Some Good (Which is to Say, Accurate) Student Debt News

debt-graphicThere is much hand wringing about student debt, as we have noted here previously.  Student loans top $1 trillion; millenials can’t buy homes or afford to get married because of student debt, etc. etc.  See The College Debt Crisis: A CNBC Special Report or “Student Debt Crisis” in the Huffington Post.

Then take a few minutes to look at work done by policy analysts at the Brookings Institute rather than hyperbolic reporting done by journalists.

Using household level data, two Brookings Fellows from the Brown Center on Educational Policy find three important things:

  1.  Roughly one-quarter of the increase in student debt since 1989 can be directly attributed to Americans obtaining more education, especially graduate degrees.
  2.  Increases in the average lifetime incomes of college-educated Americans have more than kept pace with increases in debt loads.
  3.  The monthly payment burden faced by student loan borrowers has stayed about the same or even lessened over the past two decades.*

As analyst Matthew Chingos says in a New York Times article, “We are certainly not arguing that the state of the American economy and the higher education system is just great, but we do think that the data undermine the prevailing sky-is-falling-type narrative around student debt.”

Writing in the Times, David Leonhard hypothesizes about why the debt crisis meme is so powerful.  “I think it stems in large part from the fact that Americans are legitimately frustrated about the economy’s performance over the last 15 years. But when you start looking at the evidence that blames student debt, it can be flimsy.”

The general conclusion of the analysis is straightforward and important: getting a college education, even if it requires taking out some student loans, is a smart decision. Co-authors Beth Akers and Chingos conclude that “typical borrowers are no worse off now than they were a generation ago,” and with increasing returns on education, most of them are better off in the long run.

*As a simple rule of thumb, the average monthly debt payment for student loans at typical interest rates and paid back over ten years is about 1.1% of the loan principle.  So with total debt of $30,000, a borrower would have a monthly loan payment of about $330.

Heartless Economists

No-heart copy copyAmong themselves, economists occasionally lament how misunderstood we are.  The world seems to think we are heartless and immoral when we are just trying to help the world by making things a little more efficient.

In a recent Bloomberg posting, Megan McArdle notes that New York City just outlawed surge pricing by the private car service company Uber.

Basically, New York has decided to try and suspend the laws of supply and demand and keep ride prices fixed during emergencies, even as policymakers know that allowing prices to rise with an increase in demand will bring about an increase in supply.  Some call this price rise gouging.  It often is decried during emergencies when gasoline, water or generators see their prices rise.  Economists call it efficiency and admire the beauty of the market—the matching of willing buyers with willing suppliers.  Those who want the product most will have it provided to them through the price mechanism.

Yes, those with more resources (those who are richer) will often get these scarce commodities, but the increase in supply brought about by the price increase will also mean that more individuals overall will get these needed goods than if the prices are fixed.

Trying to fight supply and demand is like fighting the weather or gravity.   Can’t be done without causing more harm.

When I taught introductory economics classes and used the emergency provision of water or gasoline and surge pricing as an example, those who loved the efficiency of the market were most likely to be economics majors.  Those who criticized suppliers for “price gouging” often ended up in the humanities.  The natural scientists tended toward efficiency but often with some qualms.

The beauty of the liberal arts experience: living and studying with others who have different views of the world!

“It’s like Rating a Blender”

blenderIn a recent editorial, the New York Times Editorial Board weighed in on educational policy in support of the Obama Administration’s proposal to have a rating system for colleges.  More importantly, they support the idea of using “the ratings to help guide the allocation of federal student loans and grants.”

They note, accurately, that college presidents finds the proposal “immensely controversial.”

There are two basic concerns:

  1. What standards to use?
    The outcomes from a college education are hard to measure for any single school, though schools, such as CSB/SJU, try.  It becomes much harder to find good outcome measures when the educational mission varies across the 4000+ post-secondary schools.  The Ivies are not doing the same thing as big state schools or small liberal arts schools, to say nothing of two year schools.  It is not heartening to university administrators or faculty to hear an Obama administration official say, “It’s like rating a blender.  This is not so hard to get your mind around, ” as Jamienne Studley, a deputy undersecretary at the Education Department, recently told college presidents after a meeting in the department’s Washington headquarters in November.

    Yes, it is like rating a blender if Hamilton Beach or Oster got to pick their consumers and could prevent anyone from buying their blenders if they thought the customer might give them a bad review on Amazon.  It is surprising and slightly depressing to discover that Ms. Studley is a former college president.  I hope she did not view Skidmore graduates as household appliances when she was in Saratoga Springs.

    No simple rating systems will adequately capture the subtlety of the diverse and hard to measure benefits that accrue over a lifetime from a college education.  As one college president said, any rating system would necessarily be “oversimplified to the point that it actually misleads.”

  2. The incentive problem.
    The bigger issue for college presidents and society at large is that any rating system will set up incentives that will harm students that the NY Times Editorial Board, the Obama Administration and all of us should care about.  Among the suggested metrics for a rating system are graduation rates, employment rates, earnings or debt loads.  If such metrics determine federal loans or grants, school will simply respond by limiting the enrollment of students who might hurt their ratings by dropping out or not finding employment, etc.

    Who might these students be?  It seems obvious that they will be minority students, those from disadvantaged backgrounds and first-generation students.  Exactly the students whom we hope will benefit from the returns on a college education.  The implications for income inequality and economic stratification should be quite obvious, even to non-economists.

Whatever challenges the higher education system has and whatever problems we need to address will not be solved by a simplistic ratings system, and the outcomes for the least advantaged students would likely be worse than they are presently.