Month: February 2019

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/

 

 

Tweaking Amy Klobuchar’s Student Loan Proposal

Tweaking Amy Klobuchar’s Student Loan Proposal

Senator Klobuchar gave an honest and realistic response to a question on free college at the New Hampshire town hall.   Free college for all is unaffordable and would end up burdening the nation with higher debt or taxes.

Senator Klobuchar proposes additional assistance for students at two-year colleges and for additional Pell grants and loans.   These proposals are not likely to substantially reduce the trend growth of student debt or the number of overextended student borrowers.

  • The percent of borrowers leaving school with more than $50,000 in student debt rose from 2 percent in 1992 to 17 percent in 2014.[1]
  • 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.[2]

Two-year colleges are a good and less expensive option for many students.  However, student debt is skyrocketing for students at four year schools.  Many students who start a four-year college drop out or transfer after the first or second year.   These students often have substantial repayment problems.  The most effective way to reduce this problem is increased assistance for first-year students.  The increase in first-year assistance will also reduce total debt for students who complete their degree.

Many overextended students are counting on Income Contingent loans, which have substantial problems.    Alternative ways to assist overextended borrowers need to be considered including:

  • 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

I recognize that many people who have repaid their loans and many taxpayers oppose debt relief to overextended student borrowers.   However, some people get substantially overextended and need assistance.   The debt relief proposals presented here attempt to establish a balance between assisting overextended borrowers and protecting the interests of taxpayers.

Kudos to Senator Klobuchar for recognizing the obvious fact that free-college is unsustainable.   She need to develop a more extensive set of policies to mitigate student debt problems.

One place to find these policies is my book Defying Magnets:   Centrist Policies in a Polarized World.   This book proposes centrist solutions to student debt, health care and retirement income.

Defying Magnets:  Centrist Policies in a Polarized World

https://www.amazon.com/s?k=defying+magnets%3A+Centrist+policies+in+a+polarized+world&rh=n%3A6669702011&ref=nb_sb_noss

Book is free for Kindle unlimited users.

The book is free on promotion days.   The second promotion day is February 20, 2019.   Day after this post is published.

Please consider reviewing the book for Amazon and Kindle.

[1] Source: https://www.brookings.edu/wp-content/uploads/2018/02/es_20180216_looneylargebalances.pdf

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

 

Defying Magnets:  Centrist Policies in a Polarized World

Abstract of

Defying Magnets:  Centrist Policies in a Polarized World

 Many Americans are experiencing increased financial stress even though the economy has performed well in the last several years.  Student debt levels and the number of overextended borrowers continue to increase.   Health Insurance premiums in state exchange health insurance markets are unstable and many state exchange markets have few providers.   People are paying more for out-of-pocket for health care.  High debt levels and the lack of funds for basic emergencies have persuaded many Americans to delay or reduce contributions to their retirement savings plan.

The policy debates on student debt, health care, and retirement income in Washington follow a similar pattern.  Conservatives offer a free market approach – reduction of financial assistance to student borrowers, repeal of the Affordable Care Act, and private accounts inside Social Security.  Liberals offer expanded government programs – free or debt-free colleges, Medicare for all, and expansion of Social Security.   In most cases, the conservative proposals would increase household financial risk while the liberal proposals are often unaffordable and poorly designed.

This book analyzes and compares conservative and liberal approaches to student debt, health care, and retirement income.  The book also outlines a centrist economically feasible policy agenda in each area, with the goal of reducing household financial risk.

The centrist agenda on college costs and student debt targets financial assistance and debt relief to students and borrowers in greatest need.

The centrist health care agenda fixes problems with the Affordable Care Act and reduces distortions caused by high out-of-pocket costs and the most expensive health care cases.

The centrist agenda seeks to expand health insurance and retirement benefits for contractors and workers at firms without employer-based benefit plans.

The centrist agenda changes rules governing 401(k) plans and IRAs to facilitate increased savings by people with high debt levels and very little cash saved for emergencies.

The centrist agenda includes an honest discussion on Social Security, which will likely infuriate both the left and the right.

 

Get the book on Kindle or Amazon:

 

https://www.amazon.com/s?k=defying+magnets+centrist+policies+in+a+polarized+world&rh=n%3A6669702011&ref=nb_sb_noss

Overview of Retirement Issues

This post describes my work on retirement issues that was published in “Defying Magnets: Centrist Policies in a Polarized World”   The book can be found on Amazon and Kindle.

https://www.amazon.com/Defying-Magnets-Centrist-Policies-Polarized/dp/179668015X/ref=sr_1_2?keywords=defying+magnets%3A+Centrist+policies&qid=1550091821&s=amazon-devices&sr=8-2

There are two pillars of retirement income in the United States.   The first pillar involves Social Security a mandatory program covering most workers.   The second system involves voluntary defined contribution pension plans.  This section starts with a basic description of the Social Security system and private defined contribution retirement plans.

The Social Security program has been highly popular with Americans and many retirees are highly dependent on this government-run program.   However, the Social Security system is running shortfalls which will lead to automatic benefit cuts around 2035.   Defined contribution pension plans — 401(k) plans and IRAs — have over the last 40 years become the dominant vehicle for private retirement savings.

Many people forego investing in 401(k) plans and IRAs even though these plans provide generous tax benefits to savers.   The failure of many people to fully invest in tax-deferred retirement plans puzzles many financial advisors.   The analysis presented here indicates that saving for emergencies and reducing debt is and should be a higher financial priority than saving for retirement for many people.

Several changes to rules governing retirement savings accounts which would allow more people to save for retirement while aggressively reducing debt and preparing for emergencies are presented here.

  • Allow tax-free and penalty-free distributions on a portion of total contributions (perhaps 25 percent) for emergencies, student debt reduction, mortgage restructuring and long term care expenses prior to age 59 ½
  • Allow for some tax-free and penalty-free distributions for paying off the mortgage for people over age 50.
  • Eliminate all other distributions from 401(k) plans prior to the age of 59 ½.
  • Prohibit 401(k) loans.
  • Prohibit states from denying Medicaid and food stamp benefits for low-income people with 401(k) assets.

This proposal could be paid for by imposing a haircut on tax exemption for 401(k) contributions.   (Currently, 100 percent of contributions to a 401(k) plan are exempt from income tax.   The new rule would exempt 85 percent of contributions.)

People without access to an employer-sponsored retirement plan have substantially lower retirement savings than people with access to retirement plans at work.  We consider ways to expand retirement savings for people without employer-based retirement savings.   Specific proposals include:

  • Equalization of contribution limits between IRAs and 401(k) plans.
  • A rule change allowing firms without 401(k) plans to contribute to employee IRAs.
  • A rule change allowing firms to compensate contractors and employees of contractors with non-taxed fringe benefits including contributions to IRAs.

According to the trustees of the Social Security system, financial imbalances impacting Social Security stemming from the decrease in the working-age population will result in automatic cuts to Social Security benefits around 2034.   In my view, it will be difficult to implement any compromise that reduces Social Security fiscal imbalances and prevents future automatic cuts to benefits without first increasing private retirement savings and reducing the dependence on Social Security.  The final chapter of this section outlines and reviews some policy proposals related to improving the Social Security system.

On-time graduation and student debt

Issues:   One way to limit college costs for some students is to implement policies that enable students to graduate on time or even early.  This post discusses issues and presents data related to on-time graduation from college and costs incurred by delaying graduation.

The Department of Education College Score Card web site provides statistics on the percent of people at four-year undergraduate institutions that graduate within six years of first enrolling in a school after high school.  However, there is a big difference in potential debt accumulation and lost earning for a person who graduates on-time or earlier and a person who graduates two years after the expected graduation rate.

The analysis presented here provides some insight on the impact of the number of years it takes to finish undergraduate programs on debt levels at graduation?

The Department of Education Web Site providing information on different colleges stresses median federal guaranteed debt at graduation.   Less information is available on PLUS loans for parents and for private loans.

The analysis presented here provides information on whether colleges need to provide more information on other types of loans and on how these loan total vary with the number of years in school.

The increase in the number of students taking Advanced Placement Exams has allowed some students to graduate with a BA or BS Degree in three rather than in four years.   However, in response to an increase in the number of students taking AP exams many schools have scaled back or are reconsidering the amount of credit that students get from AP exams.

The analysis presented here provides some information on the costs associated with colleges impeding early graduation.

The Data:

The statistics presented here were generated from the National Postsecondary Student Aid Study NPSAS 2012 database from the Department of Education.

The logical variable to look at with the analysis of this issue is cumulative amount borrowed, which is called BORAMT1.  However, the NPSAS documentation reveals this variable does not include information on PLUS loans for parents and may also omit some information on private loans.

I present statistics on cumulative debt and cumulative PLUS loans for parents for people who graduated in 2012 with a BA or BS degree.     Statistics on the cumulative amount borrowed variable are presented for private non-profit colleges and for public institutions.

Cumulative Debt Results:

Below is a table presenting information on cumulative amount borrowed for graduates in 2012 based on when their undergraduate career began

Duration of Undergraduate Career and Cumulative Debt at Graduation
# of years from initial enrollment and graduation Public Universities Private Non- Profit

Universities
% With Debt Average Cumulative Debt for Borrowers % With Debt Average Cumulative Debt for Borrowers
3 50.5 $19,625 68.5 $27,822
4 56.9 $22,504 70.0 $29,123
5 67.0 $25,537 80.2 $34,683
6 72.4 $27,163 72.0 $29,069
7 71.1 $27,707 64.2 NA
>7 69.3 $30,043 79.5 $39,102
Total 64.1 $25,640 73.5 $32,308

Observation on cumulative debt and duration of undergraduate career.

The results presented here indicate that people who finish their undergraduate careers efficiently have less debt on average.

The increase in debt with years in school exists for increases from 3 years to 4 years and for increases from 4 to 5 for both private and public schools.

The increase in debt with years in school exists for increases from 5 to 6 years for public universities but not for private universities.

These figures don’t include PLUS loans for parents.  I proceed to look at the relationship between usage for PLUS loans for parents and duration of undergraduate career.   The PLUS loan analysis looks at all undergraduate institutions together – public universities, private non-profit universities and private for-profit universities.   I combine the three types of universities because of sample size constraints impacting the PLUS loan usage variable.

PLUS loan for Parents Results:

Duration of Undergraduate Career and PLUS loan for Parents Usage
# of Years from Initial Enrollment to Graduation % with Plus Loans for Parents Average PLUS Loan for PLUS Loan Borrower
3 12.0 $33,770
4 18.5 $30,218
5 21.2 $31,463
6 18.4 $22,120
7 14.4 $18,199
>7 5.9 $16,345
Total 15.5 $27,352

Sample includes public universities, private non-profit universities and private for-profit universities.

Observations on PLUS loan for parent usage and duration of undergraduate career:

The percent of people who rely on PLUS loans by parents is dramatically lower for people who graduate in three years compared to people who graduated in four or more years.

However, the average cumulative PLUS loan for people graduating in three years is a bit higher than for people who took longer to graduate.  (I suspect the average for three years was driven by a few outliers.

Policy Discussion:

It is apparent that the amount of time it takes for a student to finish their undergraduate career is an important determinant of debt at time of graduation.

Policies that help students finish on time can greatly reduce financial debt incurred in college.

Detailed information about the frequency distribution on the number of years it takes for students to get their degree at each college would be invaluable for students and their parents.   The College Score Card reveals information on the percent of students who graduate in six or fewer years.  This statistic is inadequate.   The Department of Education should require that schools report 3-year, four-year, five-year six-year and > 6-year graduation rates.

Statistics based exclusively on federal guaranteed debt, like the ones presented in College Score Card are inadequate.   Cumulative PLUS loans and cumulative private loans also contribute to financial risk associated with taking on too much debt in college.   Several articles have revealed that many parents who take out PLUS loans on behalf of their children are incapable of repaying these loans and there has been an increase in the number of instances where PLUS loan borrowers have had Social Security payments garnished.  One of my previous posts on this topic revealed that the proportion of PLUS loan parents with low income levels has increased over time.

The Department of Education should insist that colleges report detailed information on the usage of PLUS loans and private loans by their students.

Many colleges are now deliberately making it much more difficult for students to graduate in three years by denying college credit for AP exams.

Article on AP credits being denied to students at major colleges:

http://www.msn.com/en-us/money/careersandeducation/as-advanced-placement-tests-gain-popularity-some-colleges-push-back/ar-AAmXr6o

The results presented here indicate that there are potentially large financial costs incurred by colleges choosing to deny credits for AP exams.    Some states have enacted laws requiring that publicly funded colleges provide credits to student who pass AP exam.

I believe all colleges should be required to provide detailed information on AP credit awards and information on frequency distribution describing years it takes for student to graduate.  it would be inappropriate for the state to mandate AP credit policies at private institutions.  However, the state does have an interest in insuring that markets run efficiently and market efficiency is impossible when consumers lack basic information.

Academically trained economists generally support providing consumers with better information unless they are being paid to advocate for special interest.   You would expect that university presidents might place a higher priority on the public’s right to know than other industries.   Interestingly, as demonstrated in the post below college presidents have successfully stopped meaningful college ratings

Ranking Colleges on Value and Costs:

http://policymemos.blogspot.com/2016/04/ranking-colleges-based-on-value-and.html

On this issue colleges are behaving like tobacco firms and insurance companies.