Ripping Off College Students’ Economic Future

Previously, I had written on Fair Market Value and its use by the CBO’s Douglas Elmendorf to rate the risk of Student Loans as advocated by both The New America Foundation and the Heritage Foundation. A rebuttal answer to a partisan CBO, the right-leaning New America Foundation, and the conservative Heritage Foundation on the usage of Fair Market Valuation methodology in the same manner as what I would have used it for to rate the return on a piece of capital equipment is simple. It is inappropriate for student Loans as there is little or no risk to loaning students money which can not be discharged through bankruptcy. The news media has been pandering to students promoting  a generational war by advocating the theft of student’s futures by such programs as Social Security, Medicare, Medicaid, etc. The Tom Friedmans, James Freemans, and others suggest baby boomers are ripping-off the X, Y, and Z generations with these programs.  From the well-heeled segment and do not have to work anymore 1-percenter population, we find Stan Druckenmiller, Pete Peterson, the Koch brothers, etc. spending portions of their $billions advocating the discontinuance of Social Security to save the country, students, and themselves. Some are taking to college campuses with false data and advising students to protest the rip-off of their futures in a Days of Rage manner. All tend to ignore the real threat to students and their future. The threat is not likely to come from Social Security, Medicare, etc.

What is threatening the future wealth and income of college students is the increasing debt taken on by students seeking the education necessary to have a chance in a global economy where investments are seeking fewer Labor intensive opportunities.  The increased funding necessary to go to college is the result of decreased governmental funding of schools, declining or stagnant household incomes, financial strategies delineating the increased risk of student loans  (CBO, The New America Foundation, Heritage Foundation, etc.), and the increased cost of attending colleges and universities (which as Alan Collinge of Student Loan Justice Org. states cost increases have outstripped CPI and even Healthcare) .

Student Debt has quadrupled from 2003 to 2013 going from ~$240 billion to > $1,000,000,000. Up from 41% in 1989, 66% of all students now have an average debt of ~$27,000. The rise in average student debt can be traced to a sharp decline in state funding of public colleges of 25% since 2000 and a stagnation/decline of household income for the vast majority of US households over a similar time span. As Dr. Elizabeth Warren pointed out in  “The Coming Collapse of the Middle Class”   .  .  .  where a  high school diploma and a sound work ethic were once the ticket to into the middle class, the college education and a two incomes are now the surest way into the middle class. Even so, evidence of the high cost of a college education and the resulting debt from a college education has begun to extract its toll on the financial futures of graduates, especially minority and low-income students. For most young adults chasing a college education requires taking on student debt. As reflected in an August 2013 study by Demos “At What Cost” ; the amount of debt carried by student has not only increased, it also varies by amount of family income. 75% of all BA graduates coming from families with incomes < $60,000 have varying degrees of debt as compared to 48% of those coming from families with incomes >$100,000. 14% of all low income students leave with loan debt > $30,000 as compared to 9% of students coming from higher income families.

Figure-1_0

80% of all African Americans graduates leave college with loan debt as compared to 65-67% of White and Latino students and 54% of Asian students.  African Americans carry a higher level of debt as compared to students of other races.

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The average debt load ranges from $20,200  – Public Schools to $33,000 – For Profit Schools with Private Non-Profit Schools at ~$28,000. The debt load resulting from For Profit Schools is 64% higher than at Public Schools.

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Some at the Brookings Institute and The New America Foundation would argue interest rates do not matter as the incremental increase only accounts for a few more dollars monthly. Interest rates do matter over the long term as they extend the length of the loan over the 10 years or “more”  needed to pay them off.  Brookings Matt Chingos dismisses first term Senator Warren’s idea of student loan interest rates being the same as what the FED Loan Rates to banks such as Goldman Sachs as being a cheap political trick. Senator Warren’s proposal does have merit and its only fault being it comes when the Fed is thinking of loosening Fed Policy. Perhaps, if Senator Warren was in office in 2008 the proposal to use Fed Rates for Student Loans would have come sooner; but then, maybe the crash would not have happened too? In any case, we would have been graduating one group of students with more manageable and less costly loans.

Young college educated students without student loan debt accumulate more retirement funds sooner, purchase homes sooner (more expensive homes at that), put down larger down payments, and paid lower interest rates.  “Households with education debt, however, had higher average incomes than those without, which is consistent with other research on the incomes of young college-educated households.”. Much of that difference comes from the preponderance on getting a higher salary to offset the loan. The next chart suggests the increased salary is more than offset by increased wealth of those without debt.

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As I have pointed-out to some proponents of higher interest (went unanswered), higher interest rates do make a difference in the long run of 10 years or more. It is not the month to month marginal cost of a loan which is at issue here, it is the total cost of the loan over its lifetime. For example, a loan or ~$26,600 to one student over 4 years would cost a student ~$32,000 over an 11 year period if the economy remained good. There is the chance of at least 1 recession if not two which would lengthen the loan repayment period. Elmendorf, Delisle, and Richwine are quick to point out the costs to the government and taxpayers of making lower interest rate student loans. Druckenmiller is pushing the false argument the fully funded Social Security and funded Medicare programs are ripping off college students and their futures. All seem to miss the point the riskier assessment achieved through Fair Market Valuation of Student loans will result in higher interest rates costing students impacting theiir wealth and income over the decades. Burdened with student debt, a student can expect to lose lifetime wealth of ~$208,000 when compared to unburdened students. “’Nearly two-thirds of this loss comes from the lower retirement savings of the indebted household, while more than one-third ($70,000) comes from lower accumulated home equity; because of the two withdrawals from savings later in their lives, the liquid savings gap is just $4,000.’ In general, ‘it can be predicted a $1 trillion in outstanding student loan debt will lead to total lifetime wealth loss of $4 trillion for indebted households.’”

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Besides an impact to accumulated wealth, there is also a difference in income as well. From 40 years of age onward the difference in income peaks at ~$8,000 annually. It continues until retirement between those carrying student debt and those without. In a demand led economy, the difference in incomes would impact purchasing power. ~57% of all households between the ages of 24 and 30  have some type of Student Loan Debt.

studentdebtfig8

Are students being ripped off by government entitlement programs? Yes they are being ripped off; but, not by Social Security or Medicare as Stanley Druckenmiller suggests. Nor are student loans costing the federal government and tax payers as much as the recent analysis of student loans done by the CBO’s Douglas Elmendorf. In reality, the risk to the government and taxpayers comes from these students being less successful in accumulating wealth and increasing income which as DEMOS has suggested would cost $4 trillion is wealth alone.  Unburdening students from a lifetime of student loan debt would benefit the economy.

References:

Fair-Value Estimates of the Cost of Federal Credit Programs in 2013; Douglas Elmendorf; http://www.cbo.gov/sites/default/files/cbofiles/attachments/06-28-FairValue.pdf

Fair-Value Accounting Shows Switch to Guaranteed Student Loans Costs $102 Billion;  Jason Delisle; http://edmoney.newamerica.net/blogposts/2012/fair_value_accounting_says_switch_back_to_guaranteed_student_loans_costs_102_billion-

Sorry Kids, We Ate It all; Tom Friedman;  http://www.nytimes.com/2013/10/16/opinion/friedman-sorry-kids-we-ate-it-all.html?_r=0

Stanley Druckenmiller; How Washington Really Redistributes Income; James Freeman; http://online.wsj.com/news/articles/SB10001424052702303680404579141790296396688

Geoffrey Canada ’74 and Stanley Druckenmiller ’75: Generational Theft; Stanley Druckenmiller; http://vimeo.com/65731171

Student Loan Justice Organization; Alan Collinge; http://studentloanjustice.org/

The Coming Collapse of The Middle Class; Dr. Elizabeth Warren; http://www.soyouthinkyoucaninvest.com/2009/04/elizabeth-warren-coming-collapse-of.html

At What Cost; How Student Debt Reduces Lifetime Wealth; Demos, Robert Hilton Smith; http://www.demos.org/what-cost-how-student-debt-reduces-lifetime-wealth

Do Student Loan Interest Rates Matter?; Beth Akers  http://www.brookings.edu/blogs/brown-center-chalkboard/posts/2013/06/26-student-loan-interest-rates-akers

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