Good News: The Student Loan Bubble* Has Been Canceled

(* Not to be confused with the student loan crisis being canceled. That was so~ last June.)

The other good news on this election day is that whenever Reuters says it’s conducted an “analysis,” you’re excused from taking it seriously. In “U.S. student debt burden falling more on top earners, easing bubble fears,” the news agency boldly tells us:

[T]he analysis of the Federal Reserve’s Survey of Consumer Finances [SCF], a triennial survey published in September with 2013 data, makes it clear that heavy borrowing is usually rewarded with big salaries.

Clear, eh? The article’s only real evidence that student loan debt leads to higher incomes is the word of higher ed cheerleader Sandy Baum, so that’s just an argument from authority.

The increased concentration of debt among the well-paid should ease concerns that the surge in debt is a wider economic threat.

This is a normative statement that doesn’t cite anyone who says that student debt is a “wider economic threat,” much less what that means. It’s also misleading to say that the debt is increasingly concentrated among the well paid. Although the article states that “over the past two decades the young with higher incomes have gone from owing less of the debt than the average household to owing considerably more,” over the past decade things aren’t really that different. The proportion of young households (those headed by someone between the ages of 20 and 40) earning more than $60,000 doesn’t hold any more of their age group’s student loan debt than before.

Reuters could have found that out by discussing the Fed’s write-up of its own findings. The word for this is “reporting.” Behold, Box 10 on page 27 of the Fed’s “Changes in U.S. Family Finances from 2010 to 2013: Evidence from the Survey of Consumer Finances” (pdf).

Young Families' Education Debt by Income Group (SCF)

Notice that in 2013 more than twenty percent of student debt held by young households fell into the less-than-$30,000 bracket, about twice as much as twelve years earlier. This doesn’t ease my concerns that the surge in debt is a wider economic threat, but if Reuters doesn’t have to define that, I don’t have to either. Nevertheless, you can imagine why I think it’s probably not a good thing that a growing slice of an expanding debt pie is falling on people with less than $30,000 in income.

And for those of you who think I overindulge on MS Excel graphs, gaze upon the Fed’s “SCF Chartbook,” and weep for your wretched souls while scrolling through all 1,260 browser-crashing charts therein (pdf—if you dare: Education installment loans are from pages 1083-1118).

Here are two that are relevant to Reuters‘ general argument that student loan debt isn’t a problem because most of it is held by high-income households:

Percent of Families With Education Installment Loans (SCF)

Median Value of Education Installment Loans (SCF)

These aren’t young households—you can find them on pages 1089 and 1090—but I think these charts make it clear (in the way that quoting Sandy Baum does not) that student debt is a problem for low-income households: A fraction of the student loan mountain can still be an unscalable crag.

For example, the median household in the 20th income percentile (from page 7) has made about $11,000-$13,000 over the last twenty-five years, but the percentage of such households holding student loan debt has doubled while their median debt has nearly tripled. The median middle-income household (40th to 59.9th percentiles) made less than $47,000 in 1989 and 2013. (Ouch.) That household in that income bracket saw its student loans grow by more than $10,000, and the percentage of student-debt-holding middle-incomes households nearly tripled. I don’t know what the income numbers are when you exclude non-student-loan debtor-households, but it’s unlikely to be much higher.

Back to our young earners, in 1989 17.1 percent of households headed by people under 35 had a median $5,400 in student loan debt. In 2013, the median balance for 41.7 percent of those households owed $17,200. Their median incomes have declined (page 10).

Undaunted, the article throws out just about every other argument for student loan debt that I’ve seen: the college premium, the economists who believe the supply of college graduates isn’t keeping up with demand for high tech jobs, and the claim that amputating graduate borrowing from the total makes the problem “almost” go away. Ooh, those irresponsible grad students! The only things Reuters didn’t do was find someone to tell us that all we need to do is “fix” IBR or that it’s all the for-profits’ fault.

Although the article finds the column inches for the high student loan delinquency rate, it neglects to cite the Education Department’s Federal Student Loan Portfolio (portfolio by loan status) data showing that barely half of the $1.1 trillion of federal student loan debt is in active repayment while 17 percent is categorized as in-school or in grace period. As the Fed’s report says of debts in deferments due to tough economic times, “[T]hese debts will eventually have to be repaid.”

Right. Just don’t tell that to last June’s student debt crisis slayer, Beth Akers, whom Reuters quotes:

“Debt is a tool. If anything, I’d want to encourage lower income people to take more advantage of it.”

Yeah, and look where it’s getting them.

It’s Only Links ‘n Roll

It’s been ages since I’ve done a music-themed links page, but a bunch of little news items have popped up that are undeserving of full-article treatment.

Beth Akers, “How Income Share Agreements Could Play a Role in Higher Ed Financing,” The Brookings Institution, October 16, 2014.

When we last (and first) met Beth Akers she was trolling the student debt crisis, but now she’s doing some good advocacy with “income share agreements,” a novel term for what I’ve seen referred to as human capital contracts. It’s just replacing debt with equity for financing higher education, but it shifts the risk (and the rare windfall) away from the students. Unfortunately it hasn’t come up often in recent debates, aside from the University of Oregon’s decision to investigate using them. The fear was that human capital contracts would lead to an “adverse selection” problem as with health insurance: People in majors with the best job prospects will prefer to pay full tuition while those with the worst prospects will take the equity route, leaving the funders (the university in Oregon’s case) broke. Adverse selection is really a problem for universities that don’t sell lucrative degrees, so I’m not sure it’s really the problem at all.

Rashmi Rangan and James Angus, “Time for a state-sponsored law school in Delaware,” DelawareOnline.com, October 12, 2014.

Remember the University of Delaware’s scheme to build a public law school? Well, Rangan and Angus don’t. The idea was first floated in late 2010, but several months later the university’s feasibility study produced some bad news: The project would cost $100 million and the law school would run at a $165 million operating deficit for ten years. Nothing about the rising wages and job vacancies for attorneys in Delaware. I guess those folks didn’t have the nerve to predict an attorney shortage that would have to be remedied with foreign lawyers like Indiana Tech did.

Rangan’s and Angus’s arguments for a public law school boil down to (a) the population of two of its counties is growing and (b) the school’s graduates would go into public service. Again, nothing on unfilled attorney positions and rising wages. Delaware would probably get a lot more out of a $100 million expenditure by funding legal aid clinics throughout the state.

Dean Baker, “Quick Note on Heavy Babies and GDP Accounting,” Beat the Press, October 16, 2014.

Baker writes:

I have always thought that for purposes like constructing cost-of-living indexes, we are best off just pulling out the money we spend on health care and measuring the price increases of non-health care consumption against the income we have left over after paying for health care expenses. This would treat spending on health care like a tax. If we want to then incorporate changes in our health into our assessment of living standards then we look directly at outcome measures (e.g. life expectancy, morbidity rates, self-rated health conditions), not the volume of health services we are consuming.

We could say the same thing about higher education costs, mutatis mutandis, given that there’s no evidence it increases national income yet we’re told it’s crucially necessary for “competitiveness.”

Kate Lao Shaffner, “Five Questions With … Altoona Mayor Matt Pacifico on walking routes, property taxes, and downtown struggles,” NewsWorks.org, October 14, 2014.

Altoona is a rare example of a municipality that has chosen to take advantage of Pennsylvania’s split-rate property tax system to implement land value taxation. In a Q&A with the city’s mayor, Matt Pacifico, though, he seems to think it “didn’t work.”

I think when we decided to go 100 percent Land Value Tax, it missed the mark on what it was intended to do. It was supposed to motivate homeowners to want to improve their dwellings without seeing their property taxes go up from the city, but a lot of homeowners in the city are unaware of how it works. So I don’t think it was properly promoted. For instance, you could build a $3 million house on a two acre parcel of land, and you’re only taxed by the city on the value of the land, and not the structure on it. However, the school district and the county still tax you by the structure, so it can be very confusing. If those two taxing bodies were also able to tax based on LVT, then it could have the right effect, but they are not.

This is a pretty muddled statement. On the one hand, Pacifico acknowledges that the effects of LVT have been hampered by concurrent property tax systems the city has no control over that still tax structures, but on the other hand he seems to think that the primary point of LVT is to stimulate home remodeling. I’d hazard that people don’t think much about property taxes when adding patios to their dwellings but do think about them when building new structures from scratch.

Pacifico isn’t alone, for even Altoona’s city council is going to investigate the results of the tax shift. Superficially, however, I think Altoona’s LVT been more successful than Pacifico believes. A 2011 article in the Altoona Mirror described residents calling the city asking why their property taxes had fallen—and land speculators complaining about their bills. Most persuasively, a study of the final phase of Altoona’s tax shift found that most parcels would receive a tax cut while most would see a hike if it shifted back to a flat property tax. Generally, the switch to LVT decreased revenue from residential parcels while increasing it from commercial parcels. Consequently, on an in personam basis, the findings should be that LVT has cut taxes on the majority of middle- and lower-income households and raised them on land owned by the wealthy.

Nevertheless, I hope that the investigation explores the effects of LVT on the land use of commercial properties and absentee or vacant parcels. Here’s hoping the results are both good and clearly presented.

More Education ≠ More (National) Income

When I left you yesterday morning, darlings, I boldly claimed that Eduardo Porter “acknowledges widespread higher education but can’t connect that to higher national income. Because there isn’t one.”

Shortly thereafter, about ten minutes into my commute towards our eclipsed moon, it dawned on me (you heard that right) that there was a very easy way to illustrate college graduates’ higher personal earnings without a corresponding increase in national earnings: Simply multiply the number of 25-34 year-old earners by their average earnings by education. This is done with Current Population Survey data. If the East Coast Media Elite is right, then we’ll see the cohort’s aggregate income increase and much of that will go to college-educated workers. If higher education is a positional good, we’ll see little if any increase in the aggregate income but a greater proportion of the total will go to college graduates.

On my commute home—this time toward the rising, waning gibbous moon—I found that Paul Campos had the same idea.

Behold:

Aggregate Personal Earnings by Education (25-34, Both Sexes)

Ouch. It appears college degrees are pretty much interchangeable with less education. Total income for 25-34 year-olds in 2013 was identical to 1990 after adjusting for inflation, and worse, the cohort is 8 percent larger today. In 1991, one quarter of the cohort had a bachelor’s degree or more; by 2013 nearly 40 percent did. The percentage of “some college, no degree” was about the same, below 20 percent.

You can trace the CPS data back to 1974 (before 1991, the Census Bureau used different education classifications), but the proportion of college graduates was mostly constant and aggregate income was rising because the 25-34 cohort was growing rapidly. It still doesn’t support the “more education = more income” argument. Nor does it help that even if there were an independent rise in national and college graduates’ incomes, it could still be caused by other factors.

Don’t hold your breath until the next lunar eclipse for the economics reporters and bloggers to stop weeping about how we need to help the dropouts graduate or hold the bad-apple for-profits accountable. They’re both noble goals that I support, but it’s obvious that higher education increases personal income, not national income.

*****

Postscript: I would be cheating you if I didn’t mention the Pew Charitable Trusts’ report on “Generation X’s” financial position. Xers have higher incomes than their parents’ generation(s), but they also have more debt, including an average $25,000 in student loans among four in ten of them. Their net worth is also polarized, which is bad. My favorite part is in the special panel on page 11 where the report warns that Gen X’s student loan debt can “prohibit Gen Xers from saving to send their own children to college.”

Because it’s worked out so well for them.

But I Thought ‘More Education = More Income’

Not even a month after Eduardo Porter titled an article with that exact sublime algebraic line, he now appears to accept the Bennett hypothesis without any modifications. He even provides a helpful bibliography of studies backing it up. What the buh?

This is my favorite line:

In 2012, 44 percent of 25- to 34-year-old Americans had a college degree, whether from a community college or an ivy league university, 6 percentage points more than in 2000. By contrast, the college graduation rate of young Britons rose by 19 percentage points over the period, to 49 percent. In the O.E.C.D. as a whole it increased to 40 percent, 14 percentage points more than in 2000.

In other words, he acknowledges widespread higher education but can’t connect that to higher national income. Because there isn’t one.

Porter concludes that we need to replace loans with direct government spending, which is noble but misses the point. A dollar spent on tuition is then re-spent by colleges. This is an accounting identity; it can’t be escaped. Without a hypothesis as to what causes colleges to raise tuition, what they spend it on, and why—i.e. treating higher education as a positional good rather than a public good—Porter just looks confused and clueless.

Maybe it’s too damn early in the morning for this stuff. I going to see an eclipse and go to work.

Less Debt, Fewer Defaults, and More IBR

…Is everything you needed to know about last week in the world of federal student loans.

We have The Wall Street Journal‘s Morning Editorial Report … um … editorializing on the “Surge in Student Debt Forgiveness.” The whole article is subscription required, but it appears the WSJ is continuing its biased reporting on IBR by sloppily characterizing it as a loan-forgiveness program rather than a program whose intended purpose is to reduce monthly payments. That’s not to say I don’t think IBR will cost the government a lot of money or that the average amount borrowed is high enough to indicate that a lot of these debtors borrowed Grad PLUS loans, but this is pretty shrill. Like, how dare an income-based repayment program base people’s repayments on their incomes? What’s next Social Security securing society from old people starving to death in the streets??

On the other hand, we have The Washington Post, which does a much better job of pondering why student loan defaults are dropping. IBR is part of it, as is slightly better job outcomes for graduates. It even concedes that college graduates are finding jobs that don’t require their degrees. Clearly the author has not gotten the memo on occupations.

Finally we have an article by … me. This very post you’re reading. Recently, the Department of Education released its fourth quarter report of total student loan volumes by institution. The slightly good news is that last year the aggregate disbursement fell below $100 billion.

Aggregate Federal Loans Disbursed (Current $)

The bulk (43 percent) of the $5.9 billion decline is in unsubsidized Stafford loans to undergraduates, and 37 percent were due to subsidized Stafford loans (which now go only to undergraduates). The rest (1/4th) is due to unsubsidized Staffords to graduate students. Grad PLUS loan disbursements grew by half a percent. Can’t win ‘em all, I guess.

As for the amount disbursed per recipient (in current dollars, for loan limits aren’t inflation-adjusted and that’s the benchmark to measure changes against), most of the loan types saw negligible declines, indicating that either fewer people are taking out federal loans or fewer Americans are going to college.

Meanwhile, since the Internet tells us that Thomas Jefferson School of Law is in trouble, I figure it’s time to check in on those freestanding private law schools. TJSL isn’t alone, it just hasn’t managed to find a public university to socialize it yet (see WSJ, there’s your Social Security quip!). Western State fused into Argosy University two years ago, but I heard that was a long time coming. Texas Wesleyan is now Texas A&M, and some of the formers’ graduates want diplomas that say they went to the more reputable latter. Chalk one more up for the signaling hypothesis. Finally, the University of New Hampshire (formerly Franklin Pierce Law Center) is in fact now the University of New Hampshire. Go figure.

Oh, and how could I forget: Thomas M. Cooley is now affiliated with Western Michigan University.

I’ve heard rumors of other mergers going on among the FSP law schools, but that’s four that are adapting to the new world. TJSL just happens to be dealing with its fiscal problems by having a fiscal crisis.

There’s more to be said on this, but I figured I’d leave you with a chart comparing the average amount borrowed per recipient of federal loans at each of these law schools to their total costs for full-time students according to the Official Guide.

Average Amounts Borrowed Over Full-Time Costs at FSP Law Schools (2013-14)

I draw your attention to the fact that at none of these schools can a full-time law student cover his or her tuition with just unsubsidized Stafford loans. (Also, it seems that some law students are cleverly borrowing more than the annual loan limit allows. Hm.) At the average FSP law school last year, 87 percent of students took out Stafford loans; 70 percent borrowed Grad PLUS loans.

Fin.

Because Russia Is Known for Its High Productivity

A week after I sarcastically told you you to trust your east coast media elite about higher education, the NYT’s Eduardo Porter takes the bait in, “A Simple Equation: More Education = More Income.” Porter wails:

Barely 30 percent of American adults have achieved a higher level of education than their parents did. Only Austria, Germany and the Czech Republic do worse. In Finland more than 50 percent of adults are more educated than their parents.

Here’s his chart showing the international education arms race (at all levels, not just college):

Loook Who's No. 1The number one country is Russia, which is known for its healthy, long-lived population and very little national income from locational advantages such as oil and gas deposits. Second to last is Germany, a country with very few manufacturing exports and unspeakable squalor, which is why you never hear about it.

Porter continues:

This pattern of stagnant mobility and rising inequality of education adds up to a dumbfounding paradox. American workers with a college degree are paid 74 percent more than those with only a high school degree, on average, nearly the biggest premium in the O.E.C.D.

Can you believe this a week after New York Fed economists report that college doesn’t pay off for everyone? Like seriously, read your own damn chart.

New York Fed Endorses Credential Fraud

Yes, I’m lying, but the New York Fed’s promised analysis of five-year and six-year college degrees calls the college premium into question, not that the authors understand why. They calculate that adding a fifth or even a sixth year of college costs workers ~$65,000 or ~$130,000 over their lifetimes, respectively. Thus, I wonder, “Why not graduate in just three years then to get on that wage-premium track earlier?” Maybe people could do it in two, or one, or just say they went to college even if they didn’t. It reminds me of the “seven-minute abs” scene from There’s Something About Mary, which for some reason YouTube doesn’t have a clean copy of. Feel free to explore on your own, but if you disagree with the zero-year bachelor’s degree, then you’re dreaming about Gorgonzola cheese when it’s clearly Bree time, baby.

The lesson is: Never reason from a college premium, which apparently even college graduates can’t figure out.

The more entertaining adventure is the New York Fed’s subsequent post in which it dares to question if a world outside the average college graduate exists. It’s titled, “College May Not Pay Off for Everyone.” Heretical, I know.

Here’s the authors’ chart, which unlike any research I’ve been able to do, goes back to the 1970s.

I guess The Graduate was art imitating life after all…

I’ve just received word that the authors’ security clearance has been revoked.

Don’t worry, though, they hedged themselves:

While we can’t be sure that the wages of this group wouldn’t have been lower if they had never gone to college, this pattern strongly suggests that the economic benefit of a college education is relatively small for at least a quarter of those graduating with a bachelor’s degree.

Yeah, in college-premium land it’s obvious that those grads are so stupid that if they hadn’t gone to college they would’ve been unemployed—and if they hadn’t finished high school, they would’ve sold themselves into slavery.

The obvious thing to ask is what kind of occupations these workers are in. If they aren’t in positions that require much college education, then that might imply that too many people go to college, that many college grads in highish-paying jobs benefit more from the signal their degree sends than the human capital developed through coursework, that the public is filled with endless garbage about the need for more college graduates (often at the behest of student lenders), and that a lot of these low-earners who have significant student loan debts will be unable to repay them, possibly culminating in a government write-down in the future.

Or they could just be really stupid and college qualifies them to be retail salespersons. And you shouldn’t worry, all those stories are just scaremongering and you should trust your east-coast media elite.

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