Tag Archives: student debt

About this whole “paying for college” thing

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I keep trying to figure out this whole idea behind paying for college. I seem to be missing something.

Most everyone agrees that higher education is a private good. Most people, although not always the same people, agree that higher education is private good.

The first question is how much of either?

But does level matter? Yep, fewer states directly subsidize graduate and professional programs. Less financial aid is available to those students than a decade ago.

Despite the fact community colleges serve a greater number of students who are less than fully prepared for college, they typically receive a fraction of the support of four-year colleges. Fortunately, there are fewer frills (like full-time faculty) at community colleges, and despite lass financial support, they cost much less to the student. (Yes, the state spends less, but since the colleges are supported to a level that matches the needs of their students, attrition is high and completion is something other than timely, and so I would argue the cost is higher. Too many opportunity costs from subsidizing students with little hope of completing given the circumstances.)

So, if we just look at a traditional four-year student at a public institution, we see something like this:

One year of residential college: $24,000 (after a $7,000 subsidy from the state).

Four years, after increases, call it $100,000 for an on-time completion.

If the student came from a relatively poor family, the federal government might have kicked in as much as $21,000 and change. The state may have added $16-20,000, with another $12,000 from institutional aid (which if it does not come from a large endowment, it probably comes from tuition dollars of other students.) So, let’s call it a four-year net price of $50,000, roughly $12,500/year.)

That is $50,000 for the student and their family to cover. Since we assumed earlier the student got a full Pell grant, we probably should assume her family was unable to contribute anything and that the entire $50,000 is in loans.

So, the student borrows $50,000 for a solid degree in English with a 3.4% interest rate overall (which is probably lower than reality). But, she gets a job right after graduation at the median wage for English majors, about $32,000.

So, let’s make a whole host of assumptions.

She enrolls under Pay As You Earn (PAYE) right away.

PAYE remains unchanged structurally and legally for the next 25 years.

The poverty level for an individual grows about 2% annually over time. (Discretionary income under PAYE is household income – 150% of the poverty level for the household based on size.)

She stays single with no dependents.

She gets a good job at the median wage (in Virginia) for BA English majors at $32,000/year.

She stays at the medium wage which increases at 4% per year  (it was 6% for the median wage of English grads of 1992-93. I can tell you more about that next week.) but I don’t see that growth continuing, but it may.

She makes no payments the first year because her income the year she was in school was less than $20,000. Her payments the first year after are about $98. At the median wage for a in BA English in a single household, she just barely exceeds the first discretionary income cap to require payments.

If all goes well in that she has an unblemished employment history and no health problems, and makes only the minimum required payments, then it looks like she will have made just about $60,000 in total payments over 25 years. The remaining value of the loan will be about $34,000 and will be forgiven.

(This is far too much like General Physics 101 – assume five billiard balls on a frictionless surface with the cue ball traveling ……)

In any event, this looks like a relatively good deal for the student. She gets what is really a very low-cost loan with an effective interest rate for 25 years of three-quarters of a percent, I think.

In the end, the federal government writes off $34k in debt that was spent. (Doesn’t this become a back-end tax on everyone? That money is no longer available for other purposes.)

Meanwhile, we have built and maintained an entire servicing industry to manage this process…or expanded the IRS to handle it as some new legislative proposals suggest. I guess this is job creation and is thus a “good thing,” but I prefer more useful jobs.

Of course, if she had gone into engineering, enrolling in PAYE probably would have been unnecessary, and even if she had, unless she expanded her household significantly right away, she would likely have paid off all her debt well before the end of 25 years.

But I am using the non-gendered median wages. Oops. Women made less in both areas, and the annual growth rates for women were a bit less. But that’s based on graduates of 20 years ago, all that pay inequity stuff is resolved now, right?

Another oops…speaking of 20, PAYE actually has forgiveness after 20 years, not 25. IBR has forgiveness of the unpaid balance after 25 years.  So, really, she gets an even better by deal paying only $39,000 with forgiveness of $46,000.

I guess this why the GAO is planning a study on all this. It seems a pretty crazy way to run a railroad. It just seems to me it would be more cost-effective and less confusing to pay for everything upfront. In the end, there There Just Ain’t No Such Thing As A Free Lunch – we are going to pay the cost one way or another.

Students and families can only be expected to pay so much, no matter how of a private benefit higher education is. Other than the fact that 18-24 year-olds have no money, I don’t understand why families are expected to pay the college expenses of adult children. We don’t require that anywhere else. Unfortunately, we have always done it that way and we have created a marketplace where the targeted consumer is uniquely unable to afford the marketed service.

It also seems to me that this is a system designed to hide the true cost of higher education. Except that is cobbled together more than designed.

The example I used, approximates maybe 8% of borrowers in Virginia in terms of a debt being around $50k without getting into the extremes. It also represents the lower-income category net price of one of our small public colleges. However, as I have written before, if current trends continue, the class of students entering now may well have an average debt of $42-47K for those borrowers that graduate. That makes this discussion more applicable.

What am I missing? What have I got wrong? It looks to me like the states are ducking their responsibilities and spreading the cost around through federal tax base….which means we all pay in the end, what we would have paid in the first place, and probably quite a bit more. I think a more rational approach is probably in our best interests.

But that requires rationality, difficult conversations, making commitments, and living to those commitments.

 

 

 

 

 

 

 

the nameless things that cry in the night

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Yes, the astute literati amongst my half-dozens of readers will note that I stole the title for this post. The relationship between the novel in which it appears and the next paragraphs will at least be spurious, I hope.

I spent the day in a hospital waiting room while my wife had her foot rebuilt. I followed much of the conversation on Twitter and elsewhere about student debt, particularly as it relates to justifications for the Gainful Employment rule and today’s article in the Chronicle of Higher Education. There were also pieces on Vox and the New York Times (which, based on its treatment of Abramson is not quite as liberal as some have thought).

One Twitter conversation focused on an article at the Daily Kos  that started with this paragraph, which really tells you all you need to know:

I have $170,000 in student loan debt from what’s known as a for-profit college. Schools like mine bill themselves as “career” colleges. But after borrowing mind-numbing sums to attend Florida Coastal School of Law, I’m drowning in debt, and working at a non-profit making $30,000 a year.  Not a lawyer’s salary, barely enough to make ends meet, and nothing extra to keep up with my massive monthly payments.

Andrew Kelly did some checking:

Which means:

  1. the author of the piece likely has no private loans (if so, they did not go through the school);
  2. the entire $170,000 is federal loan debt;
  3. the author is probably eligible for Income Contingent Repayment (ICR), Income-Based Repayment (IBR), or Pay As You Earn (PAYE), meaning his payment should be much lower than “massive”;
  4. If working for an eligible noprofit and continues to do that for 10 years, he is quite likely eligible for Public Service Loan Forgiveness (PSLF), even with reduced payments;

We find out further down that the author did not even complete the degree as he got scared off by the debt he was accumulating. In reality, there is rarely payoff for an unfinished degree. At any level.

If one knows going into any program that they will have to fund in its entirety with debt, they really need to understand that there is no value to dropping out unless they are Tiger Woods or Bill Gates, or one of the other very lucky (and talented), and very few. In this case, I think blaming his situation on the tax status of the institution is just politics to support Gainful Employment. The author made choices, got cold feet two-thirds of the way through, dropped out, can’t find a job as a lawyer, and is blaming the school.

The school may well be crappy. They may have a slick advertising and recruitment division. That does not absolve him of responsibility.

The article was written to support the efforts of the Young Invincibles(YI) in advocating for Gainful Employment (GE). I’m all for GE and expanding its coverage for the sake of transparency, but I think focusing overmuch on law students not only reminds folks like me that YI is a creation of a bunch of law students and illustrates a lack of awareness of the fact that the current, and eternal focus,of USED and most federal and state policymakers is on undergraduate education. YI is trying to do some good work, but they need to rethink this approach.

From the article:

I’m not a lawyer. But I do know how to make a case. 

But for whom? Can you make a case that you made a smart decision  to attend law school with NO ranking in US News & World Report, placing it outside the top 150? Did you check the rankings?

For the record, in Virginia, of the graduates with first professional degrees statewide (law, medicine, veterinary), only 22% had student debt greater than $150,000 for the first professional program.

For undergraduates it was only 0.02% – eight students.

Find more here…there are comparable national charts, at least for undergraduate debt, I just didn’t feel like looking it up. Let’s simply drop the rhetoric and horror stories. Let’s focus on the needs of most the students.

 

Oh, about those nameless things? Really not nameless – debt, cluelessness, responsibility.

 

 

Obscenity and Student Borrowing

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I shall not today attempt further to define the kinds of material I understand to be embraced within that shorthand description [“hard-core pornography”]; and perhaps I could never succeed in intelligibly doing so. But I know it when I see it, and the motion picture involved in this case is not that. [Emphasis added.]

—Justice Potter Stewart, concurring opinion in Jacobellis v. Ohio 378 U.S. 184 (1964), regarding possible obscenity in The Lovers.
Source: http://en.wikipedia.org/wiki/I_know_it_when_I_see_it

As I said in my last entry, I don’t know what the right amount of student borrowing is, but I do know too much when I see it.

The problem with even thinking about what the “right amount” of student debt is that it is going to go up. And keep going up. American colleges and universities do not seem to have found the magic formula constrain the growth of in the total cost of attendance. Institutions have made progress in some areas, but they remain basically expensive, and the rise in part-time adjunct faculty as a cost control measure is probably not serving us well. It was once explained to me very slowly by a member of the Governor’s Cabinet, “But Tod, college costs are always going to go up.” 

I don’t feel compelled to believe that, but I do see the evidence  each year. This also includes evidence that not all cost increases are within institutional control. If not annually, at least on a semi-regular basis, well-intentioned laws are passed that increase the cost of doing the business of higher education. State legislators attempt to solve the problems of constituents through bills to address admission policies, transfer policies, access, affordability, efficiency, effectiveness, economic impact, K-12 involvement and improvement, campus safety, student health, student mental health, and the list goes on. To be fair, institutions bring a lot of this on this on themselves with policies or behaviors that create a news story that upsets people. Sometimes these events are really valid drivers of change, other times they are just the embarrassing reflection of what happens with human-run enterprises. They are called mistakes and they happen. Get over it.

I continue to be amazed at how college presidents continue think that big bills to change the institutional relationship to the state will work out in their favor. More and more they lead to greater intrusion of measurement, control, and direction. Good advice has always been, “Don’t poke the sleeping bear.” Better advice is, “Don’t push a big bill about yourself that hundreds of other people can involve themselves, many of which will do so without your knowledge.” Laws to affect institutional behavior rarely seem to reduce costs. Perhaps never.

Yesterday, Secretary Duncan defended the proposed rating system to congress. He and others continue to maintain this a way to improve and maintain affordability. Here’s a suggestion: quit pushing proposals that require institutional staff and leadership to respond. Quit doing things that require institutions to have federal lobbyists and pay membership dues to lobbying organizations. Just set clear and defensible standards for Title IV participation. The proposed Gainful Employment rules do that, although a lot of lobbying and institutional engagement has been in play there, as documented by David Halperin’s fascinating new book.

Returning to the today’s theme: obscenity is material where the “dominant theme taken as a whole appeals to the prurient interest”, and that the “average person, applying contemporary community standards” would disapprove.”  I think we have reached that point with student debt. Or, at least, based on the way student debt is being reported based on horror stories and loose rhetoric. The Vox Cards on student debt by Libby Nelson provide a nice overview on the topic, but I think perhaps they indicate that the discussion on student debt has reached the level of prurient interest – it seems to be as hot a topic as sex.  

Unfortunately, I don’t think we have quite reached the point where we know what the community standards are…let alone what they should be. If the average debt for 70% of bachelor degree graduates is $29,400, is that too much, too little, or just right? Or is the concept of community standards more important than we realize here? Should the average debt in Virginia be higher than the average in Mississippi but lower than that of New York?

What is the right amount of debt?

It is a good question, but it is the wrong one.

The right question is this. “Who are the parties responsible for paying for postsecondary education and making it accessible to all Americans, and what level of responsibility does each party have?” It seems to me that it has been too long since we have had this conversation, if we ever did.

  • What is the role of the federal government?
  • What is the role of the state?
  • What is the role of the family?
  • What is the role of the student?

Until we answer these questions, and agree to live the by the answers, I don’t think we can do any more than limp along and let the debt increase. That’s the real obscenity.

 

Student Debt and the Informed Consumer

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It is hard to consume any media from a broad range of sources without encountering stories about student debt. I think. Maybe it is just because of my job I tend to notice the coverage of student debt. This is probably much the same way that I notice all the new generation Ford Escapes that have popped up since I bought mine in 2012. (However, those have been hugely successful for Ford and they have sold a lot of them.)

The Atlantic had an article earlier in the week about The Myth of Working Your Way Through College highlighting the differences in buying power of minimum wage employment in terms of a per credit basis over time. I’ve seen such analyses before, in fact, I’ve done some in the past for discussions considering new state financial aid models. I love articles like this because of the reader comments. Those are often pure gold.

After reading those for awhile tonight, I clicked onto this Daniel Greenstein commentary which I believe is prep for his speech tomorrow at the AERA conference. I’m always interested in articles about how to measure college performance. (I hope we can start doing that some day – once we have firmly established that we know how to measure what it is actually happening. Then we can measure performance.)  He starts  with a well-known metric “Because nearly 40 percent of students who start at a four-year college won’t earn a degree in six years.” It’s absolutely true – because it is all we have absolutely measured nationally. In Virginia, we know that 75% of all students who start at a public four-year institution, whether fall or spring, full-or part-time, first-time in college or new transfer complete a degree somewhere in Virginia within 10 years. It is 76% for just first-time college. Adding in data from the National Student Clearinghouse we get to almost 80%. It’s not perfect, it can be improved, but more importantly, it is a full measure. (Yes, I am bragging about my work).

Greenstein goes on to say those “who do complete a college degree increasingly carry significant debt, even as employer surveys and international comparisons suggest they lack certain skills. The trends are exacerbated by a steep drop in government funding for higher education and increased costs. Parents and students are questioning whether college is ‘worth it.'” Which is all true.The problem with the discussion of student debt, to my tumored mind, is that there seems to underlying assumption that students are entitled to not have a cost investment in their higher education. I’m not against that idea since I do believe postsecondary education is a tremendous public good, as well as a private good, however, as a nation we have not agreed upon the concept of completely free education beyond K12.

Folks that know me and have participated in meetings with me, know that I am not the least bit shy about pointing out that higher education is the only aspect of American society where parents are expected to pay for the pursuits of their adult children. An 18 year-old has complete freedom to join the military, marry, enter into contracts, and essentially pursue any legal activity except consume alcohol. If an 18 year-old attempts to attend college and ask for financial aid, all of a sudden the world changes and that legal adult must ask their parents for all kinds of personal finance information to complete the FAFSA and perhaps the CSS Profile. Parents can refuse, in which case the student can borrow their way to attendance through private lenders or they can try to prove they are actually independent of their parents (fat chance, but possible).

They are completely free to pay for college themselves – if they have the money.

Again, fat chance.

However you believe it happened, however it actually happened, whatever is going to happen in the future, we have an industry selling a product/experience to a market audience completely unable to afford it. This leaves only three options: getting somebody else to pay for it, student debt, or self-financing through work. For about 60% of undergraduates, it is a mix of the first two or all three.

When we put out the student debt reports to the institutions last fall for review prior to publication, one of the institutions questioned the maximum loan we reported for a five-year period.  The email from the financial aid officer went along the lines of, “Can you verify your data? You show us with a graduate with $171,000 in student debt, and I think that is kind of high for an art major.” Really? Kind of high? My reply was along those lines since I have an art degree as well. Unfortunately, the data were accurate and the school was able to figure out who it was and verify the amount through their own records.

What bothered me most about the entire exchange was that they did not know off-hand they had a relatively recent graduate with that much debt.

It is also bothered that that was the only discussion about such an extreme example…there were others across the Commonwealth.

In conversations about this story, at least one college president made a comment along the lines, “That’s insane! No one should pay that much for a college degree!”

Again, really? Those loans simply represented the total cost of five years of attendance at a private, residential institution. It is simply what it costs to attend…well, that and take some of the tuition money and give it to other students. But, that’s another story.

I am still troubled by this comment as it seems to call into question the perception of the product of the university that president represents. It is also an indictment of the student for not finding someone else to pay for their education. That strikes me as wrong.

I wonder if student debt is like pornography – I don’t know what the right amount is, but I know too much when I see it.

What I do know is that until the cost structure of postsecondary education changes, this discussion won’t change. There does not seem to be public and political appetite to make the current model free, especially with the current cost structure, and so a mix of student debt and having other people pay will continue. How much is the right amount of debt should be an informed decision made by the student. It is difficult to make an informed decision without adequate information about cost of attendance, graduation rates for discrete cohorts of students, likely debt amount, and historic ranges of earnings by program. These things are becoming available, thanks to the work we are doing Virginia and what is taking in other states.

More than knowing what their likelihood of graduation is, students need to know how to graduate. They need clear guidance on what it takes to graduate on time, what it costs for each additional year, and the cost of failure. These are where we should be going. If we are not going to solve the college cost problem, perhaps we can improve the college financial literacy problem.

To some degree, student debt is a choice. Certainly extreme debt is a choice, one that can be mitigated by knowing more about the wide range of options of postsecondary education available.

Wasn’t Men’s Wearhouse whose motto was, “An informed consumer is our best customer”? Might that not be an appropriate goal here?