrowers to find the kind of disclosures that typically accompany financial products.

Student Borrower Protection Center executive director Seth Frotman says he views that as "educational redlining." Stride Funding CEO Tess Michaels says analysis fails to consider "important nonracial factors." Lawmakers and regulators have warned that racially disparate impacts are unacceptable regardless of the underlying cause. A group of Democratic lawmakers including Kamala Harris asked the Consumer Financial Protection Bureau last year to investigate several lenders.

Higher Education Bailouts

If we take bailouts off the table, What would a fair response

More federal spending on education will just continue to fuel the bubble.

In his Covid-19 response strategy, President Biden cited this statistic in support of additional federal aid for colleges: “College enrollment for high school graduates was down more than 20% in 2020 compared to 2019,” the strategy document reads. “To support colleges through the pandemic, President Biden has requested that Congress provide an additional $35 billion in emergency stabilization funds for higher education.” However, that statistic turned out to be wrong. In an updated report released Thursday, the National Student Clearinghouse now estimates the number of high school graduates going on to college declined by only 7%. The reasons for the change were the addition of new data and a “process error” that “resulted in an overestimate of the rate of decline in college enrollment counts.

Many of the students who didn't enroll this year due to Zoom classes, etc will likely be rolled into future years.

The solution here isn’t a bailout for colleges and universities. To the extent federal money is needed, it should take the form of targeted support for lower-income families who may have seen their high school-age students’ postsecondary plans put on hold due to the pandemic.

The sums involved in student loan forgiveness proposals would exceed cumulative spending on many of the nation’s major antipoverty programs over the last several decades. Student loan relief could be designed to aid those in greater need, advance economic opportunity, and reduce social inequities.

Increasing spending on more targeted policies would benefit families that are poorer, more disadvantaged, and more likely to be Black and Hispanic. Shoring up spending on other safety net programs would be more effective way to help low-income people.

Those who borrowed to get college degrees that are paying off in good jobs with high incomes do not need and should not benefit from student loan-forgiveness initiatives that are sold as a way to help truly struggling borrowers.

Debt Jubilee

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