Six Reasons 401(k) Contributions Should Not be Your Top Priority

Many financial advisors believe contributions to 401(k) investments should almost always be their client’s top priority.   They sort of recognize that people who can’t pay their current bills on time and have no funds for basic emergencies need to limit or even forego contributions to illiquid retirement accounts.  However, in almost all other circumstances financial advisors favor expanding 401(k) contributions over other financial priorities.  

My view is that financial advisors tend to overprioritize the importance of 401(k) contributions at the expense of several other financial priorities. Many households should lessen the accumulation of 401(k) growth when it leads to higher borrowing costs, increased lifetime debt burdens, and outstanding mortgage obligations in retirement.  Households need to evaluate the impact of excessive reliance on 401(k) savings on tax obligations in retirement, the impact of 401(k) fees on retirement savings, and how use of alternative assets outside a 401(k) account might reduce financial risk in retirement.

Six goals – (1) Improved liquidity, (2) reduction of lifetime debt payments, (3) accumulation of house equity and mortgage reduction, (4) reduction of tax obligations in retirement, (5) reduction of 401(k) fees, and (6) management of financial risks — can lead a person to delay or reduce 401(k)  contributions. We consider circumstances where these six financial goals might override the need to increase 401(k) contributions.

Improved Liquidity:   

Many young adults are leaving college with substantial debt and little or no funds saved for emergencies.   These individuals need to reduce debt, create a fund for emergencies.  They are not in a position to tie up funds in an illiquid retirement account. 

Failure to create an emergency fund and eliminate credit card debt could lead to a deterioration in a borrower’s credit rating, which could result in much higher interest rates and a lifetime of higher borrowing costs.  A person with good credit could obtain an interest rate around 60 less than a person with bad credit for a private student loan or an auto loan.   A mortgage rate could be 40 percent lower for the person with good credit.

  • I considered the impact of credit quality on lifetime interest payments for a person with good credit and a person with bad credit.   My example involves people with three loans – a $15,000 auto loan, a $40,000 student loan and a $300,000 mortgage.   The person with good credit pays $159k less than the person with bad credit over the life of the three loans.  The largest potential savings from good credit is associated with the mortgage because it is the largest loan.

Low liquidity and high debt could lead to a great deal of discomfort and distress. In the case of a natural disaster, this could involve the difference between staying in a public shelter or flying away to a vacation.  Many people without credit or cash will find it difficult to move to a new city even if the move will lead to a higher paying job.  Bad credit can make it difficult to be approved for an apartment, may result in required down payments on utilities or cell phones, may result in the denial of a job opportunity, and higher insurance premiums.

A person who decides to tie up funds in an illiquid retirement account and allows her credit rating to deteriorate will have high borrowing costs and a more stressful life.   These adverse impacts could be avoided through the following steps. 

  • Establishment of a substantial fund for emergencies prior to tying up funds in an illiquid 401(k) account.
  • Evaluate the likely impact of contributions to your 401(k) plan on your ability to repay your loan. Make sure all bills will be paid on time prior to starting 401(k) contributions
  • Reduce 401(k) contributions and make additional debt payments as soon as debt payment problems occur.

Lifetime Debt Reduction:  

Some financial analysts acknowledge that reduction in high-interest rate credit card debt should be a high priority but are okay with long term student loan or mortgage obligations because these loans have lower interest rates.  The problem is that student loans and mortgages are often huge and lead to large lifetime debt burdens. 

  • Lifetime debt payments can be reduced by around 18 percent by selecting a 10-year student loan over a 20-year student loan and by around 20 percent by selecting a 15-year mortgage over a 30-year mortgage.

Many people can only afford the payment on the shorter-term loan by reducing payments to their 401(k) plan.  People need to consider actions that minimize lifetime debt payments even if these actions result in lower contributions to a 401(k) plan.

Here are some options.

  • Young adults who take their first job after college but plan to reenter school should almost always save for their graduate school tuition rather than tie up funds in a 401(k) plan. 
  • Student borrowers should attempt to take a 10-year student loan rather than a 20-year student loan if at all possible.  Income based replacement loans and public service loans that offer the possibility of loan forgiveness exist; however, the Department of Education has refused to discharge some of these loans and reliance on these loan programs is a risky financial strategy.  A 10-year loan may be the most effective way to limit your lifetime student loan payments. 
  • Borrowers should consider repaying their student loans in fewer than 10 years to further reduce interest payments.
  • The use of a 15-year mortgage rather than a 30-year mortgage probably requires total elimination of the student loan and may require that you delay purchasing your first house.   One problem with this approach is that when housing prices rise a delay in the first house purchase will result in a higher house price.

Mortgage Debt Elimination:

More and more older people must pay mortgages during retirement.   One study using Census Department data found that people over 60 were three times higher to have a mortgage in 2015 than they were in 1980.  

Many financial advisors are okay with their clients taking a mortgage into retirement and recommend additional catch-up 401(k) contributions over additional mortgage payments.  This is often terrible advice.

Stocks tend to have higher returns over other asset classes over long term investment horizons.   However, stock returns over a 5-year to 10-year time frame are often quite low.   By contrast, a dollar invested in reducing the mortgage balance results in a certain return.

During working years contributions to 401(k) plans are exempt from income tax.   However, during retirement all disbursements from traditional 401(K) accounts are fully taxed as ordinary income.  A person with an outstanding mortgage in retirement will, all else equal, have to disburse a larger amount than a debt-free person.  The larger disbursements lead to a higher tax obligation in retirement.  

Moreover, a person with a large mortgage balance in retirement may not be able to reduce 401(k) disbursements during a market downturn, which may lead an increased risk of the person outliving her savings.

People who pay off their mortgage on or before the date they retire tend to have planned for that outcome.   Often this outcome entails taking out a 15-year mortgage when purchasing their final home.   The simplest comparison involves a person planning to retire in 15 years who takes out either a 15-year or 30-year fixed rate mortgage.  For purposes of illustration assume the loan amount is $450,000 and the interest rates are 3.8 percent for the 30-year loan and 3.3 percent for the 15-year loan.  This is similar to current mortgage rates.   The outstanding loan balance after 15 years of payments is $0 for the 15-year loan compared to $287k for the 30-year loan.

People need to make the elimination of mortgage debt prior to retirement a high priority in their financial plan.  The following steps should be considered.

  • Taking out 15-year mortgage rather than 30-year mortgages on all homes purchased during their lifetime, even if higher mortgage payments result in the borrower having to reduce 401(k) contributions.
  • Rolling over all funds received from the sale of a home into the down payment on the purchase of the subsequent home.
  • Foregoing 401(k) catch up contributions at age 50 in order to accelerate mortgage payoff prior to retirement.

The decision to take a 15-year mortgage rather than a 30-year mortgage and the decision to reduce your 401(k) contribution could increase your current year tax liability.  However, the tax reform act of 2017 reduced the number of homeowners who claim the mortgage deduction on their tax return.  My view is that financial advisors and clients often place too high a priority on immediate reductions in tax obligations and should be more focused on reduction of risk and long-term financial objectives.   

Tax Considerations:  

There are two major tax benefits associated with 401(k) contributions. Contributions to conventional 401(K) plans are exempt from tax in the year the contribution is made.   All capital gains and investment income accumulate tax free until the income is disbursed from the 401(k) account.  As a result, contributions to a 401(k) plan are a highly effective way to reduce current year taxes and to forego taxes until disbursements in retirement. 

During retirement all disbursements from conventional 401(k) plans are taxed as ordinary income, which for most people is a substantially higher rate than the tax on capital gains on assets held outside a 401(k) plan.    

Increased 401(k) contributions decrease current year taxes and delay tax obligations.   People with a high concentration of their wealth in 401(k) accounts have higher tax obligations in retirement.   People must consider the tradeoff between immediate tax reduction and future tax obligations.

Several recent tax changes have reduced the importance of the exemption of 401(k) contributions from taxes for some middle-income household.  First, the increase in the standard deduction established in the 2017 tax law reduced potential tax saving from 401(k) contributions for some households with lower marginal tax rates.   Second, households have increased contributions to health savings accounts, which are also exempt from federal and state income tax.  These recent changes may have resulted in a decrease in 401(k) contributions. 

There are several different ways you might minimize tax obligations during retirement.   All of these techniques involve investing more funds outside your conventional 401(k) plan.

  • Funds placed in Roth accounts are fully taxed in the year they are contributed but are never taxed in subsequent years.  Roth 401(k) accounts are a relatively new innovation not available at all firms.  People with income above certain levels are not allowed to contribute to a Roth IRA.   Financial advisors tend to do a good job analyzing the relative merits of Roth versus conventional retirement accounts.
  • The elimination of a mortgage prior to retirement will reduce required 401(k) disbursements, which are fully taxed.
  • Capital gains on stock not in a retirement account are taxed at a lower rate than the ordinary income tax rate.  There are significant tax advantages with holding I-bonds issues by the Treasury and municipal bonds instead of bond funds inside a 401(k) plan.

It is important to consider both current year and future tax obligations when evaluating different investment opportunities and retirement savings options.

The importance of 401(k) fees

Many small firms with 401(k) plans charge fees of more than 1.5% per year of total assets.  Fees exceeding 2.0 % per year are not uncommon.

Fees at this magnitude can substantially erode retirement savings. In a recent blog post I calculated lifetime fees for a worker who contributes to a 401(k) fee with an annual fee of 2 percent of assets.   I found lifetime fees were roughly 25 percent of the 401(K) balance on the date of retirement.   

Should you invest in a 401(k) plan, an IRA or both?

https://medium.com/@bernstein.book1958/should-you-invest-in-a-401-k-plan-an-ira-or-both-finance-memos-3d5047c1b87b

High 401(k) fees pose significant challenges to investors in the current low-interest rate environment.  The current 10-year rate is around 1.5 % and the annual fee on some plans is over 2.0 %.  This results in a negative return on bonds invested inside a 401(k) plan.

Experts argue contributions to a high-fee 401(k) plan are still appropriate when there is an employer match. Perhaps this is correct but there is something wrong with a system that provides people incentives to save in high fee accounts.  

There are steps you can take to minimize the impact of high 401(k) fees.

  • Limit contributions to the amount needed to take full advantage of the employer match.
  • In the current low-interest rate environment, decrease 401(k) investments inside bond funds. Retain a balanced portfolio by purchasing bonds directly through the Treasury at Treasury Direct where there are no transaction costs.
  • On the day you leave your present employer convert your high-cost 401(k) plan to a low-cost IRA offered by Schwab, Vanguard, or Fidelity.

People need to fully evaluate fees charged by their firm’s 401(k) plans and adopt appropriate steps to reduce the impact of these fees on the erosion of their retirement savings.

Financial Risks:

I am concerned about two types of financial risks in 401(k) plans – (1) inappropriate investments options and (2) Interest rate exposure.   

Inappropriate Investment Options:

There is a substantial finance literature indicating that low-cost index funds outperform high-cost actively managed funds.   Some firm managers ignore this literature and choose actively managed funds.  Often this choice leads to poor results and litigation.  Below is a link to an article on litigation over 401(k) investment performance.

https://www.marketwatch.com/story/401k-lawsuits-are-surging-heres-what-it-means-for-you-2018-05-09

The optimal strategy for a person working for a firm with a 401(k) plan that has poor investment options may be to only contribute enough funds to take full advantage of the employer match.  Employees at such firms need to consider opening an IRA instead of contributing to the firm 401(k) plan.   The employee should then rollover their 401(k) funds into an IRA as soon as they leave the firm.  (Some 401(k) plans may allow current employees to rollover funds into an IRA.  I don’t know the rules on this.)

Interest Rate Exposure:

Interest rates remain below historical levels and central bank interest rates are actually negative in some countries.   This situation will not last forever.  When interest rates rise the price of bonds and the price of bond funds will decrease leading to losses.

Most 401(k) plans allow for investment in broad funds but do not allow for investments in government bonds with a specific maturity date.   The advantage of investing in a government bond with a specific maturity date is the holder of the bond will receive the full par value of the bond on the day the bond matures.   By contrast, the value of shares in a bond fund will be below the purchase price of the bond fund should interest rates rise and remain high.

Most 401(k) plans include a fixed income fund as an investment option and many 401(k) investors allocate a substantial share of their funds to the fixed income funds.   These households could result in large financial losses once we return to a more normal interest rate environment.   

My only recommendation on this problem is to consider investments in zero coupon Treasury bonds that are guaranteed to have a specific value on their maturity date.

The financial exposure associated with the eventual rise in interest rates is a scenario that keeps me up late at night.  I don’t see an obvious solution.

Concluding Remarks:

Financial advisors have always stressed the importance of investing in 401(k) plans.  This advice is better suited for people with high income, abundant funds for emergencies, and little or no debt than for the typical highly leveraged young adult.   

Even after a young adult gets a decent job, eliminates onerous credit card debt and builds up a decent emergency fund there is a need to balance competing financial objectives.  Often it makes more sense for a person to minimize lifetime debt payments and increase the accumulation of house equity than to increase contributions to a 401(k) plan.  Many people can also obtain better financial results (reduced tax obligations in retirement, lower fees, and better investment opportunities) by reducing their wealth holdings inside a 401(k) account and increasing holdings outside a 401(k) account.

The author is an economist living in Colorado.   He is the author of “Defying Magnets:   Centrist Policies in a Polarized World.”  This book can be obtained on Kindle or Amazon.  

2020 Policy Questions: Health Care

Progressives believe that revisions to the ACA would not substantially improve health insurance.  Centrists believe Medicare for All is fiscally unsustainable and could lead to unforeseen outcomes.  Guess What! They both might be right.

Questions for Centrists:  State health exchange markets created by the Affordable Care Act provides health insurance to roughly 5 percent of the working-age population.  Employer-based health insurance remains the dominant provider of health insurance to this segment of the population.   Do you favor reforms that would substantially expand the role of state exchanges in providing health insurance to more workers, especially workers at small firms? Would you acknowledge that a reform program that modestly increases the role of state exchanges but leave employer-based insurance as the dominant health insurance market will have a relatively modest impact on health insurance problems?

Many people have inadequate health insurance. Many health insurance policies have high deductibles and high out-of-pocket limits.  Many health insurance policies only provide benefit in a narrow geographic area have narrow networks and often do not cover services rendered by an out-of-network provider working in an in-network facility. These problems with existing health care plans leave many people with unanticipated health care debt, cause some people to reduce retirement savings and cause other people to forego necessary medical procedures and prescribed medicines.  What does your health plan do to improve coverage for people who currently have a comprehensive health plan?

Questions for Progressives:

The Medicare for All bill is entirely tax financed.   Under Medicare for All, health care expenditures directly impact the budget.  How would this program be insulated from budgetary pressures?

  • The Medicare for All bill creates a universal Medicare care trust fund?  What is the purpose and what are the limitations of this trust fund?  Have there been simulations of the long-term solvency of the universal health care trust fund?
  • Would general tax revenue and funds raised from bonds be automatically used to cover health care expenditures if funds in the trust fund did not cover all benefits?
  • Won’t future Congresses consider adjustments to health care expenditures and provider compensation rates based on the annual budget?   Shouldn’t Congress be more concerned about the overall deficit and the trend of the debt to GDP limit than the status of the trust fund?
  • Could the Secretary of HHS in a fiscally conservative Administration reduce benefits and compensation rates?
  • What would happen to Medicare for All benefits when there is a government shut down or a debt limit problem?    Who gets paid first people who need health care or people who own government debt?  

The current bill exempts Medicare for All from the Hyde amendment. What would prevent a future Administration and Congress from applying the Hyde Amendment to Medicare for All; thereby eliminating all insurance payments for abortion services?

People who want to learn more about how these issues are playing out in the 2020 contest should go here.

https://medium.com/@bernstein.book1958/how-should-centrists-respond-to-senator-warren-on-health-care-e82967734384?source=friends_link&sk=26049a4353e9ac170e9ec0323cef64aa

Should you invest in a 401(k) plan, an IRA, or both?

Financial Tips:   When should a person use an Individual Retirement Account rather than a 401(k) plan?   When should a person leaving an employer convert her 401(k) plan into an IRA?

Analysis:

Most financial advisors believe that workers saving for retirement should invest in a 401(k). rather than an IRA.  Many government rules favor 401(k) contributions over iRA contributions.  First, employee contribution limits for 401(k) plans are around 3 times higher than limits for IRAs.  Second employees are allowed to make additional contributions to 401(k) plans but are not allowed to make similar contributions to IRAs.  Third, many employers routinely match employee contributions.   Fourth, the IRS imposes limits on deductibility of some iRAs but not the deductibility of 401(k) plans.   Fifth, the IRS restricts Roth IRA contributions for higher income households but does not restrict contributions to Roth 401(k) plans.   

IRS rules allow 401(k) plans to automatically enroll workers who do not opt out.  However, there are situations where people are better off investing in an IRA separate from their employer than in the firm 401(k) plan. 

The main factor favoring IRAs over 401(k) plans is the higher administrative costs of 401(k) plans.  Fees on 401(k) plans are applied to the entire 401(k) balance and are often between 1 percent or 2 percent per year.  These fees can substantially erode a workers 401(k) balance over the course of the workers lifetime. 

High 401(k) fees are more prevalent at small firms than large firms. People working at a firm offering a plan charging high 401k) fees and offering little or no employer contributions need to look at other investment options than their 401(k) plan. High 401(k) fees can substantially erode retirement savings.   These fees can largely be avoided by using an IRA rather than a 401(k) plan to save for retirement.

I constructed a spreadsheet to estimate the impact of high 401(k) fees at retirement savings.   The assumptions in a baseline analysis involved a person with a starting salary of $50,000 who works for 35 years and realizes wage growth of 2% per year over her entire career.  This person contributes 10 percent of her salary to a 401(k) plan and earns an annual return of 7%.

When fees are 2 percent of the end-of-year 401(k) balance the total fees over the entire 35-year career are slightly more than $153 k compared to an ending balance of slightly less than $600 k.   

By contrast, when 401(k) fees are 0.5 % (a reasonable fee structure that exists at many firms) total fees over the 30-year career are around $48 k and the ending balance is around $830 k.

Note the difference between ending balances of the two scenarios is much larger than the difference in fees because additional 401(k) income from the lower fee compounds at the average rate of 7 percent per year.

One possible strategy for a worker at a firm that match some employee 401(k) contributions is to make a small contribution to the 401(k) to take advantage of the employer match and then invest additional funds in an IRA. This strategy may or may not be feasible depending on IRS rules governing IRA contributions, deductibility of IRA contributions, and the individual’s household Adjusted Gross Income.

The 401(k) fees are applied to all assets in the 401(k) plan.   In the current low interest rate environment, the expected return on government bonds adjusted for 401(k) fees is negative.   In this circumstance, it may make sense to place more 401(k) funds in equity and accumulate debt investments outside of a 401(k) account where they are not subject to 401(k) fees.  One alternative, which many people overlook, is direct investment in Treasury bonds and bill at Treasury Direct.

https://www.treasurydirect.gov.

Firms like Fidelity, Schwab, and Vanguard aggressively ask people who leave their employer to convert their 401(k) plan to an IRA.   This is the rare case where aggressive solicitation from financial firms is actually sound advice.  Fees on well-designed IRAs are often near 0.2%.  The decision to maintain funds in a dormant high-fee 401(k) plan could lead to a substantial loss in retirement savings.

One of the key selling points of conventional 401(k) plans is the ability of these plans to reduce current year tax obligations.   By contrast, Roth 401(k) plans and Roth IRAs do not reduce current year tax obligation but do reduce taxes in retirement.  A person with low current year tax obligations and the ability to reduce taxes through other means such as contributing to health savings account may choose to reduce or eliminate contributions to a conventional 401(k) plan.   This person might instead invest through a Roth 401(k) plan if available at her firm or through a Roth IRA.  The lack of a Roth 401(k) option may lead some investors who are concerned about tax obligation in retirement to consider a Roth IRA over a conventional 401(k) plan.

The issue of deciding between a 401(k) plan and an IRA is related to several other issues including – the choice between debt reduction and mortgage savings, the choice between investing in a health savings account or a retirement account, and the choice between a conventional and Roth IRA.    Other financial tips on these related issues will follow shortly.

Four Free Books on Kindle June 10, 2019


Innovative Solutions to the College Debt Problem

Discusses existing policies and proposals on college financial aid and student debt and comes up with several new solutions that promise to reduce the number of overextended borrowers without imposing large burdens on taxpayers.

Defying Magnets:  Centrist Policies in a Polarized World

This generation of workers is getting screwed – higher student debt, multiple problems with health insurance coverage, and difficulties saving for retirement.   Three policy primers discusses these inter-related problems.

Things to Consider Before Purchasing Long Term Care insurance

Most people can’t afford long term care insurance.     Insurance companies often raise premiums and cut benefits, years after a policy is purchased.   The possibility of needing Long term care is a major risk.  But you need to solve other problems first.  Best to minimize debt, increase 401(k) savings, buy life insurance ahead of covering this troubling risk. 

Statistical Applications of Baseball

Book teaches introductory statistics through baseball.  A bit dated but baseball is and statistics are constants and book has a number of Interesting real world examples.  

A Centrist Health Plan

Introduction:

Most of the current health care debate in the Democratic party revolves around the adoption of a single-payer health care plan or the addition of a public option to the current system.

The Medicare for-all-option offered by Senator Sanders is on paper a comprehensive solution fixing all health insurance problems.   While many countries have high-quality public health insurance, there has never been an example of a country with an advanced private system abruptly replacing it with a public system

The proposals to expand Medicaid or Medicare currently circulating in Congress could help certain communities or groups.  The provision of Medicaid on state exchange market places would be useful in several rural counties where few private insurance companies choose to compete.   A reduction in the Medicare age or a Medicare buy-in option would benefit older workers who do not have access to employer-based health insurance coverage. 

The adoption of a public option, unlike single-payer proposals does not purport to be a comprehensive solution.  The task of fixing health care system without simply blowing up the current system is difficult.   President Trump, famously observed “Nobody knew that health care can be so complicated.”     There are multiple inter-related  health problems with our current health care system.  A policy that fixes one problem (say high premiums) can worsen another (say high out-of-pocket costs).

A centrist health care plan must do more than shore up state exchange market places through new public options.  The ACA expanded coverage to millions of people but even after the enactment of the ACA many Americans lacked health insurance and under the Trump Administration the number of Americans without health insurance has increased.

This article reports that the uninsured rate went from 10.9 percent in late 2016 to 13.7 percent in December 2018.

https://www.vox.com/2019/1/23/18194228/trump-uninsured-rate-obamacare-medicaid

Moreover, even after the enactment of the  ACA many Americans saw higher premiums, higher out-of-pocket expenses, and reduced access to specialists.  Increasingly, many Americans covered by insurance choose to forego procedures rather or prescription drugs because of high out-of-pocket costs.  Simply adding a public option does not fix these problems.

The remainder of this essay outlines health care problems and centrist solutions.

Health Care Problems and Solutions

Problem One  The Erosion of the Individual Mandate:   The ACA individual mandate was repealed in a recent tax law.  As a result, some people with pre-existing conditions have an incentive to delay the purchase of health insurance until they become sick.  The repeal of the individual mandate undermines state exchange market places and increases health insurance premiums.

Potential Solution:   There are two potential solutions to this problem. 

The first potential solution involves the reinstatement of the individual mandate.  Politically, this is a difficult option because the individual mandate is unpopular and strongly opposed by libertarians and other conservatives who believe that government has no right demanding people spend money in  a particular way.

The second  approach involves creating new financial incentives in the form of tax credits and other subsidies contingent on people holding continuous health insurance coverage.

Subsidies that could be made available only to people with continuous health insurance coverage include:  (1) a tax credit for contributions to health savings accounts, (2) a partial subsidy for high cost out-of-network treatments, and (3) subsidies for some prescription drugs.   Note that a tax credit for health savings account contributions would not even require an additional explicit linkage between the tax credit and health coverage because under current law contributions to health savings accounts are only available to people who have health insurance coverage.

Problem Two: Distortions caused by growing use of health savings accounts and high deductible health plans:   The growing use of health savings accounts coupled with high deductible plans has exacerbated three problems – (1) higher out-of-pocket health care costs, (2) increase in patients forgoing prescribed medicines and medical tests, and (3) reduced funds placed in 401(k) retirement plans.

Potential Solutions:   The distortions caused by the increased use of health savings accounts and high deductible health plans can be mitigated by several policy changes.

First, lower income households would benefit from a refundable tax credit for contributions to a health savings account.  (Current law only allows deductibility of contributions to health savings account, a feature that provides less benefit to low-income low marginal tax rate households.)

Second rules governing contributions to health savings account could be altered.   Current rules only allow contributions by people with a high-deductible health plan.  The revised rule would allow health savings account contributions by people who have a plan with a lower deductible but a high coinsurance rate.   (People with high coinsurance rate plans can have substantial cost sharing obligations but may be less likely to forego needed treatments prior to the deductible being met.)

Third, many existing high deductible health plans now forego all payments on prescription drugs until health expenses exceed the deductible.   By contrast, many traditional health plans with lower deductible pay some prescription drug costs prior to the patient paying the deductible.   The combination of high deductible and absolutely no reimbursement for prescription drugs until the deductible is met results in many people with chronic health conditions like diabetes forgoing needed medicines.  This worsens health conditions and increases costs. 

A rule requiring partial reimbursement for prescription medicines needed to prevent expansion of certain diseases would reduce the incentive for people to forego prescribed medicines.  It might be possible for HHS to adopt this rule change without input by Congress because the current ACA allows high-deductible health plans to reimburse patients for certain preventive health care measures prior to the deductible being met.    

Problem Three:  The limited role of state exchange market places.   State exchange health care markets are much smaller and much less robust than the employer-based health insurance markets.  Around 8 million people are covered by state exchange market places compared to around 155 million people covered by employer-based insurance. 

 Household receiving health coverage from state exchange markets tend to be less affluent than people obtaining health insurance from employer based market.   Go to this post on my math blog for statistics on this point.

http://www.dailymathproblem.com/2019/05/comparing-employer-sponsored-and-state.html

There are relatively few young adults under age 26  in state-exchange markets compared to employer-based markets.  Go to this post in my finance blog for a discussion of this issue.

There is less choice and fewer high quality products in state exchange markets than in employer-based markets.   In some counties few health insurance companies offer coverage and often there is concern that no health insurance companies will offer health insurance in a county.  There is evidence that state exchange insurance policies are more likely to restrict access to certain hospitals and specialists.

Potential Solutions:   It should not be a surprise a small health insurance market with relatively few young adults, and relatively few affluent households will provide less desirable outcomes than a larger health insurance markets with more younger adults and a lot of affluent people. 

The characteristics and limitations of ACA state exchange market places are largely a result of the rules laid out in the ACA.

First, the ACA contains an employer mandate, which provides a financial penalty on employers with more the 50 full time equivalent employees who do not provide health insurance to their employees. The employer mandate could be modified to allow and encourage employers to pay for health insurance on state exchange market places rather than offer a company-specific plan.

Second, the ACA eliminates tax credits to people once they obtain a position offering employer-based insurance coverage.  The rule eliminating tax credits for people with employer-based health plans would be eliminated.

Third, state exchange market places do not provide any preferential tax treatment for the 41 percent of American households with income greater than 400 percent of the federal poverty line.  Households in this income group receive untaxed health insurance from their employer.  This rule reduces political support for state exchange marketplaces.   Support for state exchange marketplaces could be increased through an expanded tax credit.

A Political Note on the Role of State Exchange and Employer-Based Health insurance Marketplaces:

The introduction of state exchange market places to compete with employer-based health insurance is the central aspect of the ACA, a law that was strongly opposed by conservative economists and Republican politicians.   However, the provision of health insurance through private markets separate from the employer was an idea originated by conservative economists and supported by Republican politicians.   To be fair, there were major differences between Republican proposals, which allowed underwriting of premiums and denials of insurance for people with pre-existing conditions and the ACA.  

Republicans are on record of supporting reductions in the use of employer-based health insurance.  In fact, a health care plan offered by Senator McCain replaces the entire current employer based tax preference with a tax credit for the purchase of health insurance through state market places.   

The protections for pre-existing conditions and the limitations on underwriting of premiums increase access to health insurance for many people who would otherwise be uninsured.   (The election results of 2018 indicate the Democrats largely won this debate.)   There is some Republican support for moving the purchase of health insurance from the employer to private markets.   Could Republicans support proposals that move more people from employer-based insurance to current ACA state exchanges?

Problem Four  The introduction of short-term bare-bones health plan has increased household financial risk and undermined state exchange market places.  The  Trump Administration has enacted rules that allow use of short term health plans.   These health plans often do not cover many services that are considered essential health benefits in an ACA plan. The coverage gaps result in unanticipated bills and financial exposure.  The short term option reduces demand for ACA policies.

Potential Solutions:   There are two way to address problem caused by the introduction of ACA plan.

The first approach is to repeal the Trump era regulation and return to a system where short term health plans are prohibited.   Repeal creates a situation where people who took out short term health plans will either lose coverage or purchase an ACA plan with a higher premium.

The second approach involves modifying short term plans to allow for an annual cap but to require coverage of all essential health benefits.  People with expenditures over the annual cap would get automatic Medicaid coverage once the cap was reached.

This policy essentially converts Medicaid into a reinsurance program responsible for health care costs over the annual limit.  I loosely describe this approach in a 2008 paper on SSRN.  https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1162887)

Problem Five:  Lack of access to elite out-of-network hospitals and specialists.  Typically, narrow network HMOs provide excellent health care and charge lower premiums.   However, people who get extremely sick with certain illnesses require treatment by specialists that are only offered at certain hospitals.   This is called the “breaking bad” problem as portrayed by the fictional high school chemistry teacher who chooses to make meth to pay for his cancer treatments.

Potential Solutions:  The “breaking bad” problem can be solved by having the government share part of the costs of expensive specialized out-of-network care.  Having the government pay for a portion of complex treatments that could only be handled in sophisticated out-of-network hospitals would reduce premiums for limited network HMO plans.  This reduction in health care premiums would also reduce tax subsidies on health care purchases both on the ACA state exchange subsidies and the employer-based health insurance subsidies.

This proposal offers two benefits – lower premiums on basic narrow-network health care and access to more expensive out-of-network care should the narrow network be unable to treat certain health conditions.

Problem Five:  A lack of affordable health coverage for people nearing the end of their careers who are not eligible for Medicare.

Potential Solution:    One approach to this problem is to allow the purchase of Medicare by individuals 50 or over without an offer of employer-based health.

An expanded Medicare option for people over the age of 50 could be combined with a higher (old-young) age-rate premium ratio to lower costs for younger households.    

Problem Six:   Limited State Exchange Offerings and High Premiums for Certain Counties.  Some counties have few health insurance companies offering ACA coverage.   It has been reported that in 2018 around half of counties had only  insurance company offering ACA coverage.

Heritage Foundation article on counties with limited health insurance coverage

https://www.heritage.org/health-care-reform/report/2018-obamacare-health-insurance-exchanges-competition-and-choice-continue

Potential Solution:  Senator Schatz’s health insurance bill allowing states to offer health insurance on state exchanges would create another option in many counties with only one or relatively few ACA providers

Go here for a description of the Schatz-Lujn legislation:

https://www.schatz.senate.gov/press-releases/schatz-lujn-introduce-legislation-to-create-public-health-care-option

Summarizing the Centrist Health Care Plan

A comprehensive centrist health care plan might both expand and improve health insurance coverage.   It would lower premiums and reduce out-of-pocket expenses.   The simultaneous achievement of these two goals is often difficult because many policy changes that reduce premiums increase out-of-pocket costs while policies that reduce out-of-pocket costs often increase premiums.

Here are some aspects of the plan:

  • Link all new tax subsidies and the standard deduction to a requirement that  people maintain health care coverage.
  • Change rules governing health savings accounts to allow for contributions by people who have high-cost sharing plans even if the plan has a low deductible.
  • Create tax credits for contributions to health savings accounts
  • Require partial insurance coverage for prescription drugs used to treat chronic health care conditions prior to health expenses exceeding plan deductible.
  • Modify the employer mandate to encourage businesses to subsidize state exchange insurance rather than choose and administer an employer-based policy.  
  • Modify rules governing tax subsidies for insurance on state exchanges to allow people to keep their state exchange policy after obtaining offers of employer-based coverage.
  • Repeal current short-term bare bones health plans.
  • Create health plans with an annual cap while guaranteeing Medicaid coverage once health expenditures exceed the cap.
  • Create a new subsidy for out-of-network costs for people with narrow-network plans who require procedures not covered in the narrow network.
  • Allow people over 50 without access to employer-based health plan the right to buy into Medicare.
  • Modify the age-rate premium formula to lower costs for younger households.
  • Allow states to authorize the sale of Medicaid policies on state exchanges.

Authors Note:  A lot of these ideas and proposals are discussed in greater detail in  the second chapter of my policy primer “Defying Magnets:  Centrist Policies in a Polarized World”  

Defying Magnets:  Centrist Policies in a Polarized World

The first chapter of the book examines student debt policies.   The third chapter examines retirement income.  

I believe you will find the analysis and proposals innovative, potentially useful, and drastically different than what is being offered in Washington.

Overview of Health Insurance Issues


Republicans are seeking to repeal and replace the affordable care act, even as Republican candidates for office profess support for many parts of the act including protections for people with pre-existing conditions. The primary Republican achievement since 2016 involves a tax law that repealed the individual mandate and a Texas federal court ruling currently under appeal that voided the entire law because of the individual mandate repeal.

Democrats have robustly opposed Republican efforts to repeal the ACA but are now split between fixing the Affordable Care Act or moving towards a single-payer system.   Many 2020 Democratic candidates have endorsed Medicare for all without fully considering details of and implications of their proposals.

Some Democrats are now advocating proposals that would allow some private firms or some individuals to buy into Medicare or Medicaid. One advantage of adding a government (Medicare or Medicaid) option is that these options allow people to keep private insurance.

This section starts with a review of the current health care policy debates.   The analysis reaches the following conclusions.

  • Republican efforts to repeal the ACA would substantially increase the number of uninsured people in the United States.
  • Democratic Medicare for all proposals have not been fully vetted, would leave many people with private insurance worse off and would be more expensive than anticipated.
  • The combination of a decrease in the eligibility age for Medicare combined with a higher ratio of insurance premiums for older households relative to younger households could decrease the number of uninsured people in all age groups.

The section contains discussions of three technical health insurance issues with important implications for health insurance markets that have not received attention during the debate over repeal of the ACA.

The first issue involves modifications of rules governing health savings accounts and high deductible health plans.  Proposals designed to mitigate problems created by the increased use of health savings accounts and high deductible plans include:

  • Creation of a tax credit for contributions to health savings account by low-income and mid-income households.
  • Expansion of the type of health plans, which allow contributions to health savings accounts.
  • Require high deductible health plans pay a portion of prescription drugs used for chronic diseases prior to deductible being met.

The second issue involves modification of rules and incentives governing the use of employer-based insurance versus state exchange insurance.  

Proposals designed to strengthen state exchange insurance and to allow more firms to replace employer-based coverage with state exchange coverage include:

  • An expansion of the tax credit for premiums on health insurance policies purchased through state exchanges.
  • An alternative to the employer mandate for employers subsidizing the purchase of health insurance on state exchanges.
  • Financial incentives for young adults to leave their parent’s health insurance policy and obtain health insurance on state exchanges.

The third issue involves how to mitigate financial distortions caused by extremely expensive and complex health care cases.  Proposals designed to mitigate problems associated with the most expensive health care costs include:

  • Government and private firms sharing health care expenses over a certain threshold.
  • Automatic Medicaid enrollment for people purchasing a health plan with an annual benefit cap once expenditures exceed the cap.
  • Government assistance for certain health care cases that are difficult to treat in narrow-network HMOs.

The health care debate is eerily analogous to the student loan debate with each side taking extreme positions.  Republican efforts to repeal the ACA would increase the number of uninsured.  Democratic initiatives would crowd out private insurance for many households that are well served by the existing system.  The road to improving health care like the road to reduce student debt problems involves the analysis of arcane rules and incentives and the design of economically efficient alternative regulations.

Senator Warren and Big Tech

Presidential candidate Elizabeth Warren is proposing anti-trust action against major tech firms including Google, Facebook, Apple and Amazon.   This proposal if enacted would increase prices and reduce options to consumers.   The main beneficiary of rules restricting Big Tech would be Walmart, other larger brick and mortar stores, Cable Television firms, and large established brands.   Smaller companies that are attempting to enter markets and compete with larger older firms with the assistance of Google, Amazon or Facebook will have fewer opportunities and higher costs.

One element of her plan designates on-line firms with more than $25 billion as Internet Utilities.   These Internet Utilities would be prohibited from selling both their own products and products of their competitors on the same web site.   This would most immediately impact Amazon, Google and Apple but could also in a very short period of time impact Netflix.

A second element of her plan involves reversing mergers, which have contributed to the growth of the tech giants.    These mergers include Amazon’s purchase of Whole Foods and Ring, Google purchase of Waze, Nest and Double Click, and Facebooks purchase of Instagram and WhatsApp.

Let’s start our discussion by observing that Walmart has larger revenues than Amazon.  In 2018 Walmart revenue was around $500 billion compared to around $233 billion for Amazon.   Amazon obtains a larger percent of revenue by partnering with third-party businesses. Partnerships with small firms are less important to Walmart than Amazon.

Amazon purchased Whole Foods sparking fears that Amazon would take over the grocery sector.   There are at least five firms with grocery sales larger than Whole foods.     Walmart has the largest market share of the U.S. grocery market with a 14.5 percent market share.   Kroger is second with market share around 7.2 percent.   The market share for Whole Foods — around 1.2 percent.

https://www.cnbc.com/2017/06/21/dont-worry-wal-mart-amazon-buying-whole-foods-is-just-a-drop-in-the-bucket.html

Amazon is now actively promoting its own private label groceries on line, a strategy which would be hampered by Warren’s new rules.   What firms are threatened by the Amazon private label?  According to Wall Street research firm Bernstein (no relation to me) J.M Smuckers and Mondelez are the two firms most threatened by Amazon’s private labels.

https://www.cnbc.com/2019/01/28/bernstein-smuckers-mondelez-are-most-unprepared-for-amazon-in-food.html?&qsearchterm=impact%20of%20amazon%20on%20campbell%20and%20kraft%20heinz%20and%20mondoleze

I suspect that Amazon may purchase and fund small jam and snack producers to bolster their private label.   Explain to me why this is anti-competitive.

Bernstein finds e-commerce makes up around 1 percent of packaged food sales.   This may rise to 5 to 6 percent in a few years.   This does not strike me as anti-competitive.  Really bad news for some older established firms but hardly anti-competitive.

The Apple app store serves to provide updates for many items that are sold with a phone, computer, or IPAD.  I doubt that direct sales of Apple products in the App store are a large source of profit for Apple.  Apple might respond to the mandate for separate third-party and Apple-only App store by increasing purchases of third-party apps from developers or increased in-house App development.

Many people come to the Amazon site or the App store to either buy products sold directly by the sponsor of the site but end up buying a product or service created by a third party.  The creation of separate web sites for the big tech firm and for third parties could decrease traffic towards third-party offerings.

Google has purchased Nest giving this product a potential advantage over its several competitors including Carrier, Ecobee, Honeywell and several other smaller firms.   Is this a big problem?  There are several smart thermostats available in the market.  I haven’t seen a case made that Nest has market power over its rivals. Any case for divesting Nest from Google should be based on actual evidence monopoly power, which may not exist.

Amazon and Apple may both enter this field because home thermostats can connect with Alexa and Siri.   Should entry by Apple and Amazon be prohibited because their Alexa and Siri give Tech firms an advantage over older non-Tech competitors?

Amazon buys ring and hooks it up to Alexa, gaining an advantage of existing security companies.   This is all good news for consumers.    Any existing problems could be solved with modest regulations rather than a broad anti-trust action.

Google owns both Google Maps and Waze creating a challenging situation for Apple Maps.  Does Apple really need government help?

Currently, Google appears to have a monopoly or near monopoly on search and Facebook has a monopoly or near monopoly on social networks.  Both industries and both firms are young.  Both monopolies are contestable.   A new superior search engine could give Google a run for its money.   A new social network with a different look and policies could do the same to Facebook.

Google and Facebook and Amazon, while in different narrowly defined industries, are all in competition.   All three firms are competing for ad revenue from businesses who are marketing their goods and services to the world.   It may be tempting to stop Facebook from purchasing Instagram and other Apps to level the competition between Facebook and other social networks like Snap.   However, this could adversely impact the ability of Facebook to get advertisers and compete with both Amazon and Google, two much larger powerful firms.

The clearest potential harm caused by Warren’s proposal involves the possibility that Netflix and maybe Hulu would be treated as utilities and prohibited from producing their own content.   Netflix revenue could soon rise above 25 billion and become subject to Warren’s rules on Internet utilities.   Netflix is the main competition to cable companies, an industry that exerts monopoly pricing power in local markets.   The availability of Netflix allows people to cut the cord and save hundreds of dollars a month.  Netflix is an example of private industry fixing an anti-competitive situation.   This could all be undone by Senator Warren’s proposal.

Senator Warren is a highly skilled lawyer and candidate who has made useful contributions to discussion of several issues including bankruptcy reform, the safety net, taxes, inequality health insurance and student debt.   I admire her and readers of my blog and my books know that I share her much of her outlook and priorities.  However, her attack on Big Tech is not supported by economics and may derail her candidacy.

Author Notes:   The Trump Administration is accelerating its war on student borrowers.  It had previously proposed the elimination of subsidized student loans and the public service loan program.   The new budget proposes the elimination of income contingent loan programs and loan forgiveness programs.

The Democrats seem fixated on free college a proposal that most experts believe is unaffordable.  My book Innovative Solutions to College Debt Problems considers benefits and costs of making the first year of college free.   The book also proposes several different ways to assist overextended borrowers that are more sustainable than Income Contingent Loan Programs.

Innovative Solutions to the College Debt Problem:

https://www.amazon.com/Innovative-Solutions-College-Debt-Problem/dp/1982999446

Liberals appear to be dominating the contest for new ideas for the Democratic Presidential nomination.  Amy Klobuchar gets some points for honesty, an attribute that used to be expected.  However, honesty does not by itself solve problems.   Centrists need to put forth bold proposals that will reduce student debt, improve health insurance, and expand retirement income.

Pragmatic centrist solutions to these problems are outlined in my book.

Defying Magnets: Centrist Policies in a Polarized World.

https://www.amazon.com/Defying-Magnets-Centrist-Policies-Polarized/dp/179668015X

A final note:   I would love to do some consulting work on these topics.  Contact me through linked in.  https://www.linkedin.com/in/dbecon/

 

 

 

 

 

 

 

 

 

 

 

Is long term care insurance a viable product?

Many financial planners maintain that long term care insurance (LTCI) is an essential purchase.  Many policy makers and politicians believe that the Medicaid long term care benefit needs to be reduced and that private long term care insurance is a viable substitute for Medicaid.  Let’s agree that the political issue of how to reform Medicaid is separate from the personal decision on how you should prepare for retirement.  In my view, private LTCI is not a suitable investment for most individuals preparing for retirement.  Furthermore, private LTCI may not be a viable product.

Many households have insufficient levels of liquid asset and insufficient savings in their retirement accounts.  Studies conducted before the financial crisis indicated that only around one half of the baby generation were adequately preparing for retirement.  These households need to focus on increasing their saving rate rather than divert savings towards an illiquid asset.

Comprehensive multi-year LTCI insurance with inflation protection is extremely expensive.   Ironically, even most LTCI purchasers have only a few years of coverage and must rely on Medicaid for long stays in the nursing home.

LTCI almost always costs more than anticipated at the time the policy is purchased.    Insurance firms cannot raise premiums on a policy simply because a person claims benefits.  However, an insurance company can raise premiums on an entire class of policies if actuaries determine that the sum of premiums and investment income will not cover benefits.    Premium increases, even among the strongest and most conservative firms, are now commonplace only a few years after a policy is issued.

Premium increases are in part attributable to poor investment returns and low interest rates.    Perhaps premium increases will be less prevalent in the future.  However, current premium increases are occurring when individuals can least afford them, when their own portfolios are down in value.

Many of the better-run insurance companies are currently leaving the industry altogether.   (MetLife left the industry and I believe Prudential stopped selling on the individual market.)    This is what Fitch had to say about LTCI in a recent report.

“In addition to higher than expected claims, historically low interest rates have negatively affected LTC results.  We believe the long-tail nature of the product and future renewal premiums make the LTC business more vulnerable to interest-rate risk.  Low rates continue to curb investment income needed to help fund LTC benefits.

We believe mispricing of the LTC product will continue to weigh on the insurers’ earnings and capital, but we note the current in-force individual LTC business accounts for less than 2% of industry reserves and premiums.”

There is one LTCI product that intrigues me.  Many states participate in the LTCI partnership program.  Individual who purchase a partnership policy can keep assets equal to their amount of coverage and still qualify for Medicaid.

It is highly likely that if you live long enough you will need long term care.  You need to prepare.  However, for most of us the purchase of LTCI is not the appropriate option.  More on my views on LTCI can be downloaded on Kindle.  The article can be purchased for $4.99 or borrowed for free.

http://www.amazon.com/Things-consider-purchasing-insurance-ebook/dp/B008N5QO8G/ref=sr_1_1?s=books&ie=UTF8&qid=1342917035&sr=1-1&keywords=thing+to+consider+before+purchasing

Overview of Student Debt Issues

My view on student debt problems is somewhere between Bernie Sanders and Hillary Clinton.  I don’t believe that free college is economically feasible but my evaluation of statistics on the growth of student debt, the growth in overextended borrowers, and the growth in the number of elderly with unpaid student loan balances convinces me the college debt problem cannot be solved with minor adjustments.  

My book “Defying Magnets:   Centrist Policies in a Polarized World” attempts to find progressive centrist (not an oxymoron) solutions in three areas — student debt, health insurance, and retirement income.    

https://www.amazon.com/Defying-Magnets-Centrist-Policies-Polarized-ebook/dp/B07NLLWH1H/ 

The analysis in this book leads me to propose substantial increases in financial assistance concentrated on first-year students, changes to student loan contracts, and changes in programs and policies designed to assist overextended student borrowers.   The overview of the student debt section of my book is below.

Overview of Student Debt Issues

The Republicans and Democrats are far apart on their approach to student debt and the increasing cost of college.

The Trump Administration and many Republicans in Congress are more interested in reducing taxpayer costs than assisting students borrowing for college.  Their current proposals include — the repeal of subsidized student loans, the elimination of the public service loan program and major modifications to income contingent loan programs.   Their administrative actions and enforcement decisions almost always favor loan servicers and for-profit schools over students.

The Democrats have been advocating free-college or debt-free college at public universities.  Democrats also favor the Income Contingent Loans, a program that links loan payments to income and offers to forgive unpaid loan balances at the end of the loan term.

The analysis presented here indicates that Trump Administration proposals would adversely impact many students.   Proposals by Democrats to offer free or debt-free college are expensive and inefficient.  Moreover, Income Contingent Loan programs are not the most effective way to assist overextended borrowers.

Proposals are presented for additional financial assistance, which are designed to reduce the growth of student debt.  These proposals include:

  • Provision of additional assistance for first-year students.
  • Allocation of a modest sum to a program that funds college internships at start-up firms.

Proposals are offered to assist overextended borrowers and reduce the reliance on Income Contingent Loan programs.  These approaches include:

  • Interest rate reductions on student loans after 15 years of payments
  • Limits on increased student loan interest rates when general interest rates rise.
  • Limits to the liability of parents on PLUS loans and cosigned private student loans and other alterations to the PLUS loan program.
  • Provision of priority to student debt over consumer loans in chapter 13 bankruptcy
  • Allowing discharge of private student loans in bankruptcy
  • Revisions to the Public Service Loan Program

The proposals presented here have the potential to expand access to education and improve the financial condition of student borrowers entering the workforce.  Additional subsidies are carefully crafted to assist people who might not otherwise try higher education or would experience severe payment problems.

The proposals presented here also will be less costly to taxpayers than many current policies and policy proposals.

 

 

 

Questions for Candidates – Student Debt

Questions for Candidates – Student Debt

The Trump Administration is proposing the elimination of subsidized student loans for low income borrowers.  The main advantage of subsidized loans is the government pays all interest while the borrower is enrolled as a full-time student. Do you support or oppose the elimination of subsidized student loans?

The Trump Administration is proposing the elimination of the public service loan forgiveness program.   Do you support the elimination of this program?  Are there any changes that you would like to make to the public service loan forgiveness program?

The Trump Administration is considering changing the undue hardship provision in the bankruptcy code to allow for some discharges of student debt in bankruptcy?  Do you support this idea? What changes to the undue hardship rule would you support?

Chapter 13 bankruptcy payment plans generally treat student debt and other unsecured consumer loans in the same manner.   Should Chapter 13 bankruptcy rules be altered to give priority to student debt over other unsecured consumer loans?   How would you alter these rules?

The number of Americans over age 60 with a student debt rose from 700,000 in 2005 to 2,800,0000 in 2015. The average amount of student debt held by borrowers over age 60 rose from $12,100 to $23,500 in the same period.[1]  What policies are needed to reduce the number of older Americans nearing retirement with substantial student debt?

One recent study revealed that around 28 percent of direct student loans are now Income Based Replacement loans.[2]  The study also found the lifetime cost of the IBR loan subsidy for loans originated in 2014 was around $11.0 billion.  Is the IBR program the most economically efficient way to assist overextended students?

The Income Based Replacement program is complex. Several loan servicers have been accused of making it difficult to enroll in IBR.  Student borrower finances change over time and as a result many students who initially enroll in IBR end up with larger student loan payments.   Does this program need to be modified?

Should student loan interest rates be automatically reduced 15 years after repayment is initiated?   Would this approach be a more effective way to assist overextended borrowers than Income Contingent Loan programs or other loan forgiveness programs?

Several candidates support laws allowing people to refinance their student debts at lower interest rates.  However, many economists believe that interest rates will soon rise.  Wouldn’t this proposal be of limited value in a rising-rate environment?

Current student loan interest rates are linked to the value of the 10-year Treasury bond. Do you support changing the student loan interest rate formula to cap potential increases in student loan rates if Treasury rates rise?

Currently lenders do very little underwriting or credit checks on PLUS loans.   (Why should they?   The loans are insured by the government and not discharged in bankruptcy.)  Do you support stricter underwriting standards on PLUS loans to graduate students and parents? Do you support the discharge of PLUS loans in bankruptcy ten years after loan origination?

Do you support debt-free or free four-year public college proposals?

The Tax Policy Center a highly reputable think tank concluded that one free public college program would cost $807 billion over a decade.[3]   These cost estimates were based on favorable assumptions – no increase in college attendance, no switches from private to public schools and no tuition increases at public schools.  Do you agree with these conclusions?  Are cost estimates for your proposal consistent with the work by the Tax Policy Center?

Around 28 percent of students drop out after their first year of college and around 12 percent of first-year students transfer to another institution.[4] Almost half of students with debt who dropped out of college are in default on their student loans.[5]  Should programs to reduce debt incurred by first-year students take priority over proposals to spread additional debt over the entire population of students?

Do you support efforts to eliminate debt incurred by first-year college students at four-year institutions?   How much should the government spend on such efforts?

Some Articles on Student Debt Policies

Article on Trump Student Loan Programs

https://thecollegeinvestor.com/21636/trump-student-loan-forgiveness/

Where 20-20 candidates stand on student debt?

https://www.marketwatch.com/story/where-the-2020-candidates-stand-on-student-debt-and-college-affordability-2019-02-20

GOP blocks Warren’s Student Loan Bill

https://thehill.com/blogs/floor-action/senate/217908-gop-blocks-warrens-student-loan-bill

Klobuchar and Baldwin push to lower student debt

http://www.startribune.com/klobuchar-baldwin-push-to-lower-student-debt/378202791/

Bills to help students with student debt sponsored by Klobuchar and Franken

https://www.studentsunited.org/blog/2017/6/2/federal-update-bills-introduced-to-help-students-with-higher-education-costs

Forbes article on student loan refinance changes;

https://www.forbes.com/sites/zackfriedman/2018/08/09/student-loans-refinance-changes/#6f65764d749b

 

[1] Source:  https://www.documentcloud.org/documents/3319386-201701-Cfpb-OA-Student-Loan-Snapshot.html

 

[2] Article from New America Foundation on cost of IBR loans. https://www.newamerica.org/education-policy/edcentral/income-based-repayment-cost/

 

[3] Tax Policy Study includes an assessment of cost of free college proposals. https://www.taxpolicycenter.org/sites/default/files/alfresco/publication-pdfs/2000786-an-analysis-of-senator-bernie-sanderss-tax-and-transfer-proposals.pdf

[4] Statistics on drop-out rates after the first year of college are found here. https://www.creditdonkey.com/college-dropout-statistics.html

 

[5] A statistic on percent of student who have dropped out in default can be found here. https://lendedu.com/blog/college-dropouts-student-loan-debt/

Authors Note:  I have written a book on how a progressive centrist (not an oxymoron in my view)  would deal with student debt, health insurance and retirement income.   Go here for the book.

https://www.amazon.com/Defying-Magnets-Centrist-Policies-Polarized/dp/179668015X/ref=tmm_pap_swatch_0?_encoding=UTF8&qid=1551214070&sr=8-1

Publishers Note:   I am taking polls.   The current polling question — what is your first choice and second choice candidate for the Democratic Nomination for President — can be found here.

 

https://docs.google.com/forms/d/e/1FAIpQLSch4lBKZkabruXcyftP6yqt8wjicFQ6BFQzK79gvWLye8qgAg/viewform

or for the latest poll go to the community Policy and Politics.

https://www.facebook.com/groups/441029743334277/