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: Only 37 Percent of Student Loans in Repayment, Not Delinquent

I didn’t promise I’d cover it, but here it is, you lucky-duckies:

NY Fed--Student Loan Repayment Status in 2014

But I particularly relished the part at the end:

Some [the Brookings Institution] have argued that rising student debt and slow repayment are not particularly worrisome. After all, the story goes that if households can afford the modest payments they are making, then why worry about the cost of debt? But, of course, widespread failure to repay is a problem for the lender, in this case, federal taxpayers. We don’t fully understand yet how the burden of large amounts of debt on households’ balance sheets for long periods of time affects student borrowers’ behavior, but our research so far suggests that growing student debt has contributed to the recent decline in the homeownership rate and to the sharp increase in parental co-residence among millennials.

That, my readers, is as close as the Liberty Street gang is ever going to get to smacking-down the Brookings Institution.

MY DAY = MADE.

NY Fed Announces 2014 Was Again the Year of Student Loan Delinquency

…And you thought it was the year of the horse.

The Federal Reserve Bank of New York’s Household Debt and Credit Report gives us worrying news, again:

Percent of Balance 90+ Days Delinquent

If this keeps going I won’t even need to use an arrow to draw attention to the 90+ day delinquency line for student loan debtors. It’s already starting to look like a fish jumping out of the running river.

All household debt grew by $310 billion in 2014, but student loans accounted for only 20 percent of that, unlike last year, which was also the year of student loan delinquency. (Maybe they’ll have to throw out the Chinese zodiac altogether.) The year-over-year rate for student loans fell in 2014 as well, so at least that’s good news. The NY Fed people, though, are becoming … less restrained about student loans.

“[T]the increasing trend in student loan balances and delinquencies is concerning,” said Donghoon Lee, research officer at the Federal Reserve Bank of New York. “Student loan delinquencies and repayment problems appear to be reducing borrowers’ ability to form their own households.”

But don’t worry: The folks on Liberty Street are on the case. They plan to spend the rest of the week blogging on describing the debtors, explaining how the delinquency rate is calculated, and showing how debtors are (allegedly) paying down their balances. I doubt I’ll have time to comment on such things, but you ought to read it—if student debt is your thing.

For another perspective, data from the Department of Education also say things aren’t looking so hot for the American student loan debtor. As of Q1 2015, the number of guaranteed federal loan debtors who have defaulted on their loans has held at 4.4 million, and the number of total FFEL debtors is falling. The number of direct loan debtors in default has risen to 2.9 million from 2.4 million, about 10 percent of that total (9.1 percent in Q1 2014). Now, only 52 percent of all federal loans are in active repayment. More than one million direct loan debtors signed on to an income-sensitive repayment plan since last year. The number of people on PAYE nearly quandrupled. (It’s less than half a million, so that’s just big numbers divided by little ones.)

In short, people are starting to use IBR and its pals more, but they’re also defaulting.

Meanwhile, hours before the NY Fed worried that student loan delinquencies were on the rise, I read a Salon article suggesting that IBR isn’t very effective because it will forgive large student debt balances that are owed not by poor people but by those from affluent families, specifically law students. No relevant citation is given as to how we know that affluent law students will be IBR’s chief beneficiaries, but I’m sure all those poor people who attend for-profit law schools and graduate into chronic underemployment would beg to differ. It’s also odd that the article dismisses IBR on the logic that affluent families can bear it. If those debtors are so well off, why are they on IBR? Why should affluence matter when law school debtors can’t afford to pay their debts?

Nevertheless, isn’t it interesting that liberals and conservatives see IBR as a “debt-forgiveness” program? For conservatives it’s wasteful spending; for liberals its welfare for the wealthy. Sadly, these opinions have less to do with IBR itself and more to do with the Grad PLUS Loan Program. If people couldn’t borrow huge sums to begin with, everyone would see IBR in a better light.

The Salon article also apparently cleaves to the Elizabeth Warren assertion that the government is profiting on federal loans, even though that doesn’t make sense. If IBR cancels big loans while millions of people who aren’t on IBR are defaulting, then when, exactly, is the government going to be repaid?

Naturally, I don’t foresee IBR as a long-term success for the government; I agree with the CBO that losing $39 billion over a decade is probably not to the program’s credit. But it sounds to me like the 500,000 debtors who defaulted on their direct loans last year would benefit from IBR, and they’re probably not law school lucky duckies.

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.

CBO: IBR/PAYE to Cost Gov’t $39 Billion Over Ten Years

Most people know better than to read through the Congressional Budget Office’s annual “Budget and Economic Outlook,” which was released last week. Not me, though.

Student loans play a subtle roll in these kinds of reports, and this year’s offers an interesting twist. In Appendix A, which concerns the changes since August to the CBO’s baseline projection, on page 113 (pdf 119) it states:

CBO increased its projection of outlays for federal student loans by $39 billion over the 2015–2024 period. That increase is primarily attributable to higher projections of participation in repayment plans that are based on a borrower’s income. Under those plans, the government forgives the loans of borrowers who meet certain criteria, so they cost more than other repayment plans.

Yeeouch.

Don’t worry too much though, the office still believes that there’s an overall negative subsidy to the student loan system thanks to its accrual accounting methodology. I’m a rare liberal who thinks fair-value accounting works better. I think the opponents of FVA confuse the government’s enormous borrowing power with the belief that it never spends money recklessly.

The CBO’s specific estimates of the federal student loan system will be out later, but I suspect this stray statement will be used by Wall Street Journal types to argue that IBR/PAYE is a “debt forgiveness program” for wastrel college students rather than a monthly payment reduction program that it’s largely intended to be. At least people can’t say that it’s a student debtor shakedown to extend standard repayment plans. This whole student loan thing is going to get uglier and not end well. I’m not excited about it.

Shifting gears, another place student debt rears its hideous visage is in household formation. On page 36 (42), the CBO tells us that “[S]tudent loans have rendered some young adults unable or unwilling to obtain a mortgage.” Brookings Institution people, take note.

But for some reason the CBO thinks household formation will surge ahead.

CBO Household Formation Projection

The CBO’s only reason for optimism is “better prospects for jobs” and easier access to mortgages, yet it concedes that in recent years household formation has not been linked to employment gains as it has been in the past.

Looking at the employment-population ratio for 25-54-year-old Americans, there’s but slim reason to be hopeful. It’s risen two percentage points since October 2011, but it needs to go up five more points to return to its 2000 peak. I don’t think the current trajectory is compatible with rapid growth in household formation. On the other hand, two percentage points is probably more than I would’ve predicted a couple years ago.

Civilian Employment-Working Age Population Ratio

Without new households, vacancy rates will stay high (though there are regional variations I’ll not speculate on at this time), so expectations of higher future land values will stay suppressed. This doesn’t bode well.

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.

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.

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