Saturday, April 5, 2014

PLUS loans are not student aid

This article (link at end of post) does an amazing job of highlighting the problems with parental PLUS loans. Kudos to Rachel Fishman at New America Foundation for nailing this topic so well. 

This vignette, which Fishman draws from a piece advocating the loosening of credit standards on PLUS loans, is supposed to create outrage that this parent was denied a PLUS loan:

"Kristina, a senior English major at Claflin University, needed a $10,770 Parent PLUS Loan to finish her senior year; her request was denied. Her single father is doing his best, but he has only a high school education and seven other children to support. Like so many HBCU students, Kristina is looking toward a career of service after graduation, as an officer in the U.S. Air Force."

A single father with only a HS education and 7 kids should take out a loan that is not dischargeable in bankruptcy so his kid can finish college? That's insane. 

The solution here is an income-contingent loan for the student whose prospects are so bright - not to place  Kristina's dad and six siblings in economic peril.

Tuesday, February 18, 2014

The (Fixable) Problem with Pay It Forward

Cross-posted from the Hamilton Project blog:

Michigan has now joined Oregon in proposing a “Pay It Forward” student lending system in which students pay no tuition up front and pay back a fixed percentage of their income after college. This sounds very similar to an income-contingent repayment (ICR) system, which I advocate in a recent Hamilton Project proposal. But there is a key difference between Pay It Forward and ICR, and it’s one that makes Pay it Forward unworkable as proposed.

In both the Michigan and Oregon versions of Pay It Forward a borrower in repayment contributes a fixed percentage of income for a fixed number of years. Her liability is not denominated in dollars, as in a standard loan, but as a fixed number of payments. 

An aside on vocabulary: economists call this a graduate tax –a tax on earnings for those who have gone to college.  It’s called a tax, rather than a payment, because a borrower can’t buy her way out of the liability. The borrower is taxed for 25 years, even if she has repaid the principal (plus interest) after a few years.

In the proposed Pay It Forward systems, a graduate who does extremely well in the labor market will end up repaying many times over the cost of her education, while one who does poorly will pay much less. There is therefore cross-subsidization in this system, with the “winners” paying some of the college costs of the “losers.”

Economic theory – and history – shows that loans funded by a graduate tax won’t work because those expecting high earnings won’t participate. Yale famously attempted a graduate tax in the 1970s, lending money to its undergraduates and then having them pay back a fixed percentage of their income for a fixed number of years. What happened? Yale students who expected high earnings (e.g., aspiring investment bankers) shunned the program, while those who expected low earnings (e.g., aspiring artists) embraced it. Yale’s program spiraled into insolvency.

This is a classic case of adverse selection – borrowers who would be subsidized participate while those who would subsidize stay away. This is unsustainable, as without the high earners the system does not get enough payments to cover tuition costs. Because of adverse selection graduate tax can work only if participation is mandatory, with everyone forced into the borrowing pool.  
Another interesting aside: this is similar to the dynamic in insurance markets, which collapse if sick people buy coverage and healthy ones go without. Adverse selection is why coverage is mandatory under the Affordable Care Act, and it’s why health policy wonks have so carefully tracked the enrollment of young, healthy people in the new insurance exchanges. The young, healthy participants cross-subsidize the older, sicker participants, just as high earners subsidize low earners in a (mandatory) graduate tax.

Neither the Oregon nor Michigan plan requires all borrowers to participate in their programs. I (and other economists) therefore predict that the programs, as currently proposed, will be brought down by adverse selection.

A minor tweak to Pay It Forward, as outlined in my Hamilton proposal, will maintain its positives (simplicity, insurance against bad draws in the labor market) while eliminating the negative (unsustainability). The change is this: denominate debt in dollars, and let borrowers pay their debt. If a student borrows $25,000 and (due to pluck and luck) earns enough that she has paid back the principal plus interest after just ten years, she will stop paying into the program. 

If a borrower instead runs into hard times and still owes money after 25 years, the balance will be forgiven. In this way, Pay It Forward and my income-contingent repayment proposal both subsidize low earners.  The key is that my modification keeps high earners from fleeing the program, transforming Pay It Forward it into a universally attractive program rather than one that appeals primarily to low earners. 
As pointed out by Theda Skocpol, universal programs are politically more resilient than those that primarily benefit poor people. Keeping high earners in Pay It Forward will give it the broad-based political support it needs to survive. 

My tweak also makes transparent the cost of Pay It Forward. Some borrowers cannot, given their low earnings, pay off their loans. Their forgiven debt is the cost of the program, and is borne by all taxpayers.  Without my tweak, the costs of Pay It Forward are disguised by the fairytale that it is self-funding. When high earners shun the program and it collapses, the taxpayers will be on the hook to bail it out. The financial cost, in the end, is the same, but the political cost is much higher, since the program will be deemed an expensive failure.  

With the political momentum behind Pay It Forward, we have a rare opportunity to restructure and reimagine how we pay for college. Get the design right, and we will have a financially and politically sustainable system for funding college that works for students and taxpayers. Get the design wrong, and we will have a spectacular flameout that sets back reform for another generation.

Saturday, December 14, 2013

Girls' Growing Advantage on PISA Tests

There is a long history of academic articles and social commentary on boys' advantage on tests in math and science. Two low points: the Barbie doll who chirped "Math class is tough!" and Larry Summer's off-the-cuff, uninformed opinions on why there are not more women in science.

Girls have now caught up with boys on math and science in many tests, including the PISA, which was released last week. At least one article pointed out that, in the US, there is no longer a gender gap in math and science scores.

I saw no articles on a much more striking result: girls' advantage on reading scores is absolutely enormous. This gender gap is much, much larger than the math gap was ten years ago.

When do we get a Ken doll whining "Literacy is hard?" Will pundits soon enlighten us as to why boys are intrinsically unmotivated to read?

Tuesday, October 29, 2013

Proposal for Reforming Student Loan Repayment

Last week I released, through the Hamilton Project of the Brookings Institution, a proposal for reforming the repayment of student loans. This news item from my school's website sums up the event and press coverage:

On October 21, The Hamilton Project hosted a forum on the evolving role of higher education in American society.  At the forum, Susan Dynarski presented a paper titled "Loans for Educational Opportunity: Making Borrowing Work for Today's Students," which served as the focus of a roundtable discussion. The paper was co-authored by Education Policy Initiative postdoctoral research fellow Daniel Kreisman.

Dynarski and Kreisman propose a single, income-based loan repayment system that automatically deducts payments from borrowers' paychecks to replace the current array of repayment options. Dynarski emphasized that the U.S. currently has "not a debt crisis, but a repayment crisis," stating: 

"We have a repayment crisis because student loans are due when borrowers have the least capacity to pay. It often takes years for college graduates to settle into a steady, high-paying job that reflects the value of their education."

Dynarski and Kreisman's proposal was one of three papers released by The Hamilton Project suggesting major changes to the financial aid system. Their work received coverage in The New York Times, The Chronicle of Higher Education and Inside Higher Education.

Thursday, October 17, 2013

Postdoc Position in Education Research at Univ of Michigan

We are looking for a great postdoc to work on our team here at University of Michigan. We have a tremendous set of resources for a recently-minted social scientist (econ, sociology, poli sci, education, psych...) who wants to broaden and deepen skills in experiments, quasi-experimental analysis, and working with state and district partners in evaluation.

Sunday, October 13, 2013

The Missing Manual: Using National Student Clearinghouse Data to Track Postsecondary Outcomes

I have a new paper with two great colleagues, Steve Hemelt (former Michigan post-doc, now a prof at UNC-Chapel Hill) and Josh Hyman (current post-doc, newly-minted PhD in economics and public policy from Michigan). The three of us have worked extensively with data from  the National Student Clearinghouse, and in this paper we share insights and advice about this relatively new data rource.

"This paper explores the promises and pitfalls of using National Student Clearinghouse (NSC) data to measure a variety of postsecondary outcomes. We first describe the history of the NSC, the basic structure of its data, and recent research interest in using NSC data. Second, using information from the Integrated Postsecondary Education Data System (IPEDS), we calculate enrollment coverage rates for NSC data over time, by state, institution type, and demographic student subgroups. We find that coverage is highest among public institutions and lowest (but growing) among for-profit colleges. Across students, enrollment coverage is lower for minorities but similar for males and females. We also explore two potentially less salient sources of non-coverage: suppressed student records due to privacy laws and matching errors due to typographic inaccuracies in student names. To illustrate how this collection of measurement errors may affect estimates of the levels and gaps in postsecondary attendance and persistence, we perform several case-study analyses using administrative transcript data from Michigan public colleges. We close with a discussion of practical issues for program evaluators using NSC data."

Thursday, October 3, 2013

Government Jobs and "Miserly" Pay

This article lacks perspective on what low-wage workers earn in the US:
"And while pay for senior civil servants can be generous, other salaries can be equally miserly. Wages can vary depending on the location, but in Philadelphia, jobs at salary level GS-2 — a post that typically goes to someone with a high school diploma and no experience — pay as little as $24,379 annually."
 My quick tabulation of the March 2012 Current Population Survey (I have it on DropBox, if you are stymied by the BLS blackout!) shows that, among full-time workers in their early twenties with only a high school degree, median earnings are $18,000 and the 75th percentile is $28,000. Government work has always been a safe haven for those with low skills, and $25,000 a year does not look miserly for those competing for jobs in this particular market. A G-2 is a great job for someone with no experience and little education.