The student loan non-crisis

Jun 25, 2014 21:54 UTC

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There’s a new Brookings paper out this week, which somewhat controversially comes to the conclusion that student loans might not be the generation-stifling, nationwide debt crisis it’s made out to be. There are some surprising findings, including the fact that incomes for college-educated workers have increased alongside student loans, such that “earnings received over the course of 2.4 years would pay for the increase in debt incurred.”

Monthly payments have also stayed about the same over the last two decades. This last point is not because the amount of debt is the same, but because loan terms are longer on average. “I think they underplay the significance of this shift – student loans are now looking more like traditional mortgages in terms of their repayment periods,” says Christopher Ingraham.

Student debt is definitely a problem, but “we do think that the data undermine the prevailing sky-is-falling-type narrative around student debt,” Brookings fellow Matthew Chingos tells David Leonhardt. Where the problem does exist, the more worrying group is not the graduates with huge amounts of debt, but “the hundreds of thousands of people who emerge from college with a modest amount of debt yet no degree,” writes Leonhardt. Matt Phillips agrees, writing that it’s unfortunate that many who write about student debt likely have huge student loans to pay down (associated with fancy degrees), which biases their coverage. He thinks the answer to the student loan crisis is increased funding for state schools.

Then, of course, there’s Choire Sicha, who says quite bluntly that the study is garbage due to flawed methodology. One of the more cogent points that Sicha makes is that the report appears to sample only borrowers in households headed by people under 40, thereby excluding young people still living with their parents, as well as borrowers who have stopped paying their loans. But academic Fredrik deBoer does a point-by-point rebuttal of most of Sicha’s claims about the research methodology and finds them unpersuasive. Student debt is a huge problem, says deBoer, but people (the media, us, perhaps) “generally represent the problem in ways that are not supportable from data.” For example, he says, people with six-figure debt are actually quite rare, and “the housing bubble was orders of magnitude bigger than the student loan crisis.”

All of this said, Chadwick Matlin writes about his own experience with $124,000 in student loan debt, which he paid off in six years: “I’m the outlier, the best-case scenario, the happy ending, and still I’m left without much in savings, since it all went to the accelerated repaying of the loans,” he writes. He also notes in the accompanying tweetstorm that even if this isn’t a macroeconomic crisis, it is a crisis for plenty of individuals (especially those who go to for-profit schools). And that’s worth talking about. — Shane Ferro

On to today’s links:

Niche Markets
The odds of Luiz Suarez biting someone at the World Cup were 175/1 and at least one Norwegian man is really happy today - Metro UK

Sovereign Debt Problems
How the US justice system is upending international finance - Felix Salmon

Copy Wrong
The Supreme Court just killed Aereo - SCOTUS

Primary Sources
The full BEA release on the third revision of first-quarter GDP, which is down 2.9%, mostly because of a drop in health care spending - BEA

Why the health care spending estimate was so wrong - Brett Logiurato

Here’s why it’s so hard to land a job - Shane Ferro

New caps for graduates

Jun 11, 2014 22:28 UTC

On Monday, President Obama signed an executive order capping student loan payments at 10 percent of the borrower’s income and allowing debts to be forgiven after 20 years of payments. Income-based repayment — what the administration calls the “Pay-As-You-Earn Program” — is already an option for most borrowers. This order expands it for another 5 million people, mostly those who took out loans before October 2007.

Libby Nelson writes that it’s unclear how much this plan will really help those who need it. “Enrollment rates in income-based repayment plans [that already exist] have increased after an Education Department outreach blitz, but far more people are eligible than are enrolled”. For those who do sign up, borrowers who have the highest overall payments —  mostly law and business graduates — will benefit most, says Karen Weise. Kelly Field writes that that means this program isn’t necessarily helping those who need it most: graduates with moderate debt burdens compared to MBAs and lawyers, but much lower incomes.

Megan McArdle says the student loan problem is “still disproportionately a problem of the affluent. And the government already spends quite a lot of money on benefits for the affluent”. Kevin Drum says he partly agrees with McArdle, but at the same time it’s clear that the high aggregate debt burden (now around $1.2 trillion, with staggering growth over the last decade) is having an adverse macroeconomic effect. Plus, he says, “no society is well served by making income a barrier to higher education”.  McArdle responds by saying the issue is the high cost of education, and shifting the cost burden to the government doesn’t help the fundamental problem. Reihan Salam agrees with McArdle. “America’s higher education institutions aren’t offering value for money. And that’s a problem that tinkering with the federal student loan program won’t solve”, he says, suggesting that colleges should be fined when students default.

James Pethokoukis posts a quote from Jaret Seiberg, a policy research analyst at Guggenheim Partners, who argues that this move will be bad for the housing market, since borrowers will take longer to pay off their debt, and therefore may have to wait longer for their finances to qualify for a mortgage. However, high student debt burdens may already be having an adverse effect on the housing market. A recent post from the New York Fed pointed out that 30-year-olds with student debt are less likely than other borrowers to have a mortgage (that’s the opposite from before the Great Recession). While Cardiff Garcia points out it’s hard to prove causation, John Carney and Justin Lahart at the WSJ suggest that millennials are a “lost generation” in the housing market, partially because of their high student loan debt. — Shane Ferro

On to today’s links:

The Hobbit Merger Agreement – SEC

In Transit
Cab drivers taking to the streets of America to protest Uber? Don’t count on it – Emily Badger

In the Clouds
Google may have bought SkyBox for its cloud service potential – Robinson Meyer

New Normal
We may be permanently poorer in the aftermath of the Great Recession – Matt O’Brien

Why renters are ending up in the suburbs: The houses have already been built, and they’re cheaper than ever – Kriston Capps

Is the future of bitcoin in Africa? – The Economist

“Already, reddit is abuzz with the prospect of ‘Speakcheesies’” – Carly Ledbetter

What if the 32 nations in this year’s World Cup faced off in…anything other than soccer? – WSJ

The Fed
Play around with your very own interactive monetary policy dashboard! – Brookings

Indebted for knowledge

Ben Walsh
May 14, 2014 21:50 UTC

Class of 2014, welcome to adulthood. You now owe your share of America’s $1.1 trillion in outstanding student debt. That’s up 361% since 2003. The average debt load per student twenty years ago was half of today’s $30,000, after adjusting for inflation.

“In the past,” Neil Irwin writes, “it was easy to ignore the role that student borrowing might play in the overall economy”. That’s no longer the case. While student loans may only be one-eighth the value of outstanding mortgage debt, student debt “is highly concentrated among a small slice of people — those in their 20s and 30s — who are the engines of a great deal of economic activity”, Irwin says.

Loads of student debt, on top of stagnant wages, is a pretty good way to stall household formation. David Dayen points out that, “only one-third of all millennials head their own household, a nearly 40-year low”. Getting your own place is a huge boost to the economy. It “adds about $145,000 to output that year as the spending ripples through the economy”, according to Catherine Rampell, who cites Moody’s data.

The NY Fed says the portion of 27-30 year-olds with mortgages has fallen to 22%, from 30% in 2008. Matt Zeitlin highlights a post-recession change in the data: “Before the recession, 30-year-olds with some student debt were more likely to own a home than those without… Since then, the pattern has been reversed”. Derek Thompson thinks there’s something else entirely going on: the divide in the housing market isn’t about student debt at all. Instead, there’s one market for housing loans to “corporations, who are buying at a historic rate; and one market for families, which is still quite sick”.

The sort of good news is that the awful job market for recent college grads is getting slightly less bad. The unemployment rate for last year’s college graduates fell to 10.9% in April, from 13.3% in 2012. That’s still higher than the national rate of 6.3%, but it’s the lowest it has been since before the crisis.

Jordan Weissman details what he calls Elizabeth Warren’s “smart, flawed, and obviously doomed student debt bill” seeking to lower borrowers’ rates. The bill is flawed, says Weissman, in its treatment of private lenders, and because it exists primarily as a piece of legislative trolling. Quartz’s Matt Phillips points to another idea: income-based repayment, which is already available for under some federal loan programs. Broadening the program to student debt guaranteed by the government, he says, is “important, radically sensible and long-overdue”.

The market — or at least some hedge funds — seem to think something interesting is going on. They’re piling into the student loan asset backed securities market. It not clear whether these funds think student loans are a great value, or the next crisis waiting to happen. — Ben Walsh

On to today’s links:

Easing Ain’t Easy
We still don’t know if QE works – Atlanta Fed

The GMO debate: corporate interests vs unscientific fearmongering – Molly Ball

An advance in shirt pins (and growing human prosperity) - Cafe Hayek

Our Dystopian Future
The frightening tyranny that would be Glass in the workplace – The Baffler

Mild Rebukes
Larry Summers on Piketty: the data is great, the forecast isn’t – Democracy Journal

“‘I don’t know what money means anymore,’ said an art dealer as he exited halfway through the auction” – Bloomberg

“If you have to use someone else’s authority to get a point across, there is little merit to the point” – Jack Dorsey

Possibly Useless Data
“Some 59% of bankers said their colleagues dressed less smartly than in 2009” – Financial Times

The student loan mill

Mar 17, 2014 21:39 UTC

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Last week, the Obama administration rolled out new regulations targeting low-performing colleges: the ones whose graduates have high default rates and huge debt levels relative to their incomes. Using those two data points, the government will start cutting off low-performing schools — many of which are of the for-profit variety — from federal loan and grant money in the next 2-3 years. The government is also  investigating ITT Tech for pressuring students to take out loans they couldn’t afford.

James Hamilton calls the new regulations “long overdue”, pointing out that since 2006, the student debt burden has grown from under 4% to more than 7% of GDP. For-profit colleges account for only 13% of higher ed students, he says, but make up a third of all student loans and half of all defaults. And, writes Hamilton, in 2012 student loans surpassed credit card debt as the fastest growing source of problem debt, with more than 10% of loans 90 or more days delinquent.

For-profit colleges saw huge enrollment bumps in the wake of the Great Recession, particularly from students older than 25. A recent New York Fed report suggested many displaced workers turned to for-profit institutions that both cost more and have fewer financial aid options. Students take on more debt, and yet “graduates of for-profits are more likely to earn less, default more, and experience unemployment more than their counterparts at public and non-profit institutions”.

The Obama administration isn’t alone in being worried about student loan debt, which has climbed to $1.2 trillion from just $240 billion in 2003 (check out our posts on this here and here). Two weeks ago, a coalition of progressive groups launched a campaign, “Higher Ed, Not Debt”. At the launch event, Elizabeth Warren said she’s co-sponsoring new legislation that would require institutions with high default rates to pay the government back some of the money they receive from federal loans.

Republicans are also worried. Marco Rubio released a proposal last month advocating that income-based repayment — which is already available, though borrowers have to apply and prove financial hardship — become the default  system for paying off loans. Under the system, monthly payments would be capped at a certain percentage of a person’s salary (the proposal uses 4% as an example, but doesn’t call for anything specific). Wisconsin congressman Tom Petri has a similar plan that goes one step further, deducting the payments from borrower’s paychecks.

There are problems with income-based repayment, writes Bloomberg View. For one thing, income-based repayment systems can mean borrowers take longer to pay off their loans and end up paying more in interest. However, the bipartisan commitment to finding a solution is a good thing, they say. — Shane Ferro

On to today’s links:

So Hot Right Now
Reverse mortgages are back, with a little help from the Fonz – Peter Rudegeair and Michelle Conlin

The longevity gap: economic inequality leads to lifespan inequality – Annie Lowrey

Predictably Gloomy
Tech companies want to make “our lives tick in sync with the speculative logic of finance” – Evgeny Morozov

57% of Americans think we’re in a recession. Why? Wages – Josh Barro

“The era of Facebook is an anomaly”: one website and one online identity doesn’t work – The Verge

The Fed
Cheat sheet: What Fed policymakers have been saying lately – WSJ

Your Daily Outrage
The racist housing policies that created inner-city American poverty –  Jamelle Bouie

“We are bullish about pet ownership” – Inc.

Mt Dox
Dorian Satoshi Nakamoto denies he is Satoshi Nakamoto – @FelixSalmon

“The future is about old people, in big cities, afraid of the sky” – Bruce Sterling

Totally Unsurprising
Banks are against a public option for banking – Bloomberg Businessweek

An excellent primer on income inequality and growth –  Filip Spagnoli

Some things to like about the new Johnson-Crapo GSE reform bill – Housing Wire

Advanced Strategy
Banamex loaned lots of money to a few risky corporate borrowers – DealBook

10 things the CFPB has done for consumers – Mother Jones

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