Paul L. Caron
Dean


Tuesday, December 27, 2016

A Plan To Make Students Great Again:  Replace Loans With Income Shares, Force Colleges To Spend 5% Of Their Endowments Each Year

Trump (President Elect)New York Times op-ed: To Boost the Economy, Help Students First, by Sheila C. Bair (President, Washington College):

Donald J. Trump has made bold and provocative campaign promises on taxes, trade, immigration and infrastructure. These pledges are all in service of bolstering our economic future. While we hope these initiatives will help our economic prospects, there is one important measure missing from the debate. And it could have an even more immediate and direct impact on economic growth: student debt relief.

Student debt now stands at $1.3 trillion. More than half of student borrowers are unable to repay their loans according to the original terms. In a well-intended but poorly executed effort to make college broadly accessible, the government has lent freely to students, with little attention to whether they can repay those loans. The result is millions of young people with debt they cannot afford. ...

Mr. Trump should scrap debt financing of higher education and make the transition to true income share arrangements. Borrowers would fulfill their obligations to taxpayers by paying a fixed percentage of their income over an extended period of years. Think of this change as a shift in the government’s role from creditor to equity investor. When you lend to a business, it is obligated to pay you back with interest, but with a stock investment, your returns derive from the success of the company.

Similarly, with a student loan, there is a fixed obligation to repay the loan amount with interest, but with income share, there is only a contractual obligation for the student to return to taxpayers a certain percentage of his or her future income. Higher earners will pay back more than lower earners (up to a limit), though all will have an affordable payment and all will have protection against life events — a health crisis, caring for an elderly parent — that reduce their income.

Replacing the current, unwieldy programs with a single repayment plan based on income would provide immediate relief for millions of young people while guaranteeing a steady source of revenue to taxpayer coffers, particularly if payments were built into the tax withholding system. It would also provide economic stimulus, as lower payments on student debt would translate into higher consumer spending. ...

An additional measure to ease the student debt load would be tax law changes to require colleges to spend at least 5 percent of their endowments, as is required of other nonprofits. That’s what we do at Washington College. The law should also require that schools use a certain amount of this endowment spending for scholarships. ...

These two initiatives would be well received by young people, who in past elections have shown little affinity for the Republican presidential candidate. This most recent election was no exception, with Mr. Trump receiving 37 percent of the vote from people aged 18 to 29, compared with 55 percent for Hillary Clinton. Mr. Trump also had low support among voters with college degrees, whom Mrs. Clinton won by a nine-point margin, 52 percent to 43 percent. By moving quickly and decisively on the student debt crisis, Mr. Trump could promote his pro-economic growth agenda, while enhancing his standing among young people and voters with college degrees. Student debt relief is smart economics and smart politics for the new administration.

https://taxprof.typepad.com/taxprof_blog/2016/12/a-plan-to-make-students-great-againreplace-loans-with-income-shares-force-colleges-to-spend-5-of-the.html

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Comments

Interesting idea; but, would it not suffocate the areas of academia for which little or no return would be forthcoming? What about the "lifetime student?" Go to school and never go to work?

Posted by: Tom N. | Dec 27, 2016 12:46:38 PM

The commenters, predictably, rip Blair to shreds for treating the high cost of college as a constant that we all must work around rather than a variable that can be changed. I am confident, now more than ever, that there will be an outright revolt against college expenses by the time my children reach college age 17 or so years from now. My guess is that flagship public schools will increasingly become elite institutions and upper class parents will lobby to keep tuition levels down. Sort of like the Michigan, California system.

Posted by: JM | Dec 27, 2016 12:48:28 PM

Proposal has word "force" in it. No, thanks. Say no to the left (Nazis).

Posted by: Anon | Dec 27, 2016 3:48:45 PM

Funny how Washington college president writing the op-ed wants to lecture us about student loan debt but does not address the underlying drivers of the student loan debt crisis. College’s like hers and college administrators are pumping out way too many degrees and charging students way more for said degrees than the degrees are actually worth. Quick google search shows tuition to Washington State is $43,702 add room, board and meals that inflates to over $55,000 a year tuition. Until these College’s admit to themselves, the faculty and the students that not all degrees are created equal and not all degrees have the same marketplace value (Accounting VS Gender Studies) then this problem will persist. Happy to discuss reforms but not until the actual drivers of the student load debt crisis are addressed and the drivers are the College’s themselves.

Posted by: John.Citizen | Dec 27, 2016 3:58:31 PM

Endowments should be invested 100% in loans to students (replacing government loans). If colleges want to charge fixed rates, fine. If they opt for income-based repayments, fine. If they lend to grievance-studies majors with poor chances of repayment, fine. But in any case, colleges will be bearing the costs of their own decisions.

Posted by: Bob Watson | Dec 28, 2016 5:48:29 AM

Other posters are right. Any effort to address the college debt crisis has to deal with the costs of that education rising some three times faster than inflation, with administrative bloat being one reason.

And do we really need that many people getting degrees? I'm also no fan of intrusive government policies, but it has been the federal government, by prosecuting employers for tests that impact certain minorities more than others, has created situations where employers use an expensive college degree as a surrogant for a more practical test.

Perhaps its time for pressure to be applied on employers (including those in government) to justify their requirements for a college degree. If they can't, then open the job up to anyone who meets reasonable, practical requirements.

Keep in mind that would not only mean that more young adults would be spared those huge and often unnecessary college debts, they'd get four years of income in its place to put toward a home or starting a business of their own.

It's be a win-win situation for everyone, except of course college administrators, who will scream bloody murder.

Posted by: Michael W. Perry | Dec 28, 2016 5:50:15 AM

Costs for higher education have sky rocketed BECAUSE they are subsidized by government. This prof wants you to ease the impact on the students so that his prices can rise unfettered with only the tax payer realizing the pain. He thinks you won't notice the pain as much if it is buried in your taxes.

Posted by: Humility | Dec 28, 2016 6:16:54 AM

The government should make colleges cosigners of student loans. If the student defaults, then the college is on the hook to repay the loan balance. That will quickly put an end to the current practice of colleges charging over-inflated prices for what are essentially worthless degrees.

Posted by: champ | Dec 28, 2016 6:19:44 AM

Since the proposal would link colleges' future income to the actual value of the qualifications issued it would give colleges an incentive to make sure that the particular courses offered actually are valuable, and that the students accepted are capable of benefitting.

Posted by: Pat | Dec 28, 2016 6:49:03 AM

If the government limits the amount of student loans that can be borrowed, the cost of college will go down, and students will have motivation to earn their degree quicker.

Posted by: the observer | Dec 28, 2016 7:37:39 AM

So much ignorance in this thread... not worth the time to correct. But to address one common complaint here, folks, the MAXIMUM in federal student loans one can take out as an undergrad is barely 10% of the cost of attending a NYU or Chicago. There are many, many drivers of college tuition costs; try not to fall into the standard neoliberal "government subsidies are the only problem" trap, much as SLM and other private lenders would like you to.

Posted by: Unemployed Northeastern | Dec 28, 2016 8:32:31 AM

Funding student loans from endowments will likely have the consequences of actually raising tuition for many universities. Endowments are funded by big donors who usually specify how they want their contributions spent. Common uses are endowing chaired professorships, supporting particular university programs, and buildings. Forcing universities to spend 100% of their endowments on student loans would violate many, if not most, of the agreements that the universities have with the donors and they would be obligated to return the endowments. Expenses that were formerly covered by endowments would then have to be covered by tuition. Future endowment donors who are unable to control how their donations are spent will likely put there money elsewhere.

Forcing universities to take on the cost of failed student loans, something that Glenn Reynolds has often championed, is also a counterproductive strategy. Universities have enough statistics to be able to predict their future losses under such a program. Their easiest course of action is to raise tuition to cover those anticipated losses. Students who can repay their loans will therefore be subsidizing those who make poor choices. This is hardly the desired outcome.

Posted by: echo7 | Dec 28, 2016 9:00:29 AM

Another way would be to get Feds to block grant money to Uniiv then let them loan out and be responsible to pay back feds. This might make Univ more responsible on giving out bogus degrees in worthless degrees in Gender and Ethno studies that can never pay enough to pay back loan. Some state legislatures looking at these useless degrees in grievance studies. Tennessee legislature just defunded and shut down entire Diversity dept

Posted by: Bill | Dec 28, 2016 9:26:17 AM

I agree the cost of college needs to be addressed, but I also think the rise in cost is directly linked to government subsidies. It cost me (my parents) $55k to get a degree from Ohio State, and that cost is now over $110k. If you crunch the numbers, it comes out to something like a 9% increase every year (averaged), which is well above the increase in the cost of living.

Personally, I don't see why the government should be involved at all. I like the idea that is proposed, but why not take it a step further? Get the government out entirely, and require students to find investors themselves. It could be individuals, or investment funds, or charitable foundations, or the corporations you work for. As with everything else in the market, this would put the "Invisible Hand" to work bringing costs down and finding the most efficient use of resources. No more graduating thousands of art history majors every year when we only need to be graduating dozens (ok, maybe hundreds).

Posted by: Brett | Dec 28, 2016 9:30:15 AM

If this is an equity investment, what happens when the "firm" goes bankrupt? Is the investor (the taxpayer) wiped out?

Posted by: Larry | Dec 28, 2016 10:20:00 AM

Brett and everyone else,

If you *get the government out* of student lending, private lenders will fill the gaps because their loans are 1) also nondischargeable and 2) are securitized seven ways from Sunday. In fact, private lenders have been quietly lobbying for something like this for years. There is no free market in student lending. The only real difference to students is that private loans have no income-based repayment options and more stringent deferment policies.

Posted by: Unemployed Northeastern | Dec 28, 2016 10:30:06 AM

Equity financing of higher education is a fine idea, but Bair spoils it by assuming that government must be the lead investor. Private investors should place those bets. Otherwise we'll continue to make education decisions based on politics, not on market needs. (Side benefit for Trump: academic pockets of resistance will quickly wither.)

Posted by: Hi-Top | Dec 28, 2016 11:26:44 AM

Unemployed, riddle me this: what do you call it when a loan is made without a) collateral, b) verification of income, c) checking personal credit history, and d) without considering the ability to repay?

Well, if you're a private sector bank, that's considered predatory lending and totally illegal. But if you're the federal government, that's considered a perfectly acceptable student loan.

That's a distinction without any fundamental difference...

Posted by: MM | Dec 28, 2016 2:36:22 PM

I think this is a crap idea.
Simple solution: make student loans subject to bankruptcy where the burden of repayment is shifted back to the college in that situation.
Also base the amount available to be borrowed on the classes being taken and the economy's need for that knowledge. For instance: classes in gender studies are eligible for a $30 loan. College Algebra on the other hand would be eligible for $2000.

Posted by: Jake | Dec 28, 2016 3:07:41 PM

@MM,

Feel free to share any story or article about law students at any law school being denied full funding in private student loans in the pre-GradPLUS era (before 2006), when most private law schools cost between $40k and $60k per year and the government would only cover $20k with the Graduate Stafford program. Hint: you won't find any.

Posted by: Unemployed Northeastern | Dec 28, 2016 9:39:34 PM

Unemployed,

Could you point to any private student loan program that did not require a co-signor, a credit history check, verification of income, and collateral?

Because that was my point, the underwriting terms, which you dodged, perhaps because you know the federal government doesn't have any such lending standards, which they force ordinary banks to comply with. It's a case of do as I say, not as I do...

Posted by: MM | Dec 29, 2016 9:48:28 AM

The idea of changing to a % of earnings, for perhaps 20 yrs, has merit. It would mean that those who take big loans who dont succed are not crushed by student debt the rest of their lives, while the taxpayers would still get their money back from those who do get high earnings. I do sense one unfairness in it though, the % of earnings demanded shuld reflect a good estimate of that students future earning ability, so those in poor earning majors, with bad grades, and poor graduation prospects, have to pay a higher % to continue. As for who determines the %, let the college do it, since they should now both the student and the majors earning prospects better than anybody. We can ensure they ahve an incentive to get it right by making them responsible for 50% of the loan, in exchange for getting 50% of the future earnings. Have a default %, say 5%, adjustible up or down by 1-2% to reflect future earnings potential.

Posted by: richard40 | Dec 29, 2016 11:16:41 AM

@MM,

Yeah - law schools. Sallie, Accesss, and all the rest were more than happy to lend six figures to kids straight out of college, sans cosigners, to attend the likes of Suffolk or Touro or Cooley. The old comment threads at jdunderground are full of stories and articles about this.

Posted by: Unemployed Northeastern | Dec 29, 2016 2:51:17 PM

Forcing universities to take on the cost of failed student loans, something that Glenn Reynolds has often championed, is also a counterproductive strategy. Universities have enough statistics to be able to predict their future losses under such a program. Their easiest course of action is to raise tuition to cover those anticipated losses. --echo7 | Dec 28, 2016 9:00:29 AM

There's a solution to that moral hazard you mention, echo7. Think about how a Public Utilities Commission decides which expenses a regulated monopoly utility will be able to charge to ratepayers with a markup for the utility's profit and which expenses the PUC will insist must be borne by the utility's shareholders. I'm sure something similar can be worked out to determine how much of the college's tuition and fees are costs that can be borrowed against or subsidized by federal student aid and which are costs (e.g., rock climbing walls, campus female coddling centers, luxury dorms, coloring books and Play-doh, and campus 'safe spaces') that will not be considered legitimate college costs to be funded by loans or student aid.

Posted by: Micha Elyi | Dec 29, 2016 3:02:53 PM

Unemployed,

I'm not interested in unverified anecdotes. I'm intersted in a specific student loan program not offered by the government with all of those predatory lending features.

Surely you can link to one single example, somewhere, anywhere?

Posted by: MM | Dec 29, 2016 10:16:28 PM

The student loans mess is not a crisis. It is a condition.

I respect Mrs. Bair, who has a history as a fine public servant, but I think she thinks too small. We need to reduce the demand for higher education through two avenues: a repeal of employment discrimination law which would allow for cheaper means for sorting the labor market (e.g. employer testing) and (b) unbundling higher education services by abolishing the baccalaureate degree in favor of 1, 2, 3, and 4 year degrees for academics and the arts (where all courses are degree components) and a variety of degree and certificate programs in vocational subjects which would range in length from a portion of an academic year to 3 academic years. Programs exceeding 3 academic years of study would be limited to research degrees, medicine, a few peri-medical occupations, professional psychology, and veterinary medicine and would be offered only at research universities and stand-alone professional schools. Tough disclosure requirements for schools recruiting aspirants for research degrees would also be beneficial. One might go so far as to require schools take out permits to admit students to graduate programs in the visual and performing arts, the humanities, and the non-quantitative social research disciplines. You'd have a global budget of permits and schools would bid for permits via multiple price auctions. You could distribute student visas the same way.

Here's a suggestion re college finance: leaving aside donation and endowment income, the revenue of private colleges would come entirely from unsubsidized tuition and that for state institutions would come entirely from voucher redemptions. The vouchers would be distributed to students who placed satisfactorily on a set of baccalaureate examinations who then paid a recipient's fee. The recipients fee would be paid to the general state treasury and be scaled to the students history and his parents' history of filing tax returns in the state in question; if you've filed, say 14 returns, the fee would be nil, 7 returns and the fee is half the redemption value, no returns and the fee is the full redemption value. The state funds out of which the the vouchers are redeemed would be financed by a special income surtax; the surtax would have an adjustable exemption to excuse wage earners from liability (they'd file a return with a $0 remittance) but fixed rates of assessment. The share of personal income the state's residents acquire in a year would flow into the fund at a fixed rate and constitute a global budget for state-supported higher education (the state's schools receiving no discretionary grants). Each state school would have matriculation targets adjusted each year according to population changes in their catchment; the redemption value of the vouchers would be set equal to the revenue received divided by the global metriculation target, with a state commission given the discretion to lower the target in recession years to maintain the redemption value.

As for loans (or equity finance), they would be utile for paying private tuition or state recipients' fees. They'd have no federal guarantees and more limited creditor protection in bankruptcy, so banks would have to undertake serious underwriting.
As for discretionary financial aid, private institutions might offer tuition remission or stipends while public institutions would offer stipends or assistance with paying recipients' fees. In either case, the financial aid is offered out of institutional budgets constrained by the (unmanipulated) market in one case and by the global budget for public finance in the other.

An end to regulatory provisions which promote overconsumption of higher education and an end to dog-chasing-its-tail subsidies would be very much in order.

Posted by: Art Deco | Dec 30, 2016 7:17:58 AM

@MM,

Sigh, let me walk you through it. http://www.nalp.org/assets/645_ajddebtmonograph2007final.pdf. 2007 version of After the JD. Gosh oh golly, it's almost as if that way back when the average private student loan debt was $78k* and one could only have borrowed $60k in federal student loans for law school ($20k per year in Graduate Stafford loans), that EVERYONE HAD PRIVATE STUDENT LOANS. See how that math works? And we are talking about the Class of 2000 here; the cost of attending law school would go up considerably between 2000 and the advent of GradPLUS in 2006, while that $60k limit didn’t budge.

From that link: “The American Bar Association collects information about law school debt annually. In Syllabus(Spring 2006), JohnSebert, at the time Consultant [to the ABA] on Legal Education, said, “For the 85% of the 2004-2005 graduates who borrowed something for their legal education, the average amount borrowed by public law school graduates was $51,056; for private law school graduates, the average amount borrowed was $78,763.” Per that After the JD link, median debt for AJD respondents was $70k; Access reported that the default rates on private student loans for professional and graduate students hovered between 8% and 8.5% in any given year. So very much higher than the ~1% federal loan defaults that *data* and the other law school boosters love to crow about today as *proof* that everyone can pay their loans back.

Or check out this table of average law school debt from 2001-02 to 2011-12: http://www.americanbar.org/content/dam/aba/administrative/legal_education_and_admissions_to_the_bar/statistics/avg_amnt_brwd.authcheckdam.pdf. Again, if one could only borrow $60k in federal loans before 2006 and the average student loan debt is hovering between $70k and $90k, depending on the year, then the average student had private student loans. Now, you can choose to believe that all of those private law school loan debtors back then had solid work histories or parents willing to cosign and no one was K-JD or poor back then; I choose to live in reality. Not to mention that the After the JD link relates that the students who owe the most in student loans are from low-income backgrounds. How about that? I mean, credit card delinquency rates in the early 2000s were in the 4 to 5% range https://fred.stlouisfed.org/series/DRCCLACBS and that era was legendary for having zero lending standards, while private law school loan defaults – not delinquencies - for grad & professional degrees were 8 to 8.5%. Res ipsa loquitur.

Posted by: Unemployed Northeastern | Dec 30, 2016 10:23:21 AM

Unemployed,

So in revie, you're unwilling or unable to point to a single concrete example of a private student loan programs with lending standards as loose as the feds?

You ought to go back to dancing class, because you don't do it very well. I didn't ask about the ABA or credit card debt or any other red herrings. That's 3 strikes and you're out, and this isn't the first thread where you've equivocated or just didn't answer a simple question.

I'd suggest you educate yourself, but I suspect you're past the age where it matters.

https://www.edvisors.com/blog/is-government-predatory-lender-07-2015/

In conclusion: Quidquid Latine dictum sit altum viditur.

Posted by: MM | Dec 30, 2016 7:08:56 PM

@MM,

Of course it has not gone unnoticed that you have 1) given zero point zero evidence substantiating your own position and 2) your fallback to ad hominems indicate the hollowness of it.

Posted by: Unemployed Northeastern | Dec 30, 2016 10:48:08 PM

I'll just reiterate, for the posterity of the blog, that Unemployed can't or won't point to a single outside source in answer to my simple question regarding private student loan lending standards.

There's some irony that he immediately went to the defense of federal student lending despite the fact that the feds EXEMPT THEMSELVES from Truth in Lending requirements, among other basic "no brainer" lending standards, which I pointed out in the link I included.

More irony: Apparently providing evidence for one's argument, which I linked to above, doesn't equal providing evidence for one's argument on Unemployed's planet, wherever that is. The government may exempt itself from Truth in Lending, but clearly some folks exempt themselves from Truth in Blogging...

Posted by: MM | Dec 31, 2016 11:19:05 AM