“…A lot of the conversation around college education is that tuition is increasing very rapidly, debt is increasing very rapidly and what does that mean for everyone? If we take a bigger step back we want to reframe the discussion around higher education as the potential investment available to people in our economy to help them be more productive in the labor market and to help them have better financial lives themselves. So when we think about higher education, rather than focusing all on the costs like we have been doing with the focus on the narrative about tuition and debt, I think it is important that we kind of refocus and talk about what students are getting from their college degrees. Basically encouraging people to think about this as cost-benefit analysis as they would with any other financial activity in their life.” – Beth Akers

“People who have higher levels of education are far more likely to start or own a business, create jobs in that way; they are far more likely to file a patent, and do other things that are immeasurable contributions to intellectual thought and scientific thought and advancing living standards in important ways. Now quantifying those would be impossible. One that is easy to quantify, that I did in a piece a few of months ago for Brookings, is looking at not just what college graduates pay in taxes but their actual consumption as a direct benefit to local communities and the entire country.” -- Jonathan Rothwell

In this episode of “Intersections,” Beth Akers, fellow at the Brown Center on Education Policy at Brookings, and Jonathan Rothwell, former fellow at the Metropolitan Policy Program and senior economist at Gallup, examine the current state of higher education by looking at student debt and its correlation to the value added for individuals with a college education.

Show Notes

Using earnings data to rank colleges: A value-added approach updated with College Scorecard data

What colleges do for local economies: A direct measure based on consumption?

Making college less risky to boost social mobility

More data can make college less risky

The Game of Loans: Rhetoric and Reality of Student Debt

With thanks to audio engineer and producer Zack Kulzer, Mark Hoelscher, Carisa Nietsche, Sara Abdel-Rahim, Eric Abalahin, Fred Dews and Richard Fawal. Subscribe to the Intersections on iTunes, and send feedback email to intersections@brookings.edu.

      

 

 

Hillary Clinton is highlighting the issue of student debt in the wrong way. Her campaign recently published an analysis[1] illustrating how much borrowers would be able to save for retirement if they weren’t paying back student loans, without properly considering the economic benefits of college.

Debt versus retirement savings?

The campaign’s case study was a college graduate with $28,950 in student debt (the average burden held by 2014 graduates) paying back their obligation over 20 years. Let’s call him Bernie. At federally subsidized interest rates, Bernie will be making monthly payments of $186. What if, the campaign asks, rather than making these debt payments, he was putting the same amount towards retirement? The answer: if Bernie puts the same amount into a 401k every month, he will have accrued $86,000 in retirement savings within 20 years.

Mathematically speaking, these numbers are correct. But it amounts to a one-sided cost benefit analysis, which assumes we can wipe away a borrower’s monthly payments without other financial consequences. If that were an option, I’d be all for it. But it’s not. There is no free lunch. 

How could we free Bernie from his $186 monthly payments? Only really in one of three ways:

1. Federal government forgiveness of outstanding debt burdens. But this would mean raising taxes or cutting other social benefits, perhaps impacting the same people receiving relief from the loan forgiveness.
2. Lower the cost of college. Sounds good, but it is far from obvious how to do this without increasing taxes or reducing quality.
3. Bernie doesn’t go to college. Of course, Bernie might decide not to go to college at all. In fact, the heated and often inaccurate rhetoric about student debt might well persuade him not to.

Let’s look at a true cost benefit analysis of that last option. If Bernie skips college altogether, he’ll earn about $1,800 per month less. So even taking account of debt payments, he still comes about $1,650 per month behind where he would have been if he’d gone to college and taken on debt. Over the course of twenty years, this means he’d lose around $396,000.

Perhaps the other routes to zero debt—loan forgiveness or measures to make college cheaper—will prove more attractive, depending on the circumstances. But the key point is that less debt isn’t always better. Whether from an individual or a policy perspective, reducing student debt isn’t costless. 

Reduction of student debt is a laudable goal, but the benefits need to be properly weighed against the costs. It’s also important to think about the distributional impact of student debt relief. People who have student debt are, on average, more educated and have higher earnings and lower risks of unemployment. If we are to use public funds to shore up individual financial security and retirement savings, this is probably the group that needs them the least. There is an important and timely national dialogue underway on college affordability. As we weigh the various policy options, we need to be careful to be clear and honest about the tradeoffs inherent in each.

      

 

 

“Higher education, more than ever, is the ticket to the middle class.” So said President Obama last year.

But is it? We know individual investments in higher education pay large dividends. But that is true of many investments that are not easily accessible people with fewer economic resources. Investing in the stock market, for example, generates wealth: but only if you have money to invest in the first place. So it is worth asking whether higher education is in fact succeeding in lowering intergenerational “stickiness” of socioeconomic status.

Unfortunately, college appears to be out of reach for many. Just nine percent of individuals born into the lowest income quartile will ultimately earn a college degree, compared to 54 percent in the top income quartile:

Even for those lower-income children who do make it to college, recent work by Brad Hershbein and his colleagues suggests that a bachelor’s degree might be worth less. The disparity in returns is so large that college graduates who were born into poor families have the same chance of staying in the bottom income quintile as people who are born into rich families but don’t complete high school.

How can higher education play a bigger role in supporting social mobility? First, we need to help students make better decisions. For a long time we’ve hesitated to talk about education as a financial investment. But that has a done a disservice to the students who can’t really afford the luxury of turning a blind eye to the economic consequences of their decisions. We need to empower students to make good decisions by publishing data on the labor market returns of each program covered by the federal student aid program.

We also need to remove an invisible barrier to college access: risk. Generous loan limits in the federal aid program paired with a robust private loan market mean that almost any student can find the money they need to enroll in college. In that sense, college is already affordable to all. But college doesn’t always pay off in the long run. Like any investment, it’s a gamble. And it’s a gamble that not everyone can afford to take. Fortunately, there are plenty of ways to reduce the risk of investing in higher education, including a more robust income driven repayment system in the federal loan program, private market financial products that offer insurance to student borrowers, and new business models that offer guarantees to students.

There is no silver bullet solution that can eliminate the stickiness of socioeconomic status. But lowering risks could help higher education to become a more effective engine for mobility. 

Note: A version of this piece was previously published on Real Clear Markets.

      

 

 

More young Americans are going to college than ever before, but they are also racking up student loan debt at unprecedented rates. As of 2013, 40 percent of young households in the United States had some outstanding student loan debt. This has a lot of potential implications. But since Valentine’s Day is right around the corner, let’s focus on just one: the decision to marry.

Earlier this week, President Obama released the Federal Budget for 2017 and proposed a significant change in the way that debt is handled for married couples. In the current income-driven repayment system, borrowers with low earnings can qualify for reduced monthly payments and sometimes forgiveness on their loans. If the President’s proposal is enacted, eligibility for these benefits would depend on their spouse’s income as well as their own.

A high earning spouse could, in this sense, be a liability for someone who would otherwise be able to take advantage of repayment benefits reserved for low-income borrowers. The proposal is aimed at a fairer assessment of a borrower’s ability to pay. But of course this will depend on how couples choose to manage their finances.     

This new “marriage penalty” for borrowers with student debt would come on top of some existing financial downsides. Borrowers with modest earnings (i.e. a Modified Adjusted Gross Income of less than $80,000) are able to deduct interest paid on student loans on their federal taxes, up to $2,500. But this limit is the same for married couples, so many couples will lose out on a deduction they could have claimed if they were single. (Filing taxes separately doesn’t help, since married borrowers filing separately aren’t eligible for the deduction at all.) 

As more students take on debt and their debts get larger, the disincentive to marriage created by these rules will also grow. This could mean that young people with debt will choose to delay marriage. So far, despite the frequent discussion of this issue, conclusive evidence is elusive—not least because this kind of effect is fiendishly difficult to measure. But with the combination of disincentives for marriage created by Uncle Sam and the likely behavioral impact of debt, it’s reasonable to suppose that debt is impacting the way that young people are thinking about marriage.     

So this Valentine’s Day, when you’re waxing poetic with your sweetheart about your future together, try to keep these things in mind. It can be uncomfortable to talk about finances, so if you’re at a loss for words, perhaps try something like this: “Let’s not forget that our decision tonight could have an impact on our future tax liability and eligibility for federal loan repayment benefits.” Of course, this might kill the mood a little. Oh well. Thanks, Obama.

      

 

 

Tomorrow, President Obama unveils his last budget, and we’re sure to see plenty of proposals for spending on education and skills. In the past, the Administration has focused on investments in early childhood education, community colleges, and infrastructure and research. From a budgetary standpoint, the problem with these investments is how to capture their benefits as well as their costs.

First step: find out what works. The Obama Administration has been emphatic about the need for solid evidence in deciding what to fund. The good news is that we now have quite a lot of it, showing that investing in human capital from early education through college can make a difference. Not all programs are successful, of course, and we are still learning what works and what doesn’t. But we know enough to conclude that investing in a variety of health, education, and mobility programs can positively affect education, employment, and earnings in adulthood.

For example:

1. Young, low-income children whose families move to better neighborhoods using housing vouchers see a 31 percent increase in earnings;

2. Quality early childhood and school reform programs can raise lifetime income per child by an average of about $200,000, for at an upfront cost of about $20,000;

3. Boosting college completion rates, for instance via the Accelerated Study in Associate Programs (ASAP) in the City University of New York, leads to higher earnings.

If such estimates are correct (and we recognize there are uncertainties), policymakers are probably underinvesting in such programs because they are looking at the short-term costs but not at longer-term benefits and budget savings.

First, the CBO’s standard practice is to use a 10-year budget window, which means long-range effects are often ignored. Second, although the CBO does try to take into account behavioral responses, such as increased take-up rates of a program, or improved productivity and earnings, it often lacks the research needed to make such estimates. Third, the usual assumption is that the rate of return on public investments in human capital is less than that for private investment. This is now questionable, especially given low interest rates.

A hot topic in budget politics right now is so-called “dynamic scoring.” This means incorporating macroeconomic effects, such as an increase in the labor force or productivity gains, into cost estimates. In 2015, the House adopted a rule requiring such scoring, when practicable, for major legislation. But appropriations bills are excluded, and quantitative analyses are restricted to the existing 10-year budget window.

The interest in dynamic scoring is currently strongest among politicians pushing major tax bills, on the grounds that tax cuts could boost growth. But the principles behind dynamic scoring apply equally to improvements in productivity that could result from proposals to subsidize college education, for example—as proposed by both Senator Sanders and Secretary Clinton. Of course, it is tough to estimate the value of these potential benefits. But it is worth asking whether current budget rules lead to myopia in our assessments of what such investments might accomplish, and thus to an over-statement of their “true” cost.

      

 

 

There are lots of good reasons to go to college, but the vast majority of prospective students in this country report[i] that they’ll go to college because they believe that it will improve their employment opportunities and financial wellbeing. And for the most part, they’re right. Despite many suggestions to the contrary, it’s very well documented[ii] that investments in higher education pay large dividends in the form of future earnings. This makes higher education one of the most important tools we have for generating social mobility. Regardless of an individual’s starting point in life, higher education offers access to greater financial well-being. Unfortunately, it’s not a fail proof system.

Investments in education, like investments in the stock market, do not come without risk. In financial markets, access to information is one way investors mitigate risk. Mutual funds, for example, disclose average returns over various time periods for certain categories of investments (e.g. large-cap funds, emerging market funds, technology funds, etc.), in addition to other information. These data, moreover, are widely and freely available through consumer-oriented websites like Yahoo Finance, Vanguard, and E-Trade. Yet, for higher education, students have had access to no analogous information until quite recently.

For decades, economists discussed the average benefits of a college education compared to a high school education with no regard to either field of study or institution. Finally, in 2009, the Census Bureau started collecting data that could be used to assess which majors pay the most,[iii] and then just a few months ago, the Department of Education released data on the earnings of alumni by institution, for all students who receive federal grants or loans. These data can be further analyzed, as we have done, to estimate the economic contribution of schools (or value-added) as distinct from the outcomes attributable to student characteristics (like test scores).[iv] Still, even with these data advances, students cannot compare earnings by major across institutions, except in a handful of cases using state data systems.

Here, we illustrate how data by major and institution can inform the decision of what to study and where using data from Texas. Suppose first that this student is a Texas resident and has decided she would like to pursue a bachelor’s degree at a public institution in her state.

Our data on alumni earnings by major comes from the Texas Higher Education Board, and we combine it with information on the net cost of tuition from the Department of Education’s IPEDS database as reported in the College Scorecard.[v] We use these data to estimate the ten-year return on investment for each institution in the state of Texas by major.   

We calculate an estimate of ten-year return by summing the average earnings faced by graduates over the first ten years following graduation[vi] and subtracting off the wage they would have received as a high school graduate without a degree (taking into account additional years of earnings when they would have been enrolled in college). To estimate this benchmark, we used data on Texas residents from the Annual Social and Economic Supplement to the Current Population Survey, obtained via IPUMS CPS.[vii] We then subtract the institution specific costs[viii] to get the ten-year financial return. Since education pays off over a lifetime, this isn’t the ideal exercise, but it’s still informative. We’ve estimated these returns based on the population of individuals who both complete their degree and do not go on to complete graduate study. Ideally, these estimated expected returns would be adjusted to account for how earnings and costs are affected by non-completion. Indeed, the average rate of completion across these schools is only 48 percent. This is a quick and dirty method for estimating returns that fails to take into account a number of selection issues,[ix] but we believe that it still provides an effective illustration of risk in higher education. 

Figure 1 illustrates the potential average outcome facing our Texas student, who is deciding between bachelor’s degree programs from the set of public institutions in her home state. We’ve plotted the distribution of financial returns for the set of potential expected outcomes, which are defined as all combinations of institution and major. To be clear, the distribution of potential outcomes would be far wider if we were using individual specific variation (i.e. the fact that some students will ultimately earn more than others, even with the same degree from the same institution) and the real possibility of non-completion.

We know that, on average, this student will face a positive return on her investment, wherever she chooses to go. The average rate of return across all possible choices facing this student is quite a sizeable 11.3 percent (or $216,000 in undiscounted 2014 dollars). At a systemic level that’s important.  Still, the standard deviation is 6.7, with a low return of a -6.6 percent (Animal Science at Sul Ross State) and a high return of 79.8 percent (Registered Nursing at UT Brownsville). Out of 1065 combinations of majors and schools, 19 yielded average negative returns. This was true even for two programs at the selective UT Austin campus (Visual and Performing Arts and Classics). 1.1 percent of students who graduated in 2004 were in a major-institution combination that yielded a net return below 4 percent. In such cases, they would have been better off putting their dollars into treasury bills.

Figure 1. Mean return on bachelor’s degree investment by institution and major, for Texas residents who graduated in 2004 from a Texas public college

Students who know what they want to major in could benefit greatly from knowing which school is likely to generate the largest pay off (it would be nice to know this in terms of learning as well as money, but that is another more complicated matter).

We’ve illustrated the distribution of potential outcomes for two different popular majors, Liberal Arts and Sciences and Electrical Engineering.[x] Both majors clearly offer a significant average rate of return across all institutions (12 for Liberal Arts and 20 for Electrical Engineering), but depending on which major they choose the student will face a different level of risk in their future earnings. The variation (standard deviation) in the expected rate of return across institutions is much larger for Liberal Arts majors (5.7) than for Electrical Engineering majors (3.7). Yet, while these facts may discourage people from pursuing a Liberal Arts major in the abstract, the plot below does show that some Liberal Arts majors out-earn their peers in electrical engineering. For example, Liberal Arts majors from UT Austin earned a higher return than electrical engineering majors at UT Dallas, the University of Houston, and three other UT campuses. Thus, these more detailed facts can actually encourage students to pursue majors that look economically bad for the average student but quite attractive at a particular school with a strong program.

Figure 2. Distribution of earnings 10 years after graduation for bachelor’s degree holders with an Electrical Engineering or Liberal Arts degree, for Texas residents and 2004 graduates from Texas public colleges 

The point is that college degrees, like other investments, are risky, but information goes a long way to clarify the nature of that risk and improve the quality of investment decisions. In addition to providing students and the public greater access to data on market performance of alumni, there are a number of innovations both in the policy arena and in the private market that could help make college investments less risky. First of all, innovative financing systems that allow students to pay for their investment over a longer period of time and tie repayment to earnings would greatly limit downside risk for students.  Second, institutions have the capacity to shoulder some of this risk, and a proposal known as risk-sharing[xi] is gaining some traction and would require schools to pay the federal government some portion of loan default losses. On a voluntary basis, some colleges have offered on-time graduation guarantees[xii] and wage guarantees.[xiii] And last, new business models in higher education could help mitigate risk. Part of the problem in the current system comes from the all-or-nothing regime in which students have to invest in a bundle of coursework (i.e. a degree) in order to reap significant returns. The growing prominence of new models, like micro-credentials[xiv] and coding boot camps,[xv] can offer alternatives that don’t require students to put all of their eggs in one basket.

      

 

 

Jeb Bush just released an education reform plan that represents a wholly new approach to the federal government’s involvement in higher education. So—is it any good?

Big idea: innovative financing system

The big idea at the heart of the plan is to reduce the risk of borrowing to go to college by adopting a system that would function like an income share agreement between the student and the government.

There are three main elements to this aspect of the plan:

1. Each individual could access $50,000 of credit towards educational expenses over their lifetime.
2. Borrowers would repay by committing a set fraction of their income over 25 years, rather than repaying based on a fixed rate of interest. So borrowers with high earnings will pay back more than they’ve borrowed (up to a limit), while borrowers with low earnings will pay far less.
3. Collections would be through the tax system, in place of the dizzying complexity of the current repayment system. (PLUS loans for both parents and graduate students would be eliminated).

Sound principles, a good start

As with any new program, the devil will be in the details, but this proposed reform is built on solid principles. Education is a sound investment that pays large dividends for most students. As such, reforms that seek to provide broad-based relief to students miss the mark. We need instead to be addressing the problem of debt coupled with low earnings. This plan does exactly that.

Accountability

In addition to these far-reaching reforms of the federal loan program, Bush’s plan also creates a “skin-in-the-game” system for institutional accountability. He proposes that institutions take on some liability when their students fail to fully repay their debts.  Many oppose this additional layer of regulation, but it’s a reasonable model that does have precedent in other markets. For instance, state unemployment insurance programs are partially funded by higher payroll taxes from employers who have laid off more employees in the past.

Promoting innovation

The plan also creates opportunity for innovative business models in higher education through a reform of the rules for institutional access to federal aid. Here the plan is thin on the details, but it endorses a new pathway to eligibility based on performance outcomes rather that the traditional model of accreditation. Encouraging innovation is the right idea, but the success of this proposal would completely depend on how it’s implemented.

A misstep on student information

The most obvious misstep in the plan is an inadequate proposal for improving student access to information. Information on institutional outcomes is a critical part of the system of accountability for institutions. Bush’s plan proposes strengthening the state databases which track student outcomes across time, but it fails to endorse a centralized data system, which would be the most efficient and effective way to collect and disseminate the information that consumers need.

Overall, Bush offers a thoughtful plan that addresses some of the key issues plaguing the nation’s system of higher education. Right now the debate is dominated by the idea of making college free. So the plan will likely be criticized from the left for the absence of additional subsidies. But the plan looks to be in line with both values of the GOP, and the needs of the higher education market.

For Beth’s earlier analysis of Clinton’s higher education plan, click here.

      

 

 

The public discussion about higher education has long been focused on two obvious trends: the rising cost of college, and the growing burden of student debt. These are certainly important factors for consumers, college administrators and policymakers to consider, but the emphasis on these points has caused us to collectively overlook another critically important factor: risk. The real solutions to the problems that plague our nation's system of higher education will come when policymakers shift their focus to address the systemic risk inherent in investing in a college degree.

Over the last 20 years, published tuition and fees have more than doubled at four-year public institutions, and have increased by more than 50 percent at private four-year and public two-year colleges. This rate of increase has not been seen in any other sector of the economy. Some of this is mitigated by the fact that schools have increased grant aid at the same time, but there is no question that the cost of college is trending steadily upward (even after accounting for inflation).

But the rapidly rising cost of college education is not as troubling as it first appears. While the price of higher education has increased, so has its value. Over the last 30 years the lifetime earnings associated with having a college degree hasgrown by 75 percent. Today's students are paying more to go to college, but they are also getting more out of it. In this sense they're getting a better deal.

We've also seen a dramatic rise in education debt in recent years. There is more outstanding student debt today than ever before. The fraction of households holding student loans is continually increasing and the balances of their loans are increasing as well. This trend is worth noting, but we shouldn't neglect to consider this in the context of the financial return to education. Spending on college, even if it is financed with debt, generally leaves a student better off. Research indicates that the financial rate of return on a college degree is about 15 percent - a rate that far exceeds the yield on most other investments available to the individual consumers, especially young ones. This is why many across the nation, including President Obama, are working hard to increase the rate of college enrollment, particularly among disadvantaged students.

It's absolutely true that college is still "worth it," but this narrative misses an important nuance that needs to become a bigger part of the discussion. Going to college is risky. The financial returns to college degrees are large on average, but students face a range of outcomes. Even if the majority of students face favorable returns on their investments in higher education, that still leaves some who would have been better off without having enrolled in the first place. As the cost of college has risen, so has the cost of making a losing bet on a degree.

There are many forms of risk facing students as they consider enrolling in higher education. One common pitfall is failing to complete a degree. Among the cohort of first-time, full-time students entering four-year degree programs in 2005, only about 60 percent ultimately graduated. This often unforeseeable outcome leaves students with the expense of college, but without the earning power associated with holding a degree. Even students who complete their degree are not guaranteed a payoff on their investment. Some students will realize, in retrospect, that the earnings opportunities afforded by their degree do not justify the cost. For example, new research has shown that many students who attended for-profit colleges in recent years are facing poor financial outcomes. In essence, these students took bets that didn't pay off.

In the existing federal student loan program, borrowers are protected from unaffordable monthly payments on their debt through a set of repayment programs that cap monthly payments based on income. However, these programs are difficult to navigate, and don't always deliver relief where (or when) it is needed most. A more streamlined and robust program of income-driven repayment could go farther in protecting students from risk, but private market solutions, like income share agreements, and institution level innovations can also play a role in addressing this problem.

The problem of risk in higher education will be a challenge to solve, but practical solutions are not inconceivable. The challenge, instead, is getting the issue of risk to become an important part of the national discussion about higher education reform. We're all implicitly aware of the notion of risk, but it's time to bring it to the forefront of the discussion.

Editor’s note: this piece first appeared in Real Clear Markets

      

 

 

The Obama Administration recently announced  a new experimental initiative that, for the first time, will allow non-accredited institutions to gain access to the federal student aid program.  This initiative, which will be limited to 10 experimental sites, will make it possible for students to use Pell grants and federal student loans to finance investments in education at accredited colleges and universities that make extensive use of new and innovative models that haven’t yet received a stamp of approval from the system of accreditation – such as MOOCs, which are becoming increasingly popular alternatives.  Currently, students are only able to use federal loans at accredited institutions.  However, some of these institutions are utilizing educational services from non-accredited providers as part of their curriculum.  But current regulations limit this practice.  Institutions are not able to have programs where more than 50 percent of the curriculum is provided by a non-accredited partner.  This restriction will be waived at the institutions that are selected to participate in this experiment, effectively opening access for federal financial aid to a select group of non-accredited institutions operating in partnership with accredited institutions.

This small, but welcome, step towards transforming the accreditation system gives a green light to innovations that have the potential to sharply reduce costs and improve student outcomes at the same time.  Implicit in this change is the recognition that the current system of accreditation is falling short.  Our system of higher education serves a very diverse set of students with needs that are changing quickly over time.  As such, we need a system of accreditation that will support a variety of pathways for skill development and that can embrace innovation.  Unfortunately, the current system of accreditation has functioned as a barrier to the development of innovative business models that could provide valuable alternatives to the traditional models of higher education.

There are a growing number of instances in which innovative models are already proving their worth.  In some cases  – such as Arizona State University’s partnership with edX and Georgia Tech’s $7,000 master’s degree partnership with Udacity - accredited institutions have been making use of new educational technologies as part of their curriculum.  In these cases, massive open online courses (MOOCs) and programs from external suppliers – such as “boot camps” for teaching computer programming – have replaced traditional coursework, reducing costs and arguably increasing quality.  There have even been examples, such as Western Governors University, to combine entirely online degrees with achievement based on competency measures rather than traditional credit hours. But all these innovations have required often difficult negotiations with accreditors. This new initiative will make it easier for the pilot institutions to experiment further with these types of arrangements and could pave the way for other creative approaches.

While the Administration’s announcement is a step in the right direction, it’s still only a very small step toward reform.  Legislative changes, which may be on the horizon, will be necessary for any large-scale, systemic change.  A number of policy makers, including Senate Education Committee chairman Lamar Alexander, Utah Senator Mike Lee and Senators Marco Rubio and Michael Bennet, have already developed proposals for reform.  Fortunately the Administration also appears poised to take additional executive actions to require accreditors to focus more on student outcomes and not just supply-side criteria, responding in part to the fact that some accredited institutions that have dismal graduation levels.

While the primary objective of the federal aid program is to encourage enrollment (by both providing financing through debt and lowering the cost of attendance with grants), the allocation of aid must also minimize both the extent to which students spend grant money on degrees that don’t pay off and borrowers taking on debt that they won’t be able to repay.  This objective helps protect individual borrowers from making poor investments in their education and ensures efficient use of taxpayer dollars.

Accreditation is currently a part of the mechanism for determining eligibility for federal student aid.  In theory, accreditation would ensure that an institution was providing educational services that were a good investment both for the individual and the taxpayer.  Unfortunately, it hasn’t always worked that way.   Meanwhile, innovative programs offering valuable services to their students are excluded from the federal aid program because they do not meet the traditional requirements for accreditation.   Clearly, a better mechanism for determining aid eligibility is needed.

      

 

 

College tuition is high, but degrees are still worth it. Debt is growing, but the largest debts are held by people with the highest income. So what’s the problem? The really troubling trend is the growing risk associated with investing in higher education.

Historically, making a bad investment in higher education was not a catastrophe. Wasting tuition dollars on a degree that didn’t pay off was like buying a car that turned out to be a lemon. There were financial consequences, but they weren’t ruinous. That has changed. The high price tag of higher education means that investing in a college degree means putting all (or at least  many) of your eggs in one basket. Degrees still pay large dividends for the typical student, but there are many who will sink dollars into a degree that will see little or no return.

What can be done? The main response must be to help students to insure themselves against bad outcomes. Income-driven repayment plans, which have been expanded in the past few years, help students who use federal loans. But students who take on private loans to supplement federal borrowing are not protected in the same way. Borrowers who use private loans to finance their education are in the vulnerable position of investing large amounts of their wealth in a single, risky asset (i.e. their education). (Recent work from the Hamilton Project and Brookings Papers on Economic Activity show how widely the returns to college can vary.)

Until now, tools for mitigating this risk have not been widely available. But that might soon change. This summer, Purdue University announced that they will begin making Income Share Agreements (ISA) available to their students, perhaps as soon as this spring. There is also growing congressional interest in legislation to create a legal and regulatory framework to support a market for ISAs.

Income Share Agreements are an innovative tool that will, as I have argued elsewhere, allow students to finance college by selling “shares” in their future earnings. Graduates pay back in proportion to the pecuniary value they get from their degree. If the degree proves worthless, the students will pay little or nothing. If the degree is immensely valuable, then the students will pay back a lot. Either way, the payments are, by construction, affordable.

Private education loans put borrowers on a sharp financial hook, whether they can afford it or not. These loans are difficult to discharge in bankruptcy, making a risky situation even riskier. The typical borrower will do just fine repaying their private loans; but the borrower who gets a raw deal from their education will face serious consequences. As always, the devil is in the details. But with careful implementation, Income Share Agreements have the potential to patch this hole in the safety net for students investing in higher education.

Up next: Susan Dynarski on income-contingent loans.

      

 

 

Last week, the White House announced an important innovation in higher education data availability.  For the first time, the U.S. Department of Education has made institution level earnings information available to the public.ⁱ Students shopping for a college can now log on to the College Scorecard and see earnings information alongside other important factors, such as cost and graduation rate (as seen in Figure 1).  The availability of this data makes it possible for consumers of higher education to use a cost-benefit framework to make savvier decisions about college.ⁱⁱ Simply put, they can compare the upfront cost of tuition to the benefits that they are likely to receive in the form of heightened future wages.  This has the potential to create both individual and systemic benefits. 

Figure 1. Example of College Scorecard Entry

The availability of this information empowers the consumers of higher education to utilize choice, which can elicit competition and innovation.  As the theory goes, with this information in hand, students have the opportunity to demand a price for enrollment that is in line with the value that an institution provides, and the invisible hand will phase out institutions that do not respond to this incentive. 

This makes sense in theory, but will information on price and outcomes actually change the market in higher education?  That depends on a few different factors.  First, it will depend on the extent to which institutions are reliant on students’ tuition dollars to balance their budgets and therefor need to take consumer preferences into account.  This remains to be seen, but we have some evidence to the contrary.  For example, according to the National Center on Education Statistics, tuition and fees only comprised between 17 (at two-year institutions) and 22 (at four-year institutions) percent of revenues at public institutions in 2012. If an institution’s funding does not change appreciably when it loses enrollment to a competitor school, then that institution will not have an incentive to innovate in order to maintain enrollment.  Second, the power of this information to affect change will depend on whether consumers access and use it to make decisions about college.  That will likely depend, in part, on the degree to which prospective students actually have choice in a practical sense.  So, what does choice look like in the market for higher education? 

In one sense, we have a national market for higher education.  Students are free to spend their federal aid dollars at brick and mortar institutions across the country.  Though some students relocate their home (temporarily or permanently) in order to enroll at a particular institution, the reality is that most students face some geographic constraints when they shop for college.  According to research published by ACT, students travel a median distance of 51 miles to go to college, though some groups of students are more mobile than others.  Higher achieving students typically travel farther, as do students from households with more educated parents.  First generation students travel a median distance of only 24 miles to their college.  This means that the opportunity for students to exercise choice is constrained by the options available in their geographic region. 

The map below provides an illustration of the geography of educational opportunity across the United States.  Clearly, there is significant variation in the density of higher education markets across throughout the U.S.  Some regions contain a number of colleges for students to choose from, while others (often with lower population density) have few, if any, options. 

Figure 2. Institutions of Higher Education and Population Density in the U.S.

Notes: Points represent all non-for profit colleges and universities.  Shading represents population density.  The progression from light to dark represents the progression from low density to high density.

To explore this further, we carried out a preliminary empirical analysis using county-level population data from the 2010 Census and geocodes for all institutions appearing in IPEDS in 2010, excluding for-profit institutions.ⁱⁱⁱ Our analysis shows that most of the population (99.5 percent) has at least one institution of higher education within 51 miles of their home.  However, that number falls dramatically when you look only at public institutions, which are the most affordable option for most households.  We find that only 65 percent of individuals live within 51 miles of a public college and less than 1 in 5 people (19 percent) live within 51 miles of a public 4-year institution. 

Figure 3. Percent of the U.S. Population with one, three and five Institutions of Higher Education within 5-50 Miles from their Home

We also want to know the extent to which local education markets provide multiple options for students.  We find that about 95 percent of individuals have at least three institutions within a moderate distance of their home (51 miles), but that number drops to less than 50 percent if the individual wishes to attend a public institution.^iv Of course, student preference regarding things like program of study and selectivity limit the practical choice set even further.  Online education offers an alternative that could supplement the set of options for potential students, but the take-up of online education in higher education is still rather small.

     

 

 

Improving data in the field of workforce development is a necessary step to evaluating programs and replicating success. What does current data tell us about the populations served? What outcomes should we measure to ensure programs are meeting America’s workforce development needs?

Earlier this month, we convened an expert group of policy makers, practitioners and scholars to address this problem, along with other challenges in workforce development. Previously, we interviewed Kate Blosveren Kreamer on the need to strengthen bridges from school to work. Next up in our Q&A series is Beth Weigensberg, a researcher at Mathematica Policy Research.

A: Although there is increasingly more rigorous research to assess effectiveness of programs, I feel a missing piece is understanding how to replicate and scale-up effective strategies. Often times workforce development programs that are deemed effective in one place do not always succeed when implemented in another. Research that evaluates effectiveness of programs should assess the role of contextual factors (including organizational, leadership, community, and political factors) to identify what is needed to successfully implement, replicate, and scale successful programs.

A: The workforce development field has an unfortunate history of “creaming”—programs selectively work with individuals most likely to succeed at finding employment, leaving those “harder-to-serve” individuals struggling to find assistance. Individuals that are often considered “hard-to-serve” include those who are homeless, disabled, formerly incarcerated, older workers, non-English speakers, low-income, and youth who are disconnected from school and employment. Increasing efforts to focus on these “harder-to-serve” populations include specialized targeted programs and strategies to help address the complex needs of these individuals, which often extend beyond skill development and finding a job. These specialized programs often provide additional support services to help address their complex needs, which can serve as additional barriers to obtaining and retaining employment.

A: Intermediate measures of engagement and skill development would provide interim measures of progress, while the ultimate objectives are obviously employment and educational attainment. Ongoing evaluation on interim measures allows for earlier acknowledgment of achievement and identification of those struggling to progress. Assessing outcomes in ways that control for different populations or barriers to employment, such as using risk-adjusted methodologies, can help us evaluate workforce development programs in an equitable manner.

One of the biggest challenges in the field is ensuring we have valid and reliable data to accurately estimate outcomes. The data available to assess outcomes are usually limited by what is collected in management information systems, which are often developed to be responsive to reporting requirements of publically-funded programs. But these siloed data do not allow for comprehensive assessment of workforce development outcomes within a state, locality, or even within a community-based employment and training organization that relies on numerous funding sources. Efforts are needed to integrate data and assess standardized outcome measures across program and funding silos to allow for more comprehensive assessment of outcomes within the field.

     

 

 

Building stronger links between educational institutions and employers is an important step towards improving education, raising the skills of the U.S. workforce, and expanding opportunity. The question is: how?

Earlier this month, we convened an expert group of policy makers, practitioners and scholars to address this question. Over the next few weeks, we will share insights gained from the session, by publishing Q&A’s with thought leaders on this topic.

First up, Kate Blosveren Kreamer. Kate is the Associate Executive Director of the National Association of State Directors of Career Technical Education Consortium (NASDCTEc). Yes, she does manage to fit that on a business card.

A: There is no question that too few students have a chance to explore careers before leaving high school, which is a missed opportunity in multiple ways. It means too many students—from those enrolling directly in four-year institutions, as well as those in less traditional routes—are unaware of the best career opportunities available in their region and are making uninformed choices.  There’s a reason that the average age of GED test takers is 26 and community college students is 29; many of these individuals left high school and entered a job that failed to offer advancement, requiring them to make a mid-course adjustment.

Or, to put it another way, imagine a world where all students had a chance to learn about various industries and careers by engaging with employers, participating in work-based learning experiences or applying academic knowledge in those career contexts. Not only would this allow more students to find their paths earlier, but it would also enable students to decide what they don’t want to do before spending their money or loans on the wrong college major, or skipping the necessary postsecondary education and training all together. We might have fewer pre-med students, but we would also likely have lower student debt.

A: It is absolutely viable—and critical if we are to close the skills gap and ensure our education system is preparing individuals for high-wage, high-skill careers.

While there are limitations in making international comparisons, what makes the Swiss or German apprenticeship models so successful is that their employers truly have co-ownership in their CTE systems because they understand the value of investing time and resources as a way of ensuring their talent pool and bottom line. This is a paradigm shift from how many U.S. companies view the education system—both at K-12 and postsecondary levels—although models are emerging in communities such as Nashville, Tennessee and Charlotte, North Carolina where employers are engaging in meaningful ways to inform program design and ensure program effectiveness at the institution and system level. It’s critical we lift up these models to other employers so they can see engagement that goes well beyond philanthropy to an investment in their future success. 

     

 

 

Good morning Chairman Alexander, Ranking Member Murray, and distinguished Members of the Committee. Thank you for giving me the opportunity to be here today to share my thoughts on this very important issue. 

My name is Beth Akers.  I am a fellow at the Brookings Institution where I carry out research on the topic of higher education, with a particular focus on student loans.  I’ve been engaged in research related to higher education policy since 2008 when, in my role as Staff Economist at the Council of Economic Advisers, I assisted the Department of Education as they quickly implemented the Ensuring Continued Access to Student Loans Act.  My testimony is informed by the time that I’ve spent engaged as a researcher in this field, first as a graduate student in the Economics Department at Columbia University and then as a Fellow at the Brookings Institution. 

Over the past two decades there’s been a dramatic increase in the share of young U.S. households with education debt.  The incidence has more than doubled, from 14 percent in 1989 to 38 percent in 2013 (Table 1). Not only are more individuals taking out education loans, but they are also taking out larger loans. Among households with debt, the mean per-person debt more than tripled, from $5,810 to $19,341 during the same period (2010 dollars). Median debt grew somewhat less rapidly, from $3,517 to $10,390 (Figure 1, Table 1). Among all households, including those with no debt, mean debt increased eightfold, from $806 to $7,382 (Table 1).

Figure 1. Trends in Education Debt over Time, 1989-2013

Notes: Based on households age 20-40 with education debt.
Source: Akers and Chingos 2014b

Only a trivial number of households had more than $20,000 in debt (per person) in 1989/1992, whereas in 2013, almost one third of those with debt had balances exceeding $20,000 (the change in the distribution is illustrated in Figure 2). The incidence of very large debt balances is greater now than it was two decades ago, but it is still quite rare.  In 2013, seven percent of households with debt had balances in excess of $50,000 and two percent had balances over $100,000 (Akers and Chingos 2014b).

Figure 2. Distribution of Debt, 1989/1992 and 2013

Notes: Based on households age 20-40 with education debt. All amounts are in 2010 dollars.
Source: Akers and Chingos 2014b

The large increases in education debt levels over the last two decades are often attributed to the increases in tuition charged by colleges and universities. There is also evidence that college students are relying more on debt to finance college costs and paying less out-of-pocket (Greenstone and Looney 2013b), suggesting that student behavior is changing in ways that favor loans over other ways of paying for college. Furthermore, there have been shifts in the level of educational attainment and demographic characteristics of the U.S. college-age population that could impact observed student borrowing.  Estimates suggest that roughly one-quarter of the increase in student debt since 1989 can be directly attributed to Americans obtaining more education (both through increased enrollment and increased levels of attainment) while increases in tuition can explain 51 percent of the increase in debt observed during this period (Akers and Chingos 2014a). 

Recognizing that the increases in borrowing are driven by multiple factors, some of which are less concerning than others, highlights an important point.  The growth in student loan debt is often discussed as a problem in and of itself. However, to the extent that borrowers are using debt as a tool to finance investments in human capital that pay off through higher wages in the future, increases in debt may simply be a benign symptom of increasing expenditure on higher education.  On the contrary, if these expenditures were spent in ways that don’t pay dividends in the future, then the observed growth in debt may indicate problems for the financial future of borrowers.   

Positive Return on Investment

The most direct way to examine whether borrowers are using debt to finance investments that will pay off is to measure the financial return that their investment will yield in terms of lifetime earnings (relative to what they would have earned if they had not enrolled in a program of higher education) and compare it to the upfront cost of enrollment.  Despite the recent recession, the significant economic return to college education continues to grow, implying that many of these loans are financing sound investments. In 2011, college graduates between the ages of 23 and 25 earned $12,000 more per year, on average, than high school graduates in the same age group, and had employment rates 20 percentage points higher. Over the last 30 years, the increase in lifetime earnings associated with earning a bachelor’s degree has grown by 75 percent, while costs have grown by 50 percent (Greenstone and Looney 2010). There is also an earnings premium associated with attending college and earning an associate’s degree or no degree at all, although it is not as large (Greenstone and Looney 2013a). These economic benefits accrue to individuals, but also to society, in the form of increased tax revenue, improved health, and higher levels of civic participation (Baum, Ma, and Payea 2013). 

Studies that seek to identify the causal relationship between education and earnings draw similar conclusions.  A recent study, published by researchers at the Federal Reserve Bank of New York in 2014, suggested that the financial return on a college degree, when expressed as a rate of return, was 15 percent and had held steady at that level (a historic high) for the previous decade.  A valuable insight from this work is that the return on college has not fallen, despite the growing cost of attendance and stagnant earnings growth across the economy.  This counterintuitive result is driven by the decline of earnings among workers without college degrees (Abel and Deitz, 2014).  These statistics indicating large financial returns on investments in higher education suggest that, for the average student, college will pay for itself in the long run. 

Month-to-month Affordability of Student Debt

The long run financial return is an important indicator of affordability, but it could potentially obscure more transient challenges faced by households. For example, an increase in debt may be affordable in the long run but impose monthly payments that squeeze borrowers in the short run, especially early in their careers when earnings are low. However, month-to-month affordability of student debt does not seem to have declined in recent history.  The ratio of monthly payments to monthly income has been flat over the last two decades (Figure 3, Table 2). Median monthly payments ranged between three and four percent of monthly earnings in every year from 1992 through 2013.  Mean monthly payments, which are larger than median payments in each year due to the distribution being right-skewed, declined from 15 percent in 1992 to 7 percent in 2013 (Akers and Chingos 2014b).

Figure 3. Monthly Payment-to-Income Ratios, 1992-2013

Notes: Based on households age 20-40 with education debt, wage income of at least $1,000, and that were making positive monthly payments.
Source: Akers and Chingos 2014

The ratio of monthly payments to monthly income stayed roughly the same over time, on average, at each percentile and for each education category. By this measure, the transitory burden of loan repayment is no greater for today’s young workers than it was for young workers two decades ago. If anything, the monthly repayment burden has lessened.

This surprising finding can be explained in part by a lengthening of average repayment terms during the same period. In 1992, the mean term of repayment was 7.5 years, which increased to 12.5 years in 2013. This increase was likely due primarily to loan consolidation, which increased dramatically in the early 2000s (Department of Education 2014, S-16). Loans consolidated with the federal government are eligible for extended repayment terms based on the outstanding balance, with larger debts eligible for longer repayment terms.  Average interest rates also declined during this period, which would also lower monthly payments (Table 3).

In order to appreciate how much of a burden monthly payments place on households, it’s useful to compare student debt payments to other household expenses.  In Figure 4 average monthly student loan payment (based on data from 2010) is plotted together with the average monthly expenditure in each major consumption category (this data comes from the 2012 Consumer Expenditure Survey, which is administered by the Bureau of Labor Statistics).  The largest categories of monthly consumption expenditure are housing ($1,407), transportation ($750) and food ($588).  Monthly student loan payments are relatively small compared to these expenses, and at $242, are closer in scale to monthly spending on entertainment ($217), apparel ($145) and health care ($296).  There is relatively little variation in monthly loan payments (due to consolidation with longer repayment terms for larger debts) (Akers 2014a). 

Figure 4. Average Monthly Expenditures and Student Loan Payments

Data: 2010 Survey of Consumer Finances and 2012 Consumer Expenditure Survey
Source: Akers 2014a

Student Debt is a Poor Indicator of Economic Hardship       

It might seem reasonable to be most concerned about the plight individuals with large outstanding student loan balances, but evidence suggests that these individuals may not be faring any worse than households with smaller balances or no student debt at all.  The highest rates of financial distress, as indicated by late payments on household financial obligations, are seen among households with the lowest levels of student loan debt.  Households with large debts tend to have higher levels of educational attainment and earnings, on average, and miss bill payments less often.  Among households with outstanding education debt in the lowest quartile of the debt distribution ($0 - $3,386), 34 percent report having made a late payment on a financial obligation in the past year compared with 26 percent of households with education debt in the highest quartile (≥$18,930).  Households with student loan debt do not show indications of financial distress more often than households without student loan debt (Akers 2014b).          

This body of evidence contradicts the notion that a crisis of college affordability exists on a macro level.  However, it is undeniable that many individuals and households are facing serious economic hardship that can be explained completely or in part by their spending on higher education.  Like any other investment, the returns to higher education are not guaranteed.  While the average student will see a large financial return on the dollars they spend on higher education, some students will find that their investment won’t pay off.  We can reduce the frequency of this occurrence by ensuring that students have the information and resources they need in order to make good decisions about college enrollment.  For instance, a national level data base that reports earnings by institution would succeed in helping student to avoid enrolling at institutions that do not have a track record of success.  This would succeed in creating more institutional accountability without additional government intervention. 

An additional way to improve outcomes for students is to simplify the federal lending program both on the front end, with the menu of services, and also on the backend with a more streamlined system of repayment.  Recent work on this issue has revealed that students have relatively little understanding of their financial circumstances while they are enrolled in college.  About half of all first-year students in the U.S. seriously underestimate how much debt they’ve taken on.  Even more concerning is the fact that among all first-year students with federal student loans, 28 percent report having no federal debt and 14 percent report that they have no debt at all (Akers and Chingos 2014c).  Removing the complexity of the federal aid system could potentially succeed in making it easier for students to comprehend their circumstances and to make better informed decisions. 

However, some of the uncertainty about the payoff of college is unavoidable.  For example, some students will invest in developing skills that will ultimately become obsolete due to unanticipated technological or policy innovation.  It’s important that the government provide insurance against these types of occurrences both for the sake of ensuring individual welfare and also to discourage debt aversion among potential students.  Income driven payment programs, like the ones currently in place for the federal student lending program, are the appropriate tool for providing a safety net to borrowers.     

In sum, college is affordable in the sense that on average it will pay for itself in the long run with heightened wages.  However, to ensure that college is universally affordable ex-post, it’s necessary to maintain a robust system of income driven repayment such that students are insured against their investment not paying off.  Lastly, we need to ensure that both the system of federal lending and the safety nets that exist to support it are simple enough that the benefits of these policy innovations can be fully realized. 

References

Jaison R. Abel and Richard Deitz, “Do the Benefits of College Still Outweigh the Costs?” Federal Reserve Bank of New York Current Issues in Economics and Finance, vol. 20, no. 3 (2014), available at http://www.newyorkfed.org/research/current_issues/ci20-3.html.

Elizabeth Akers and Matthew M. Chingos. 2014a.“Is a Student Loan Crisis on the Horizon?” Brown Center on Education Policy, Brookings Institution, available at http://www.brookings.edu/research/reports/2014/06/24-student-loan-crisis-akers-chingos.

Elizabeth Akers and Matthew M. Chingos. 2014b. “Student Loan Update: A First Look at the 2013 Survey of Consumer Finances.” Washington, DC: Brown Center on Education Policy, Brookings Institution, available at http://www.brookings.edu/research/papers/2014/09/08-student-loan-update-akers-chingos.

Elizabeth Akers and Matthew M. Chingos. 2014c. “Are College Students Borrowing Blindly?” Washington, DC: Brown Center on Education Policy, Brookings Institution, available at http://www.brookings.edu/research/reports/2014/12/10-borrowing-blindly-akers-chingos.

Elizabeth Akers. 2014a. “They Typical Household with Student Loan Debt.” Washington, DC: Brown Center on Education Policy, Brookings Institution, available at http://www.brookings.edu/research/papers/2014/06/19-typical-student-loan-debt-akers.

Elizabeth Akers, 2014b. “How Much is Too Much? Evidence on Financial Well-Being and Student Loan Debt.” Washington, DC: Center on Higher Education Reform, American Enterprise Institute, available at http://www.aei.org/publication/how-much-is-too-much-evidence-on-financial-well-being-and-student-loan-debt/.

Sandy Baum, Jennifer Ma and Kathleen Payea. 2013. "Education Pays, 2013." Washington, DC: The College Board, available at https://trends.collegeboard.org/sites/default/files/education-pays-2013-full-report.pdf.

Department of Education. 2014. “Student Loans Overview: Fiscal Year 2015 Budget Proposal.” Washington, DC: U.S. Department of Education. http://www2.ed.gov/about/overview/budget/budget15/justifications/s-loansoverview.pdf (accessed June 13, 2014).

Michael Greenstone and Adam Looney. 2010. “Regardless of the Cost, College Still Matters.” Brookings on Job Numbers blog, October 5. http://www.brookings.edu/blogs/jobs/posts/2012/10/05-jobs-greenstone-looney.

Michael Greenstone, and Adam Looney. 2013a. “Is Starting College and Not Finishing Really that Bad?” Washington, DC: Brookings Institution, Hamilton Project, available athttp://www.hamiltonproject.org/files/downloads_and_links/May_Jobs_Blog_20130607_FINAL_2.pdf

Michael Greenstone, and Adam Looney. 2013b. “Rising Student Debt Burdens: Factors behind the Phenomenon.” Brookings on Job Numbers blog, July 5, available athttp://www.brookings.edu/blogs/jobs/posts/2013/07/05-student-loans-debtburdens-jobs-greenstone-looney.

     

 

 

Late last year, researchers at the University of South Carolina and the University of California, Los Angeles, published a report^[1] on the relationship between student loan debt and psychological well-being.  This study comes in the midst of a plethora of new research attempting to quantify causal relationships between student loan debt and personal outcomes (including home ownership,^[2] entrepreneurship and the macro economy).  Despite the intense interest in this issue among researchers, this is the first paper that attempts to understand the emotional cost of carrying student loan debt.  This question is, in fact, more fundamental than the others being posed in this genre of research, since it could help to explain the mechanism through which debt may be affecting other outcomes.  Using a strict classical lens to examine this issue might lead one to conclude that the true cost of carrying debt could be measured in strictly financial terms.  However, the widespread and growing discontent among households with student debt paired with the evidence that the financial circumstances of borrowers haven’t radically worsened^[3] suggests that an alternate lens may be necessary.  In particular, a lens that considers the possibility that student loans take an emotional toll on borrowers, even when wealth is held constant.^[4]     

The new study, carried out by Katrina M. Walsemann, Gilbert C. Gee and Danielle Gentile, uses data from the National Longitudinal Survey of Youth (1997) to examine the relationship between student loan debt and self-reported psychological health.  Survey respondents were asked to answer 5 questions relating to emotional health^[5] and the categorical responses were used to generate an index of psychological well-being.  Regression analysis was then used to examine the relationship between this measure and debt, including both cumulative borrowing and annual borrowing during in-school periods.   

Based on their analysis, the authors report, “cumulative student loans were significantly and inversely associated with better psychological functioning.”  In other words, individuals with more student debt reported lower levels of psychological health, when other things are held constant (including occupation, income, education and family wealth).  The effect is statistically significant, but it is quite small.  They also find that “the amount of yearly student loans borrowed was inversely associated with psychological functioning,” which implies that taking on debt is emotionally costly for students. 

This work takes an important first step in helping us to understand the emotional toll of student loan debt, but could benefit from an alternative framework for evaluation.  The researchers attempt to control carefully for covariates that are closely related to psychological well-being and debt.  With this approach, they are effectively examining the relationship between debt and psychological well-being while holding all else constant, including income.  On one hand, this is good, because we know that income is independently related to well-being.  On the other hand, it means that the variation in education debt that is being examined in the study is being driven by variation in wealth, which we also know is related to psychological well-being.  As a result, this research falls short of being able to tell us whether student loan debt pays an emotional toll that is any greater than the toll imposed by other debts or financial obligations. 

An alternative framework, which is arguably more difficult to implement, would hold wealth constant while varying debt.  Since this may seem like a semantic difference, I’ll provide an example.  Consider that an individual, Sally, could be in one of two scenarios.  In the first, she earns a monthly income of $1,000 and has no debt.  In the second, she earns $1,500 each month but has to make a $500 payment on a student loan each month (assume that this payment is made in perpetuity for the sake of simplicity).  The level of wealth is constant between the two scenarios, but she has a debt obligation in one and not in the other.  The question that is relevant to policymakers is; which of these scenarios does Sally prefer?  Or alternatively, by how much does she prefer the scenario in which she doesn’t carry any debt?  This example is overly simplistic, but with a slightly more realistic example, one could also ask how Sally’s distaste for the scenario that includes indebtedness would change if the period (duration) of the loan were different or if payments were building equity in a transferable asset (i.e. a car or house). 

The answers to these questions will tell us how concerned we need to be about the growing reliance on debt as a means for financing investments in human capital.  While debt is an efficient mechanism for enabling access to higher education, it may be the case that debt imposes emotional costs that counter some of the benefits of this efficient mechanism.  If research ultimately indicates that carrying debt imposes a significant emotional cost to borrowers, then there may be a role for policymakers to provide some relief.  One option would be to alleviate the emotional toll of debt through changing the tone of the public discourse on this issue.  The treatment of student debt by the popular media has almost certainly caused some borrowers to worry about their debts more than they would have otherwise.  It may be possible to alleviate some concerns about debt through educational programs that help borrowers to better understand their circumstances and the safety nets that are available to them.  Alternatively, instruments other than personal debt have the potential to alleviate an emotional tax.  For instance, income share agreements, or even a more socialized system for financing education, could succeed in achieving this end.  However, all of this should wait until research can tell us a more conclusive story about this issue. 

     

 

 

In this video segment, Brown Center Director Russ Whitehurst and Scholars Beth Akers and Matthew Chingos candidly discuss the problems facing the higher education market in the U.S., and propose their favored solutions. 

An audio-only version of this discussion can be listened to below, or downloaded here.

     

 

 

Earlier this year, I coauthored a report that questioned the national dialogue about a pending student loan crisis.  This report revealed evidence that ran counter to the notion that the majority of borrowers with student loan debt were struggling financially, or that the condition of borrowers has been deteriorating over time.  Our analysis showed that onerous debt burdens were less common than many imagined, with only seven percent of young borrowers holding balances in excess of $50,000.  We also found that the widely publicized increases in borrowing seen over the past two decades were accompanied, for the most part, by increases in earnings, despite stagnant growth in wages in the broader economy.

Many observers criticized our work, suggesting that the conclusions belittled the very real challenges that many borrowers are facing.  But these borrowers are precisely the reason we need to move beyond the broad notion of a crisis in our system of student loans in order to focus on developing solutions to the real problems.  Focusing on a broad crisis when none exists has produced policy proposals that miss the mark in terms of providing relief where it is actually needed.^[1]  Understanding the reality of student lending will allow policy makers to work on addressing the real problems in student lending instead of using excessively blunt tools to tackle the elusive “student loan crisis.”  A report that I released earlier this week, with co-author Matthew Chingos, reveals such a problem.   

Our new report, “Are College Students Borrowing Blindly?,” reveals surprising new evidence that college students have little awareness of their financial circumstances.^[2]  Our analysis is based on survey data from a selective four-year public university as well as data from the most recent (2011-12) National Postsecondary Student Aid Study (NPSAS), which is based on survey and administrative data for a nationally representative sample of college students. 

We find that college students are largely unaware of the price they are paying for matriculation, the debt that they are taking on to finance their degrees, and, in some cases, the fact that they are borrowing at all.  We find that only a bare majority of respondents (52 percent) at a selective public university were able to correctly identify (within a $5,000 range) what they paid for their first year of college. The remaining students underestimate (25 percent), overestimate (17 percent), or say they don’t know (seven percent).  Using nationally representative data, we find similar results.  Half of all first-year students in the U.S. seriously underestimate how much student debt they have, and less than one-third provide an accurate estimate within a reasonable margin of error.  The remaining quarter of students overestimate their level of federal debt.  Lastly, we find that among students with federal loans, 28 percent reported having no federal debt and 14 percent said they didn’t have any student debt at all.

Respondent Estimates of Debt Relative to Actual Values

Our research cannot explain why so many students are unaware of their financial circumstances.  There are many potential explanations, some more concerning than others.  One possibility is that young people simply don’t have the level of financial savvy that would be necessary to comprehend the trade-offs involved with higher education.  For instance, many college students, especially those who enroll immediately following high school, have never had the experience of managing household finances, making it difficult for them to appropriately process and retain information about price and debt.  Alternatively, some students may lack awareness because their parents are the ones managing these decisions.  This could include both parents prompting students to take out loans that the parents plan to assume responsibility for repaying, as well as parents who advise students about where to go to college and how much debt to incur, with the expectation that the student will eventually repay the debt.  Regardless of the reason, this lack of literacy regarding the financial trade-offs of higher education should be concerning for students, parents, university administrators, and policymakers alike.

There are three potential consequences of misinformation about price and debt.  The most obvious is that students may make expensive mistakes that they will later come to regret.  Broadly speaking, students without this information will be unable to decide whether a degree program they are pursuing is worth the investment.  Unfortunately, the realization of mistakes of this nature may not come until it is too late and students are stuck with the bill.  Income based repayment and loan forgiveness programs provide relief to borrowers who face dire circumstances, but there is likely a broader population of borrowers whose regret is driven by factors other than financial distress.  For instance, students who borrow large sums to pay for professional degrees may feel stuck in career paths they don’t enjoy because they would be unable to comfortably repay their debt if they were to pursue a different path.

The second unfortunate consequence of misinformation about debt in particular is the unpleasant surprise that occurs when borrowers ultimately realize the financial burden that they have accumulated.  Our findings that many students underestimate their borrowing suggest that many borrowers are unpleasantly surprised when they learn that the financial burden of student loan debt is greater than they had imagined.  This has undoubtedly contributed to the sense of victimization expressed by many student loan borrowers in the popular press.  Whether the investment paid off in the end (financially or otherwise), the experience of being unpleasantly surprised by the reality of your financial circumstances is likely to have an impact on your behavior regarding employment and consumption, and attitudes toward debt.  The frequency of this experience and the resulting dialogue may be sending the wrong message to prospective students about the value of debt as a tool for accessing higher education.

The final, and perhaps most concerning, consequence of misinformation is its likely effect on prices.  The U.S. system of higher education functions as a market with minimal regulation over price and oversight of quality.  In order for a system like that to produce good outcomes, it is necessary that consumers (students) police the market.  In order for price to remain in line with value, students must be sensitive to both price and quality and choose institutions accordingly.  If students are unable to adequately judge quality and are insensitive to or unaware of price, then the mechanism that ensures good value will fail to function, resulting in symptoms like tuition inflation and the continued presence of institutions that do not provide value.  In this light, students’ misinformation about price should be of tremendous concern to policymakers. 

The student loan market may not be headed for a crisis, but it is certainly facing some real challenges.  It’s time to move on from seeking solutions to the elusive student loan crisis and start crafting solutions to the real problems , like misinformation, that borrowers are facing today.  Rather than focusing efforts on providing financial relief based on the notion that hardship is widespread among borrowers, this evidence tells us that we need to take steps to develop a culture of informed and critical decision making in higher education.

     

 

 

Improving the college search process by making college costs more transparent to potential students and their families has been a primary focus of recent higher education policy efforts. But the importance of this information does not end at the university gates. In order to make prudent decisions about what to study, how many courses to take, and what kinds of jobs to pursue, college students should continue to bear in mind the cost of their education and the loan payments they will eventually have to make as they progress through school. But do they?

In this analysis, Elizabeth Akers and Matthew Chingos draw on data from two sources that link student survey responses to administrative records on costs and borrowing. Their findings suggest that a significant share of undergraduate students do not understand how much they are paying for college or how much debt they are taking on. Specifically, the authors find that:

1. Only a bare majority of respondents (52 percent) at a selective public university were able to correctly identify (within a $5,000 range) what they paid for their first year of college. The remaining students underestimate (25 percent), overestimate (17 percent), or say they don't know (seven percent).
2. About half of all first-year students in the U.S. (based on nationally representative data) seriously underestimate how much student debt they have, and less than one-third provide an accurate estimate within a reasonable margin of error. The remaining quarter of students overestimate their level of federal debt.
3. Among all first-year students with federal loans, 28 percent reported having no federal debt and 14 percent said they didn’t have any student debt at all.

Students who do not have a good idea of their level of borrowing are likely to be surprised or even fearful when their first loan payments come due, which may impose an emotional burden on borrowers. More broadly, it may perpetuate popular narratives about crushing student loan burdens, which could discourage promising students from pursuing a college education.

Downloads

• Download the Report

     

 

 

In response to growing concerns over the issue of higher education finance, policy makers, advocates, and entrepreneurs have developed and proposed an array of solutions to address the shortcomings of our current system.  Income Share Agreements (ISAs) are one such proposal that deserves more attention.  ISAs allow students to raise funds to pay for their degrees by selling “shares” in their future earnings.  This solution is sometimes dismissed as a gimmick, akin to indentured servitude, despite the fact that it has the potential to offer improvements over traditional loans in terms of shielding students from risk and providing information about quality, two widely held objectives among advocates and policy makers.

ISAs are financial instruments that can be administered by the government or by private financial institutions, just like loans, savings accounts and insurance policies.  Their defining characteristic is that an individual gains access to capital, cash to pay for college, in exchange for a promise that they will pay back a fraction of their earnings for a prescribed period of time to the entity that administered the agreement.  Unlike a loan, where the total to be repaid is known up front, individuals who use ISAs to “borrow” money will pay back an amount that depends on their actual earnings.  A graduate who earns less than expected will pay back less than the full amount of the initial funding, while graduates who earn more than expected will pay back more than their share.  ISAs are not broadly used in the United States, but are being used in a few particular settings, including trade schools that train web developers in exchange of 18% of their first-year income, and a non-profit who funds low-income students in California.    

ISAs are not a new invention, with contracts of this nature first proposed in the 1950s by Milton Friedman as a solution to the problem of students being unable to borrow against their future earnings to pay for college.^[i]  ISAs enable students to effectively collateralize their financing with future earnings, just as home buyers collateralize their mortgage with the house itself.  From the student’s perspective, ISAs offer protection similar to the protection offered by the existing Federal Loan programs.  In theory, an ISA could be structured such that the cash flows were similar to those of a traditional federal loan with income based repayment, if that were the desired objective.  However, the reason to think more carefully about ISAs is that they have the potential to provide benefits beyond those afforded by traditional loans.

As college becomes more expensive and families are less able to finance college out of their income and savings, there is a growing concern about the risk inherent in investments in higher education. For some, the real risk of facing poor labor market outcomes (low wages or unemployment) but still having to repay educational debt will discourage them from enrolling in the first place.  And those who do enroll and borrow to pay for college may end up with excessive risk in their wealth portfolio, a fact that is especially true among borrowers with private debt, due to their lack of safety nets. Investments in education that pay off in heightened future wages are inherently risky and increasingly require relatively large initial investments.  The lack of adequate insurance against poor returns to investments in higher education means that these young people are putting all of their eggs in one basket.

Programs like Income Based Repayment and payment deferral for federal loans solve part of the problem by acting as insurance policies for borrowers, transferring some of the financial risk of an educational investment from the student to taxpayers. However, students do not seem to take advantage of these programs, a fact that policy makers and researchers are working to understand.  At the same time, however, these programs, which are offered without regard of the student’s future income prospects, create perverse incentives that can lead to tuition inflation.^[ii] 

ISAs provide an elegant solution to the first problem by allowing students to access their future earnings and simultaneously providing insurance against bad financial outcomes.  The fact that payments go up when income is high and down when income is low amounts to an effective “hedge” for the risk associated with the educational investment.  Institutions that would administer ISAs have a greater ability to diversify risk than individuals, so agreements can be structured such that they are both advantageous to a student and also profitable to the administering institution (i.e., the taxpayer, or a private entity).  In other words, ISAs need not “take advantage” of borrowers in order to be financially sustainable.

Among the set of challenges facing higher education is that students make decisions regarding enrollment using an insufficient set of information, particularly on the dimensions of quality and financial return.  The result is that many students face poor outcomes that could have been predicted and therefore avoided.  Correcting this situation requires surmounting two challenges.  First, students do not generally have access to the information necessary to make an informed decision.  Government databases created to help students decide where and what to study lack information on graduates’ financial outcomes that would be necessary to adequately weigh tradeoffs.  Second, the tradeoffs that students shopping for college need to consider can be complex.  For instance, students must recognize that they should take into account both price and expectations about future outcomes.  ISAs have the potential to help address each of these challenges.

In the current system, there is almost no incentive for any institution outside of the government to collect, analyze and disseminate information on the financial rate of return to various programs of study.  A broad market for ISAs could change that.  Institutions that administer ISAs would need this information in order to appropriately set the terms of financing agreements.  For instance, degrees with large financial returns, due either to low price, high wage reward, or both, could be paid for with only a small percentage of income committed to repayment (PIC).  Alternatively, programs that offer little financial value (due either to high price, low wage reward, or both) would prompt an agreement that collected a relatively large PIC.  This system might appear to penalize students who choose fields associated with lower pay (i.e., they would be required to pay a higher fraction of their earnings), but it really penalizes students who choose fields for which costs are high relative to future income.  Thus, in the long run ISAs could encourage institutions to price programs based on the labor market return (i.e., disciplines that tend to lead student into lower paying occupations could reduce tuition).^[iii]  The financial success of the ISA-administering financial institution would depend on its ability to accurately predict a person’s future earnings and to price the agreement appropriately.  Over time, institutions administering ISAs would generate the data necessary to develop reliable measures of labor market returns, which would be conveyed to students through pricing.^[iv]

This pricing mechanism can succeed in easing the challenge faced by students in considering the options for college enrollment.  Under a set of simple assumptions, the PIC provides a measure of quality, in terms of financial return, that is comparable across institutions and programs.  For example, in a competitive market, the PIC for a student enrolling in a program that is 20 percent more expensive than the average cost of similar programs, but where graduates make only average earnings upon graduation, will be 20 percent higher.  The signal received by the student would be quite clear: if you attend the first school, you can expect to pay 12 percent of your income, if you attend the second one you can expect to pay 10 percent of your income.  Prospective students who are considering a set of institutions and programs of study can compare the PIC across the agreements offered for each program of study and make inferences about their relative quality (in terms of financial return).  This enables borrowers to calculate tradeoffs using only a single, intuitive statistic.^[v]  It is conceivable that this simplified method of information provision could succeed in getting individuals to make better personal decisions, but could also succeed in enabling forces of competition to rein in tuition inflation by keeping prices in line with value.

Some research has indicated that debt can impose a psychological cost that causes borrowers to act as if debt payments impose more of a burden than other types of expenses.^[vi]  There is relatively little research on how borrowers respond to education debt in particular, but it is reasonable to wonder how this might be affecting borrower well-being (and even the macro economy).  One approach to improving the well-being of borrowers is to alleviate this psychological burden.  Research indicates that framing of debt, the way in which the financial obligation is described, can be critical to the borrower’s attitude toward debt.^[vii]  Given this, it is conceivable that those financing investments in higher education would be better off with an ISA than with a loan, even if the expected cost is the same.  This is an important area for further study.  

As we face the challenges of reforming our system of higher education finance to meet the needs of today’s students, no potential solutions should be left off the table.  Regulatory obstacles that could be easily addressed by Congress are the primary reason that ISAs have not been employed more broadly.  These obstacles would be eliminated if Congress would pass legislation that would provide adequate protections for individuals engaging in ISAs as well as   regulatory clarity that would give private institutions the certainty necessary to justify investments in this industry.  Because of the subsidies in the federal loan program, most students would only elect an ISA over a traditional loan if they were tapping into the private market for loans, which means that ISAs would not displace any of the benefits students currently receive. Enabling ISAs to operate more broadly in the United States will enable policy makers, advocates and researchers to explore their potential for improving the well-being of those who choose to finance investments in higher education.  

If the use of ISAs is broadly adopted, it will be important to study how ISAs impact behavior and well-being.  The financial crisis leading to the Great Recession taught us the lesson that the advantages of innovative financial products, like collateralized debt obligations (CDOs) and balloon payment mortgages, can vanish if consumer and financial institutions are not savvy enough to utilize them properly.  ISAs face a similar challenge.  ISAs may not be the silver bullet that will solve all of our collective concerns, but they should have a place in the landscape of services available in the heterogeneous market for higher education. 

This piece benefited greatly from conversations with Miguel Palacios, Assistant Professor of Finance at the Owen Graduate School of Management, Vanderbilt University, and Co-Founder of Lumni Inc.