New America Foundation: Let the Sins of Grad PLUS Be Visited Upon IBR

I’ll try to go quickly through the New America Foundation’s (NAF’s) Jason Delisle’s and Alexander Holt’s Washington Post opinion piece from Friday. Reacting to news that the president’s budget forecasts income-based repayment programs (IBR) will cost the government an additional $21.8 billion, the authors argue that “too much” of it is attributable the administration’s changes to IBR, i.e. reducing monthly payments even more and accelerating loan forgiveness to 20 years from 25. Their article has many problems.

One, Delisle and Holt don’t provide evidence that the $21.8 billion comes from the changes to IBR. They’re just conjecturing. My hunch is that the additional costs are mainly attributable to the changes in the budget’s model that don’t anticipate as much job growth as before—or just increased participation in IBR. Without this evidence, the rest of Delisle’s and Holt’s article is just righteous huffing.

Two, the authors use this pretext to slide into their grad-students-are-abusing-IBR claim the NAF has been making for a few years now. This argument is problematic because the problem isn’t IBR so much as the Grad PLUS Loan Program, which the authors understand is unlimited and to their credit have advocated abolishing elsewhere. That’s all fine and good, but if the problem is Grad PLUS, then it’s not IBR, and the authors should focus on that instead. More on this point below.

Three, the grad-students-are-abusing-IBR claim has never been substantiated either. The NAF has always trotted it out in hypotheticals without doing the actual research. How many (and what percentage of) graduate debtors are (a) on IBR and (b) earn high enough incomes that could allow repayment under 25-year or consolidated repayment plans without compromising their living standards? Also, how many grad debtors are on IBR but are not earning enough to repay their loans under the older repayment plans?

These questions are crucial because until they’re answered those of us sitting at the feet of the East Coast think-tank elite can’t weigh how many people unfairly benefit from the changes to IBR against those who do not. If every unfair IBR beneficiary is canceled out by dozens of debtors who will never repay their loans in 25 or 20 years, then it’s safe to say that the changes to IBR are useful and the adverse consequences minimal. (And it’s not like the IBR changes have influenced people’s graduate school enrollment behaviors as law school applicants are still falling.) In the end, Delisle’s and Holt’s arguments are really just revamped versions of welfare queen fear-mongering.

Four, Delisle and Holt do not regain any sympathy with their hypothetical graduate debtor, Robert, who finishes law school with $150,000 in debt and earns $70,000 per year. Here are the problems with Robert:

(a)  For those of us who’ve done the research, Robert’s debt is plausible, but his income is not. Robert earns well over the median salary reported to NALP in 2013 ($62,467). Assuming that all non-reporting graduates are making less than the median, which I believe is fair, Robert is above the top 23 percent in law graduate earnings. He is quite atypical. The true median, which would include graduates working part-time and the 12.3 percent who were unemployed (and matter since we’re talking about debt repayment), is much, much lower. It’s likely many of them will never repay their loans. These people will benefit from the PAYE changes, but the NAF ignores them.

(b)  The authors then fashion out of Robert’s rib a wife, who earns $80,000 per year. With an annual household/family income of $150,000, readers should recognize that this partnership is in the top 10 percent by household income. Is this common for graduate debtors? Probably, but again the authors don’t say.

(c)  Delisle and Holt proceed to criticize IBR for not taking spousal incomes into account, that only 1.9 percent of Robert’s household’s/family’s income is going to his student loans. Are you shocked? Well, the response is, so what? Robert’s wife didn’t sign his master promissory notes any more than she would his gambling debts. If Robert wants to leave work to raise their kids, for example, doesn’t that imply that his wife will essentially assume his debts? Would the NAF say this if Robert were Roberta? How would unmarried Robert feel if he had to tell his bride-to-be that she’d be partly on the hook for his student loans if they got married? Again, what if Robert were Roberta, who would be more likely to take time off to raise children?

(d)  The authors’ hypothetical is only as outrageous as the lopsided assumptions they bake into it. It’s one thing to say that Robert, unusual though he is, benefits more from the Obama administration’s changes to IBR than before. But it’s a rhetorical foul altogether to throw in a wife, whose high earnings Robert largely has no power over, and then blame IBR for the result. Delisle and Holt could just as easily give Robert’s parents multimillion-dollar lottery tickets or 5 percent of Maine’s landmass, but it would still have little relevance for IBR as a policy.

Five, the authors repeat that graduate debtors are the unfair beneficiaries of the administration’s changes to IBR, that they’re half of all IBR participants (unsurprising: they have undergraduate debts too), that they have higher incomes and are less likely to be unemployed than undergrad (or non-grad) debtors. Again, no income data on IBR participants is given, so Delisle’s and Holt’s IBR welfare queens are all speculative. Now, I’m sure some exist, but the NAF needs to show us the bodies and carefully tell us whether they’re worth less than the number of underemployed graduate debtors who won’t be able to repay their loans.

Six, even if they do that, all their talk of IBR’s “loan-forgiveness benefits” is really a problem with Grad PLUS loans, not IBR. As I wrote last week, IBR without Grad PLUS loans would be much more innocuous. It’s one thing for Delisle and Holt to make poor arguments with unrepresentative examples, but I question their credibility if they’re going to attack IBR, which I think we all agree was never crafted with Grad PLUS loans in mind, instead of the loan program itself. Why not attack the problem at its source? What’s so special about IBR, then? Nor does it help that they bait their readers with the $21.8 billion IBR shortfall and then switch it with the changes to IBR without evidence. For all their elegant, mathematical—and probably costly—policy papers, the NAF’s results almost always have zero external validity. Like, if I didn’t know any better, I’d say those folks had some kind of ulterior, partisan motive…

Seven, and finally, at the beginning of their article the authors characterize the federal loan program as “an implicit contract: Students get loans to go to college at reasonable interest rates, with no previous credit history required, but when they graduate, they [and their high-income spouses, apparently] have to pay them back. But that agreement is shifting.”

In their dreams. The “implicit agreement” was that the loans would make debtors more productive workers so they could fill higher-paying jobs that required additional skills. Little of this has turned out to be true: There’s no good evidence that widespread college education is raising our national income, and the government has pretty much reneged on its jobs promises.

As far as contracts go, this one has been drafted in favor of the government. When its underlying assumptions are true, everyone wins, but when they’re not, the government won’t be held accountable for self-serving research, false promises, and reckless lending. Instead, attempts to help the debtors will face resistance by people like Delisle and Holt, who will howl at all the alleged benefits the lucky-duckies are getting—and right now we’re only talking about grad student debt! Consequently, you should expect the endgame for all this unpayable student loan debt to be really, really acrimonious.

NY Fed Chimes in on Collapsed Household Formation Rate

Following up on last week’s post, the Federal Reserve Bank of New York put up a post titled, “Household Formation within the ‘Boomerang Generation’,” asking, “Why might young people increasingly reside with their parents?”

Of the excellent charts the authors provide, I’ll only reprint the one I like best:

The write:

The chart also suggests, however, that the trend in parental co-residence has not substantially changed the fraction of individuals living with a single roommate, an arrangement that in many cases is likely to be a romantic partnership. (These patterns are similar for thirty-year-olds, where our analysis using the Current Population Survey indicates that co-residence with one adult is a highly accurate indicator of romantic partnership.)

So when exactly are the <50 percent of 25 year-olds supposed to form romantic partnerships and buy out their parents’ homes?

Answer: Never.

Our results demonstrate that local economic growth is a mixed blessing when it comes to building youth independence: Improvement in youth employment conditions enables young people to move away from their parents, but rising local house prices are estimated to have forced many young people to move back home. These two effects partially offset each other.

[W]hile local economic growth, reflected in rising youth employment and escalating house prices, has mixed consequences for youth independence, the increasing magnitude of student debt among college graduates appears to be driving young people home and keeping them there.

It’s astonishing that the NY Fed of all places is more willing to tell it like it is than the East Coast media elite, who think we need to send everyone to college and that student debt isn’t a problem.

10 Ways to Falsify Law Graduate Employment Doomsayers

I begin 2015’s first substantive post by invoking the right of listicle clickbait.

A loose end from December is Loyola Law School, Los Angeles professor Theodore Seto’s response to my American Lawyer article on the Bureau of Labor Statistics’ proposed change to how it measures the replacement rate for lawyers. For Professor Seto, I have good news and better news.

The good news is that when he writes that he’s flattered that I’d respond to his article, he need not be. Of course I was going to write on the topic for The American Lawyer anyway, but his first article usefully illustrated the kind of thinking I cautioned against when I broke the story in early November.

The better news is that his closing line raises an interesting question worthy of further consideration. He writes:

But we should all remember (myself included) that the best legal counselors, when faced with new evidence, adjust their advice accordingly. They do not simply attack the evidence.

Let’s not discuss whether I was attacking new evidence. Readers can compare my article to Seto’s for themselves. Instead, if I interpret Seto fairly here (and he says I didn’t do that for his other article, so I tread lightly), he’s implying that I or perhaps others make unfalsifiable claims about the future of law graduate employment—that we unfairly dismiss any favorable news about graduates’ prospects because it contradicts our dogmatic positions that law school is a poor decision in probably most circumstances.

If so, he’s incorrect. My beliefs are falsifiable, and because the topic of falsifiability arose on this blog two more times in the last month, I’m inspired to write on it. So, here’s a list of events one could point to (and would probably need to) to predict that things will be better for grads in 2016.

(1)  The absolute number of graduates in the classes of 2014 and 2015 employed in full-time, long-term, bar-passage-required, non-school-funded jobs rises. No one disputes that employment percentages will improve on account of there being fewer graduates, but the best way to show that graduates are finding jobs is … showing that graduates are finding jobs. Similarly, I’d like to see evidence that grads are finding better jobs. That could be the NALP reporting that grads are shifting into lawyer jobs at law firms larger than the 2-10 bracket, though 2013 toed in the right direction.

No. Graduates Employed by Size of Firm (NALP)

You can slag biglaw all you want, but it tends to pay better. Likewise, wage growth in the 25th percentile for law grads is absolutely necessary if anyone wants to convince me that law school is better than going back to college for a more lucrative bachelor’s degree, but technically that’s a slightly different issue.

* Note: At this time I’m not too concerned that the ABA’s decision to give law schools a tenth month to report their graduate employment data will substantially impair any comparisons to previous years.

Continue reading

Voodoo Links

I’ve been asking myself recently what standards a topic needs to meet before I’ll post on it, and while there’s no point in giving a list of criteria, one thing I try to look for is information readers won’t find at other sites, particularly more heavily trafficked ones. Consider it my offer to readers. So, I thought to myself that maybe I should occasionally point out instances of good work that teaches me something I didn’t know. (It would certainly give me an opportunity to practice not being a meanie in my writing.) I can think of two examples from the last month+.

Law School Truth Center, “LSAT Scores Do Not and Cannot Predict Bar Exam Scores,” Outside the Law School Scam, November 20, 2014.

I have to thank the normally satirical LSTC for playing it straight and explaining item type theory and equating to me. It didn’t just illuminate how standardized testing works; it spared my readers disputable longitudinal comparisons between law school classes. I especially appreciate the post because until then I had no interest in last summer’s bar exam debacle.

Mitchell D. Weiss, “Don’t Believe the Hype: There’s Still a Student Loan Crisis,” Credit.com, January 5, 2015.

June 2014 blessed us with a policy paper by Beth Akers and Matthew Chingos of the Brookings Institution ridiculing our assertions that there’s a student loan “crisis” on the horizon. Weiss does us a favor by summarizing many of the Brookings Institution’s policy papers over the last year arguing that the student debt system is fine but it’s those irresponsible kids taking on too much debt that’s the problem. I’m wary of giving Brookings any more attention than it already gets: The last thing we need is more genuflecting to D.C. think tanks, but Weiss’ contribution is a solid analysis for anyone interested in Brookings’ position on higher education and student loan debt.

I hope to get to substantive stuff soon.

Marketplace Has No Idea Why Law School Enrollment Is Down

In, “Why Law School Enrollment Is Way Down,” Marketplace teaches us:

While law school was once seen as a golden ticket [Ugh, so lazy.] to a financially stable future, the profession is becoming less popular. New technology is helping lawyers work more efficiently, allowing them to handle a bigger workload. But it also cuts down on a firm’s need to hire more lawyers, which means fewer graduates nab full-time permanent jobs.

Tell that to the productivity data. In terms of output per hour, the legal sector is 8 percent less productive than in 2007. It may be that potential applicants are hearing stories that law firms are filled with robo-lawyers, but if so it’s thanks to misinformation from outlets like Marketplace, not facts. It boggles my mind that reporters can get away with simply passing memes off as explanations for people’s behaviors. It’s not something that should be taught in journalism programs.

Speaking of higher education, that same article tells readers they should like another published in October titled, “Arne Duncan: Education Beyond High School Is Absolutely Necessary.” Oh joy. According to the interview:

When asked if he thought everyone should go to college, Duncan said he believed everyone needed additional education beyond high school: “If young people drop out of high school today, they are basically condemned to poverty and social failure. There are no good jobs out there… the economy has changed.”

I have no idea why Obama didn’t replace Duncan in his second term. The education secretary strikes me as an uninspiring one-term posting, like every other no-name in executive branches you didn’t even know existed. But we’re stuck with Duncan for a while longer, and with quotes like these, we can expect a warm seat for him at the student loan welfare Lumina Foundation. I forget if I’ve said this before, but in the coming decades when politicians start flinging mud at one another over the student loan write-down, Incompetent Arne will be long gone. At least the voters deciding the issue will have watered-down credentials to help them make the right policy choices.

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.

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