Government’s Student Loans Profits Just An Illusion

Despite reports that federal government is set to make a substantial profit from student debt payments, Dylan Matthews explains how that profit is all an illusion of Congressional Budget Office math.

“Just like any institution, the CBO determines the cost of loans by ‘discounting all of the expected future cash flows associated with the loan or loan guarantee…to a present value at the date the loan is disbursed.’ To do that, it needs to settle on a ‘discount rate,’ which is usually the expected rate of return on the loan in question.”

“Banks and other private institutions generally estimate that by finding loans with similar risks and maturities to the one being evaluated, and then using those similar loans’ rates of returns. The CBO does not do that. It discounts all government loans using the returns on Treasuries of similar maturity… But Treasuries are the safest bonds in the world.”

“Worse, it’s hard to say what the actual market price of these loans would be, because unlike the federal government, private lenders actually ask basic questions of borrowers.”

Student Loans Become a Federal Cash Cow

“The Obama administration is forecast to turn a record $51 billion profit this year from student loan borrowers,” Huffington Post reports, and the “estimated increase in the Education Department’s earnings from student borrowers and their families may cause a political firestorm in Washington.”

“The new profit prediction comes as Washington policymakers increasingly focus on soaring student debt levels and the record relative interest rates that borrowers pay as a potential impediment to economic growth. Regulators and officials at agencies that include the Federal Reserve, Treasury Department, Consumer Financial Protection Bureau and Federal Reserve Bank of New York have all warned that student borrowing may dampen consumption, depress the economy, limit credit creation or pose a threat to financial stability.”

“Compared to a benchmark interest rate — what the U.S. government pays to borrow for 10 years – student borrowers have never paid more… the CFPB lamented that borrowers are unable to refinance their obligations after they have graduated from college and secured well-paying jobs.”

Stop Focusing on “The Deficit”

Reihan Salam explains why lawmakers’ narrow focus on bringing down the deficit for its own sake is “a fool’s errand” and not the right way to make policy.

“The country faces a number of interrelated challenges. Reforming entitlement programs, and in particular health entitlement programs, are among the most important of these challenges, but not just because they are a driver of future deficits. After all, we could raise taxes, including relatively efficient consumption taxes, to address fiscal imbalances.”

“Rather, the deeper problem is that while some of our institutions work relatively well for most people…a lot of them work really badly for people in the bottom two-fifths… We’re in this, or we should be in this, for more than just paring down the debt.”

Student Loans Could See New Rates Scheme

The House Education and the Workforce Committee is preparing to consider a bill that would “remedy, once and for all, the looming problem of student-loan interest rates,” according to National Journal, which notes that the legislation “has the advantage of being similar to proposals offered by the Obama administration and Democrats in both the House and the Senate.”

“The fixed rate for need-based loans of 3.4 percent is set to double on July 1 unless Congress acts… The legislation would effectively remove the annual need for lawmakers to tinker with the student-loan interest rate that has been set into law without a long-term offset.”

“The measure would reset interest rates for all federal student loans each year based on 10-year Treasury note plus 2.5 percent, capped at 8.5 percent. Graduate student and parents’ loans would be set on the 10-year Treasury note plus 4.5 percent, capped at 10.5 percent. In practical terms, that means the interest rates for subsidized and unsubsidized student loans would be the same, at 4.4 percent, in 2013.”

Abstract of the Week

Stephanie Owen and Isabel Sawhill have a new paper for the Brookings Institution on the benefits of higher education, finding significant variation in return on education depending on what degree and which school a student attends.

“For the past few decades, it has been widely argued that a college degree is a prerequisite to entering the middle class in the United States. Study after study reminds us that higher education is one of the best investments we can make, and President Obama has called it ‘an economic imperative.’ We all know that, on average, college graduates make significantly more money over their lifetimes than those with only a high school education. What gets less attention is the fact that not all college degrees or college graduates are equal. There is enormous variation in the so-called return to education depending on factors such as institution attended, field of study, whether a student graduates, and post-graduation occupation. While the average return to obtaining a college degree is clearly positive, we emphasize that it is not universally so. For certain schools, majors, occupations, and individuals, college may not be a smart investment. By telling all young people that they should go to college no matter what, we are actually doing some of them a disservice.”

The Troubling Youth Nonemployment Rate

From 200 to 2011, the US “has gone from having the highest share of employed 25- to 34-year-olds among large, wealthy economies to having among the lowest,” writes David Leonhardt, noting that “an explanation of the root causes remains elusive.”

“But there are obvious suspects, and each probably plays a role. The United States, for example, has lost its once-large lead in producing college graduates, and education remains the most successful jobs strategy in a globalized, technology-heavy economy… Beyond education, the nation has also been less aggressive than some others in using counseling and retraining to help the jobless find work.”

“What might help? Easing the parts of the regulatory thicket without societal benefits. Providing public financing for the sorts of early-stage scientific research and physical infrastructure that the private sector often finds unprofitable. Long term, nothing is likely to matter more than improving educational attainment, from preschool through college (which may have started already).”

Reihan Salam notes the role of higher education: “the nonemployment rate includes students enrolled in higher education, whether or not they are likely to complete a terminal degree… the availability of higher education subsidies might make college enrollment a more attractive option than low-end employment, at least in the short-term. In this regard, we may well be seeing a parallel to rising disability rates, which in part reflect the deterioration of the labor market position of older less-skilled workers, among younger workers.”

The Best of George W. Bush

Former President George W. Bush is back in the spotlight this week with the opening of his presidential library. Matthew Yglesias looks back at some of Bush’s better policies.

“The good Bush begins with the oft-derided No Child Left Behind Act that passed with overwhelming bipartisan majorities near the beginning of Bush’s presidency… Education policy and the appropriate use of standardized tests remains controversial, but I’m confident we won’t go back to the pre-Bush standard.”

“There’s also the matter of the 2003 Medicare Reform… it represented a huge advance over the status quo and arguably the largest expansion of the U.S. welfare state between Lyndon Johnson and Barack Obama… The Bush administration’s Housing First approach to homelessness seems to have been a big success and is now broadly supported.”

“Bush also had some worthy failures, like the 2007 Immigration Reform effort and his eventually overriden veto of the 2008 Farm Bill.”

Why Universal Preschool Makes Sense

Education Secretary Arne Duncan makes the case for President Obama’s universal preschool proposal.

“ The president’s plan includes a cost-sharing arrangement with states, with the entire federal investment of $75 billion covered by a new cigarette tax, and with incentives for states to make programs available for even more middle-class families… Studies consistently demonstrate that high-quality early education gives children the foundation they need to succeed. No study is perfect, but the cumulative evidence that high-quality preschool works is overwhelming.”

“Graduates of such programs are less likely to commit crimes or rely on food stamps and cash assistance; they have greater lifetime earnings, creating increased tax revenue. Although the range of savings varies across studies, the studies consistently find robust returns to taxpayers… If the United States is to remain a global economic leader, high-quality preschool must become the norm.”

Texas Considers Relaxing Strict Education Standards

The New York Times reports that Texas, the “state that spawned test-based accountability in public schools and spearheaded one of the nation’s toughest high school curriculums,” is now looking at loosening its standards.

“The Texas House of Representatives overwhelmingly passed a bill this month that would reduce the number of exams students must pass to earn a high school diploma to 5, from 15. Legislators also proposed a change that would reduce the required years of math and science to three, from four. The State Senate is expected to take up a similar bill as early as this week.”

“Proponents say teachers will be able to be more creative in the classroom while students will have more flexibility to pursue vocational or technically oriented courses of study. But critics warn that the changes could result in the tracking of children from poor and minority families into classes that are less likely to prepare them for four-year colleges.”

Breaking Down the Obama Budget

Federal Eye has a roundup of how President Obama’s budget proposal affects various government departments and agencies. Below are key highlights.

Department of Defense: “The most striking part of Obama’s proposed $526.6 defense budget request is that it fails to acknowledge the prospect that sequestration will remain in effect beyond this year.”

Department of Education: “Obama is proposing several new initiatives aimed at expanding pre-school to all low and moderate income four-year-olds…and streamlining federal programs that support education in science, technology, engineering and math. He wants to expand on the competitive grants that have become a signature of his education policy, this time creating a college version of Race to the Top, which would award $ 1 billion in competitive grants to states that make college more affordable… The budget calls for $300 million for a new program that would reward high schools that develop partnerships with employers and local colleges and redesign secondary education so that high school students are learning skills needed for careers and college.”

Department of Health and Human Services: “As expected, this budget repeats previous proposals by Obama to cut Medicare and other health programs by about $400 billion over the next decade… The budget would also increase Medicare premiums charged to higher income beneficiaries… On the plus side of the ledger are two measures with particular resonance in the wake of Newtown, Conn., school shootings: A new $130 million initiative to expand mental health services, including training for social workers and other professionals who work in schools; and an extra $30 million for programs that research ways to prevent violence.”

National Aeronautics and Space Administration: “The NASA budget includes $78 million, little more than starter money, for a mission that would use a robotic spacecraft to lasso a small asteroid and tug it back to a stable orbit a bit farther from Earth than is the moon. That asteroid could then be visited by astronauts in a spaceship under development.”

The Washington Post has also created a terrific interactive graphic digging much deeper into the budget.

Obama Releases Budget

President Obama unveiled his fiscal year 2014 budget proposal, including “nearly $250 billion in new spending on jobs, public works and expanded pre-school education and nearly $800 billion in new taxes, including an extra 94 cents a pack on cigarettes,” according to the Washington Post.

“But the president’s spending plan would also cut more than $1 trillion from programs across the federal government — for the first time targeting Social Security benefits… his budget seeks $50 billion in new cash for roads and public works, $1 billion for 15 new institutes to promote innovation in manufacturing and $77 billion to make free, public pre-school available to 4-year-olds nationwide.”

Wall Street Journal: “The budget would replace the across-the-board spending cuts known as the “sequester” with new caps on military and domestic spending, higher taxes, and changes to Medicare and Social Security, among other things… The budget calls for raising the federal tax on a pack of cigarettes from $1.01 to $1.95, which the White House says would raise $78 billion over 10 years… It would also, for the first time, propose forcing banks and other firms to pay higher taxes on trading of derivatives by accounting for gains and losses each year, raising $19 billion over 10 years.”

Politico: ”One novelty in the fiscal 2014 submission was that Pentagon officials evidently feel they’ve culled all the high-profile weapons programs they need – Wednesday’s submission did not contain news of any major cancellations. In fact, it includes funding for a new Air Force rescue helicopter program; fully supports Lockheed Martin’s controversial F-35 Lightning II with orders for 29 aircraft; and continues supporting nascent programs such as the Army’s Ground Combat Vehicle and the Marine Corps’ Amphibious Combat Vehicle.”

How to Help High-Achieving, Low-Income Students

Following a recent study finding that high-achieving, low-income students rarely apply to the most selective colleges, Reihan Salam highlights new research by Caroline Hoxby and Sarah Turner providing a solution.

“Hoxby and Turner evaluate a series of low-cost ($6 per student) interventions designed to (in a sense) substitute for expert college guidance counseling, including no-paperwork application fee waivers and customized information mailed directly to students… they discovered that the families of low-income high-achievers much preferred to receive information via snail mail and that they preferred that the information not resemble recruitment brochures, in part because many parents were fearful of being duped by unscrupulous, fly-by-night operations.”

“According to Hoxby and Taylor… under conservatives assumptions, that $10 buys a lifetime earnings increase of $222,990 to $346,874 (at a real earnings growth rate of 2.5 percent a year) or $365,028 to $567,821 (at a real earnings growth rate of 5 percent a year). This is before accounting for the social costs and social benefits, which might include, for example, helping future high-achieving students from underperforming schools by providing them with role models.”

Subsidized Student Loan Interest Rates Set to Double

“The rate for subsidized Stafford loans is set to increase from 3.4 percent to 6.8 percent on July 1… But it translates to real money for incoming college freshmen who could end up paying back $5,000 more for the same maxed-out student loans their older siblings have,” the Associated Press reports.

“The difference between the two rates adds up to $6 billion… Neither party’s budget proposal in Congress has money specifically set aside to keep student loans at their current rate… Congress in 2007 lowered the rate to 6 percent for new loans started during the 2008 academic year, then down to 5.6 percent in 2009, to 4.5 percent in 2010 and then to the current 3.4 percent a year later.”

Government Can’t Keep Up With Student Loan Defaults

“The U.S. Department of Education said 6.8 million federal student loan borrowers are now in default, representing $85 billion in debt. And the department’s systems for collecting the bad loans are struggling to keep up,” according to CNBC.

“The Department’s Office of Inspector General… blames a system installed in 2011 by Xerox that is supposed to transfer defaulted loan accounts from servicing companies to private collection agencies… The Inspector General’s office says the collection problem led to a ‘material weakness’ in the department’s financial controls last fiscal year”

Abstract of the Week

Caroline Hoxby and Christopher Avery have a new paper for the National Bureau of Economic Research exploring why high-achieving, low-income students fail to apply to the most selective colleges as frequently as their high-income peers.

“We show that the vast majority of very high-achieving students who are low-income do not apply to any selective college or university. This is despite the fact that selective institutions would often cost them less, owing to generous financial aid, than the resource-poor two-year and non-selective four-year institutions to which they actually apply. Moreover, high-achieving, low-income students who do apply to selective institutions are admitted and graduate at high rates. We demonstrate that these low-income students’ application behavior differs greatly from that of their high-income counterparts who have similar achievement. The latter group generally follows the advice to apply to a few ‘par’ colleges, a few ‘reach’ colleges, and a couple of ‘safety’ schools.”

“We separate the low-income, high-achieving students into those whose application behavior is similar to that of their high-income counterparts (‘achievement-typical’ behavior) and those whose apply to no selective institutions (‘income-typical’ behavior). We show that income-typical students do not come from families or neighborhoods that are more disadvantaged than those of achievement-typical students. However, in contrast to the achievement-typical students, the income-typical students come from districts too small to support selective public high schools, are not in a critical mass of fellow high achievers, and are unlikely to encounter a teacher or schoolmate from an older cohort who attended a selective college. We demonstrate that widely-used policies–college admissions staff recruiting, college campus visits, college access programs–are likely to be ineffective with income-typical students, and we suggest policies that will be effective must depend less on geographic concentration of high achievers”

Bonus Chart of the Day

– The Center on Budget and Policy Priorities has a new report including this chart showing the deep cuts and sharp tuition hikes that many states have made in public higher education since the start of the financial crisis.

Phil Oliff: “Deep state funding cuts have major implications for public colleges and universities.  States (and to a lesser extent localities) provide 53 percent of the revenue that is used to support instruction at these schools… Reversing these trends and reinvesting in higher education should be a high priority for state policymakers.”

“A large and growing share of future jobs will require college-educated workers.  Investing in higher education to keep tuition low and quality high at public colleges and universities, and to provide financial aid to students who need it most, would help states to develop the skilled workforce they will need to compete for these jobs.”

Easing the Sequester Pain

Included in the latest continuing resolution were a number of amendments meant to keep the full $85 billion of sequester cuts while reducing the pain resulting from indiscriminate, across-the-board cuts.

The New York Times details some examples of the new flexibility in enacting sequestration: “The final Senate bill did ease the hit of the automatic cuts known as sequestration somewhat, especially those that could hurt vulnerable Democrats. For instance, an amendment adopted Wednesday transferred $55 million to federal meat and poultry inspectors from other agriculture programs to make sure food plants can stay in operation… Another amendment shifted money to hard-hit tuition assistance programs for military service members.”

Wall Street Journal: “The Senate bill also included more money for an array of programs that enjoyed bipartisan support such as customs and border agents, disaster assistance, embassy security, and a new program to blunt cyberattacks and foreign espionage. But to offset those increases, the bill squeezed other programs, including Environmental Protection Agency programs and an Obama health-care panel.”

The Invisible Hand of Sequestration

Matthew Yglesias: “I think the idea of sequestration as a macroeconomic killer was overblown from the beginning, but ever since Republicans stopped trying to call it the “Obamaquester,” the tendency has been to underblow it with a wildly disproportionate amount of attention being paid to things like White House tours. The truth is that sequestration isn’t going to lead to a single visible disaster, just a lot of slow-rolling sad stuff.”

“I doubt 36 poor kids losing their preschool slots will have a discernible impact on Q2 GDP. They’ll switch into some lower quality day care option, and whatever negative consequences accrue from that won’t be fully visible for decades.”

Sequester Begins to Panic Lobbyists

The New York Times reports that the continued failure of lawmakers to address the sequester cuts that went into effect at the start of this month has set off a “frenzy of lobbying” from Washington’s most powerful interest groups.

“Health care and education groups, advocates for poor people, and state and local officials who fought in the past for bigger budgets are now trying to minimize the pain… The pace of lobbying has picked up because of a widespread belief that this year’s cuts are locked in and may be a prelude to further cuts in the same programs in each of the next eight years.”

Student Loan Bubble Keeps Growing

The Wall Street Journal reports on the explosion of investor demand for student loan securities even as “borrowers are falling behind on their payments at a faster clip,” showing “the lengths they are willing to go to generate returns in a period when interest rates are hovering near record lows.”

“31% of people paying back student loans were at least 90 days late at the end of the fourth quarter, up from 24% in the fourth quarter of 2008… But investors have stepped up their search for yield since the Fed in September announced its latest bond-buying program, aimed at lowering long-term rates.”

Yves Smith sounds the alarm: “Student debt is now a bigger source of consumer borrowing than credit cards… And it’s now the loan category where borrowers are in most distress… This level is particularly ugly given that student loans cannot be discharged in bankruptcy. It’s more rational to get in arrears on anything else, since you have some hope of negotiating for a restructuring.”

“It’s hard to discern how this plays out, but the endgame might not be that far off.”

Texas Wonders What To Do With Budget Surplus

Texas Comptroller Susan Combs announced last month that the state would have an $8.8 billion surplus, according to The Economist, but the extra funds have sparked a fight over what to do with the taxpayers’ money.

“Under Texas law, the state may not spend more than the comptroller expects it to have. The 2011 estimate…meant that the state was in effect facing a budget shortfall of more than $20 billion… Most of the shortfall was made up by deep cuts… So now the Democrats are arguing that the state can afford to be a lot more generous.”

“The state’s Republican leaders are apparently willing to spend more money this time round than last, and the state will probably allocate billions of dollars to much-needed infrastructure improvements… The Republicans seem less interested, though, in operational expenses such as school funding.”

Too Much Guidance in Obama's Pre-K Proposal

Reihan Salam is concerned that President Obama’s plan to provide matching funds to states to expand access to public preschool is “will encourage overspending” and could be “overly prescriptive.”

“How will we determine which kinds of teachers are deemed qualified? This is presumably a domain in which different approaches might yield different conclusions… The definition of “well-trained,” if experience is any guide, may well include some level of postgraduate instruction, a boon to incumbent higher education providers.”

“Moreover, the federal government is explicitly establishing that teachers must be ‘paid comparably to K-12 staff,’… The federal government is also insisting on small class sizes — so even if it makes more sense for a pre-K programs to have a high adult to child ratio but teachers who are paid substantially more than K-12 staff, that option is off the table.”

Chart of the Day

– Chart showing per capita spending on children and the elderly at the federal and state levels, via the Urban Institute, which notes that “an elderly person receives close to seven federal dollars for every dollar received by a child.”

“State and local spending on public schools dwarfs all other forms of spending on children, averaging $7,154 per child, out of a total public investment of $11,822 per child in 2008.”

“In total, public spending on the elderly was $26,355 per person, or 2.2 times the amount spent per child in 2008. Health care expenses are a significant portion of public expenditures on the elderly—more than $11,000 per person—but per capita spending on the elderly remains considerably higher than per capita spending on children even when health spending is excluded.”

An Easy Way to Send More People to College

Peter Orszag: “More graduates would mean lower inequality, because the wage premium for a college degree would be reduced by the additional supply. And it would mean higher national income, because better-educated workers are, on average, more productive.”

“Among many considerations that influence a person’s decision to attend college, financial aid is a significant one… It is not just the amount of aid that matters but also the complexity of the process. Students apply for federal aid through the Fafsa (free application for federal student aid), which is cumbersome to the point of being intimidating to many potential applicants.”

What's So Great About Universal Pre-K?

President Obama announced in his State of the Union address that he wants to promote universal pre-kindergarten in his second term, but provided few details on how to achieve this goal.

Matthew Yglesias lays out some of the basic questions that must be answered: “How much money is the federal government going to pony up? What’s the income definition and subsidy level the president has in mind? By what standard are we assessing ‘high quality’?”

Jonathan Cohn says that the plan “will probably resemble a recent proposal from the Center for American Progress… the biggest component is a proposal to partner with states, matching their investments dollar-for-dollar, with a goal of subsidizing preschool based on income… It would cost about $10.5 billion a year.”

Adam Ozimek provides recommendations for implementing the plan: “I think a goal of universal pre-k is far more achievable and far more desirable than a goal of universal college attendance. At the very least marginal educational dollars should be directed from college subsidies to early education. To ensure buy-in from education reformers and to make sure the money is spent well it is imperative that pre-k funding not be spent through the existing union dominated public school system that has proven so difficult to reform. Charters and choice should be a focus here.”