Student Loan Debt and Low Income Families

Posted by Student on 2009/10/12 @ 2140 Comments (0) (show tags and categories)

The Wall Street Journal recently reviewed the ways low income families are impacted by the US credit crunch. In addition to consumer purchases, The WSJ points to student loan debt as a major factor — sometimes the largest — in the composition of individual debt portfolios.

Excerpt from: http://online.wsj.com/article/SB125511860883676713…

“We saw an extension of credit to a much deeper socioeconomic level, and they got access to the same credit instruments as middle-class and mainstream Americans,” says Ronald Mann, a Columbia University law professor. Now, “it will be harder for families at the bottom of the income ladder to get credit cards,” he says.

The financial crisis has forced lenders to be especially cautious with the riskiest borrowers, a category that low-income families often fall into because their debt tends to be higher relative to income and assets. The ratio of credit-card debt to income is 50% higher for the lowest two-fifths of Americans by income than for the top two-fifths, Federal Reserve data show.

Although the tone of the article tends to focus on young people and their consumer behaviors, there is also a glimpse at a much more troubling problem.

Treasury Secretary Timothy Geithner, testifying before Congress in July, said: “We now know that millions of Americans were…unable to evaluate the risks associated with borrowing to support the purchase of a home, a car or an education.”

Student Loan Bubble is curious to hear more about Geithner’s perspective on the inability of Americans to evaluate risk, and if this can be remedied by better information, better financial education, different regulation, or perhaps something else entirely.

Education is an excellent vehicle for elevating one’s socioeconomic status, but The WSJ has identified a major issue for those in greatest need of elevation: disproportionate debt levels, coupled with the previously unheard of suggestion that education might be a risky investment.

The Lifetime Earnings Myth Part II: College Grads only earn $732576 more than High School Grads

Posted by Student on 2009/03/13 @ 1736 Comments (2) (show tags and categories)

If you are fortunate enough to be in college right now, or if you ever went to college, then you are probably aware of the statistic that proclaims, “college graduates earn $1,000,000 more than high school graduates.” On this basis, you may have rationalized student debt as being a necessary liability for achieving this higher lifetime earning potential. It’s easy to see where this mythical million comes from: according to the oft-quoted statistic, by the time college grads retire they will be earning about $25,000 more per year than high school grads. Multiply that figure by 40 years of productive labor, and you get $1,000,000.

Student Loan Bubble recently discussed one major problem with this figure: new college graduates will only earn $7000 more per year than their high school peers, while shouldering significantly more debt than high school-educated workers. Additionally, high school grads will have at least four years worth of income before college grads even enter the workforce. The take home message from the first Student Loan Bubble article is that recent grads are facing a very real risk that they won’t be able to manage their student loan debt with such a meager income increase, at least during the first few years.

The first article provoked some interesting feedback such as the question, “what happens later in life?” In this article, Student Loan Bubble presents two graphs of lifetime earnings, which were calculated based on median income data from the US Census. The census provides data in 10-year aggregates, so Student Loan Bubble assumed a yearly pay raise that would make yearly earnings consistent with the census aggregates. After determining yearly income, Student Loan Bubble determined the cumulative income between the ages of 21 and 64.

The first graph presents yearly median incomes of High School and College graduates. You can click for a higher resolution version. Notice that the gap is not major while workers are young, and that by age 35, everyone has nearly achieved their maximum earning potential. It is difficult to perceive, but high school workers actually notice a slight pay decline between age 55 and 64.

student-loan-bubble-median-yearly

Next, Student Loan Bubble presents cumulative earnings, and these results might surprise you. By the time workers are 64, college grads will have earned $1,991,574 while high school grads will have earned $1,258,998. These are median figures, which means that 50% of workers will earn less than these amounts. The difference in median lifetime earning is $732,576, which is less than 75% of the fabled $1,000,000.

student-loan-bubble-median-cumulative

Consider, too, that it not unusual to pay $120,000 to attend a private university for 4 years, and the earning difference drops to approximately $600,000. Once interest expenses are included in this figure, and accounting for the very real risk of penalties for late payments, the earning difference will be reduced even further. It should be reiterated again that these are all median data, which are a robust measure that is not affected by high-earning outliers.

It is plainly evident from these graphs that college graduates can expect to earn more with their degree, but the exact amount of this earning difference deserves to be scrutinized. The next step is to examine the upper and lower quartiles to see how the relationship looks. Student Loan Bubble predicts that the earnings gap for the 25th percentile will be somewhat lower than the median difference, and that the 75th percentile will show a much larger income difference.

It is the conclusion of Student Loan Bubble that the $1,000,000 lifetime earning difference truly is a myth that is not supported by the median income data. In the case that this myth has been used to justify excessive student debt liabilities, it is possible that some students will be seriously disappointed by their lifetime earning potential.

Supplement: A CSV file is available to download here, for anyone who wishes to give these data a closer look.
student-loan-bubble-lifetime-median-income.csv

Is student loan forgiveness the answer?

Posted by Student on @ 1125 Comments (2) (show tags and categories)

Many sectors of the economy, from banking to insurance to manufacturing, have all received extremely sizable public assistance in order to repair their damaged businesses. To be clear, these “bailouts” are actually offsetting the losses from disastrous decision-making or failed business models. If the economy were not being affected en masse, these same businesses would probably be allowed to fail, because every indication is that they have failed.

What, then, about those who used debt to create real value? What about the companies that leveraged their debt and invested wisely? What about the individuals who used debt to pay for education? This line of reasoning is loaded, because it takes as a presupposition that “Education is Valuable.” With the caveat that some people might argue over the true value of education, Student Loan Bubble will take it as a given that college usually does increase an individual’s capacity to be a productive member of society.

At what point did we collectively decide that our public funds would be used to reward failed businesses? When did we decide we would use public money to send people to school, only to leave them with crippling debt repayments? As Student Loan Bubble has previously speculated, it is entirely possible that the public financing of education has driven tuition prices up at a rate much faster than inflation.

As a nation, are we entirely satisfied to punish the most productive members of our society with debt that is impossible to discharge, when it was probably a public policy error that inflated tuition prices in the first place?

Certainly, this line of reasoning is not without consequence. This is the perfect storm that would trigger the Student Loan Bubble, which would create a new “dark ages” for US colleges and universities who rely on inflated tuition, and would bankrupt even more lending companies. Those securities that are backed by student loan debt would suddenly become “toxic assets” in exactly the same manner as housing mortgages. Government purchase of those newly-toxic assets would, in fact, be a bailout for the student lending industry.

At this point, Student Loan Bubble is not willing to articulate a formal position on the topic, but there are extremely compelling arguments to be made for both sides of the issue. Consider the following article from banks.com…

Excerpt from: http://www.banks.com/blogs/mortgages/2009/03/13/wo…

In a way, it makes sense. How many of us graduated from school with student loan debt? What would we be able to buy if we didn’t have it? How much more would we be able to borrow if we weren’t making student loan payments? The stated goals of our leaders, since the issue of financial crisis reared its head, have all been connected with getting us to spend more money. So why not make it possible?

Student loan forgiveness would be costly, though. The government would have to buy all the loans from the folks it subsidizes to offer low cost student loans, and then forgive the loans. It could work, though, as part of the effort to cut out the “middle man” when it comes to student loans. If the government began making the loans directly to students, rather than paying others to do so, the government could make money on it. And it might go toward reducing the horrendous deficit we’re in.

The lifetime earning myth: go to college, make $1 million extra. The reality: recent college grads annually earn $7,415 more than high school grads.

Posted by Student on 2009/02/23 @ 0630 Comments (9) (show tags and categories)

In a recent article for Forbes Magazine, Kathy Kristof writes about “The Great College Hoax,” which debunks the premise that student debt will be offset by higher lifetime earnings. Kristof discusses the census finding that, on average, college-educated individuals earn $25,900 more per year than high school graduates, pointing out the fallacy of inferring too much about the reasons for this income discrepancy.

Student Loan Bubble sees a much more serious statistical error in this reasoning: recent graduates earn less at the beginning of their careers, and average (also called “mean”) earnings are a distorted representation of actual earnings. A few individuals (so-called outliers) who earn much more than the rest will distort the mean, while the median will be resistant to this problem. Wikipedia provides the following explanation of median versus mean:

The median is primarily used for skewed distributions, which it represents differently than the arithmetic mean. Consider the multiset { 1, 2, 2, 2, 3, 9 }. The median is 2 in this case, as is the mode, and it might be seen as a better indication of central tendency than the arithmetic mean of 3.166.

Calculation of medians is a popular technique in summary statistics and summarizing statistical data, since it is simple to understand and easy to calculate, while also giving a measure that is more robust in the presence of outlier values than is the mean.

The following table, entitled “Earnings By Occupation and Education,” presents median yearly earnings for individuals aged 21-24, broken down by educational attainment. Click on the image for the full-size version. The original census data are available from http://www.census.gov/hhes/www/income/earnings/call1usboth.html

student-loan-bubble-census-median-income

Students cannot expect to earn an “average” amount of money; in this case, the median is a much more accurate picture of reality. Among recent graduates, the median income discrepancy between college and high school grads is a mere $7,415, which is accompanied by tens of thousands in student debt repayment. Later in life, a college degree is “worth more,” but student debt repayment usually begins when the student is 21 or 22 years old; student lenders are not content to wait until the debtor earns a higher annual income.

It is the conclusion of Student Loan Bubble that the median income statistic deserves more attention, and that lifetime earnings are a misrepresentation of what recent graduates can expect to earn. Between college and high school graduates, loan debt uniquely affects the former, who do not earn dramatically more than the latter. College graduates in their early 20s are at unique risk of not earning enough to repay their student debts. The risk inherent in managing student loans as a young professional may not be offset by future earning potential.

Excerpt from: http://www.forbes.com/forbes/2009/0202/060.html

Census figures show that college grads earn an average of $57,500 a year, which is 82% more than the $31,600 high school alumni make. Multiply the $25,900 difference by the 40 years the average person works and, sure enough, it comes to a tad over $1 million.

But anybody who has gotten a passing grade in statistics knows what’s wrong with this line of argument. A correlation between B.A.s and incomes is not proof of cause and effect. It may reflect nothing more than the fact that the economy rewards smart people and smart people are likely to go to college. To cite the extreme and obvious example: Bill Gates is rich because he knows how to run a business, not because he matriculated at Harvard. Finishing his degree wouldn’t have increased his income.

All the while students have been lulled into thinking of the extra $1 million that will be theirs, they have been forced to disgorge an ever larger fraction of it in pursuit of the degree. While the premium that college grads earn over high schoolers has remained relatively constant over the past five years, the cost of acquiring a degree has risen at twice the rate of inflation, dramatically undermining any value a sheepskin adds.

Offsetting that million-dollar income discrepancy is the $46,700 four-year cost of tuition, fees, books, room and board at a public school and $99,900 at a private one–even after financial aid, scholarships and grants. Add all this to the equation and college grads don’t pull even with high school grads in lifetime income until age 33 on average, the College Board says. Even that doesn’t include the $125,000 in pay students forgo over four years.

Regarding H.R.384: Consumer Protections for Student Borrowers

Posted by Student on 2009/02/19 @ 0630 Comments (0) (show tags and categories)

On January 26, 2009 a coalition including The Project on Student Debt sent the following letter to Congressman Barney Frank, Chairman of the Financial Services Committee, and Congressman George Miller, Chairman of the Education and Labor Committee. Student Loan Bubble is reprinting the full text of the letter, formatted as HTML for the Internet, without additional commentary.

Dear Chairman Frank and Chairman Miller:

As representatives of students, consumers, colleges, administrators, and counselors, we want to take this opportunity to thank you for your efforts to include consumer protections and accountability under the Troubled Asset Relief Program (TARP) through H.R.384, the TARP Reform and Accountability Act of 2009.

We are writing about an urgent matter related to the planned roll-out of the TARP sub-program, the Term Asset-Backed Securities Loan Facility (TALF), in February. As you know, we are concerned about the planned allocation of TALF funds to private student loan providers. Private student loans are more risky and expensive than federal loans because of high variable interest rates and few consumer protections, and private loan lenders already enjoy special bankruptcy treatment under federal law. For these reasons, financial aid experts agree that private loans should only be a last resort for students. Additionally, we estimate that just eight percent of undergraduates use private student loans, and many of those borrowers have not exhausted their federal loan options.

To ensure that taxpayer dollars in the TALF program serve students and consumers as well as lenders, we ask you to urge the Secretary of Treasury to make the receipt of TALF funds for private student loan financing conditional upon adequate consumer protections and better data collection. Specific conditions that we believe are important for the Secretary implement include:

  1. Loan modification and/or work-out requirements, such as reductions in principal and economic hardship deferrals, for current and future private student loans;
  2. Discharges in cases of borrower death or severe disability, for current and future private student loans;
  3. Limits on interest rates, origination and other fees for future loans;
  4. Mandatory loan certification and inclusion of the FTC holder notice for future loans; and
  5. Detailed data reporting on individual future loans replicating the reporting required for Family Federal Education Loans (FFEL) pursuant to section 1092b(a) of 20 U.S.C..

A bailout for the providers of usurious private student loans will not solve the college affordability crisis caused by the failing economy, and will actually be detrimental to many students and consumers. However, if a form of rescue is provided for private student loans, it would be unconscionable to do so without also providing better consumer protections. Implementing these protections will help ensure that private lenders do not unfairly benefit from the bailout at the expense of past, present, and future students and their families.

We realize that there are many pressing issues requiring your attention during these difficult economic times, but respectfully request that you consider this issue a priority given the fast-approaching commencement of TALF fund disbursement.

Sincerely,

American Association of Collegiate Registrars and Admissions Officers
American Association of Community Colleges
American Association of State Colleges and Universities
American Association of University Women (AAUW)
Americans for Fairness in Lending
Campus Progress
Consumers Union
Dēmos: A Network for Ideas & Action
The Greenlining Institute
National Association for the Advancement of Colored People (NAACP)
National Association of Student Financial Aid Administrators
National Center for Public Policy and Higher Education
National Consumer Law Center (on behalf of our low-income clients)
National Consumers League
The Project on Student Debt (an initiative of the Institute for College Access & Success)
National Association for College Admission Counseling
The Sargent Shriver National Center on Poverty Law
U.S. Public Interest Research Groups
United States Students Association

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