Friday, April 6, 2018
Many alarmist narratives suggest that federal student loans are going to lead to a fiscal crisis for the federal government unless loan limits are capped, interest rates are increased, and debt forgiveness is curtailed. These hyperbolic claims are implausible. Higher education is a tiny fraction of the federal government’s spending and of the U.S. economy (around 3 percent of each). Moreover, education spending is a boon to the economy--boosting employment, earnings, growth and tax revenues.
The federal government spends 4 trillion per year and growing—mostly on the military, healthcare, and social security. That’s $200 trillion dollars in net present value, discounted at 2% in perpetuity. The whole U.S. economy is worth roughly 5 times that much. Household net worth is close to $100 trillion. The federal student loan portfolio is only about $1.3 trillion. Student loans may look big on the federal government’s balance sheet, but the federal government’s balance sheet asset are small to begin with relative to the size of the government and the size of the economy.
Even with Income Based Repayment (IBR) with partial loan forgiveness, borrowers pay some interest and principle, so the loss rates on these programs are nowhere near 100%. Several analyses by the GOA and DOE peg the net subsidy rate on these programs as negative by a few billion (i.e., the programs are slightly profitable for the government), with the possibility of eventually becoming positive by a few billion per year (i.e., the programs could become slightly subsidized). These studies do not take into account the fiscal benefits of higher tax revenues, they only look at the net present value (NPV) of interest and principal payments. The estimated annual subsidy rates are around 0.3% or negative 0.3% or less of the size of the portfolio.
Different assumptions could produce different results. But you would need some pretty extreme assumptions to get to the point where losses on student loans could move the needle. Nations that are no more productive than the United States—and where the returns to higher education are lower—have fully funded higher education with public dollars (i.e., grants and direct institutional subsidies, not student loans) for decades while maintaining a lower debt to GDP ratio than the United States. A grant is the equivalent of a loan with a 100 percent loss rate, since no funds will be repaid except in the form of higher tax revenue.
The direct budgetary impact of federal student loans as a pure lending program—that is, the net present value of all funds dispersed and all fees, interest, and principal collected—is tiny. Viewed in context, whether the student loan program is slightly profitable or slightly subsidized, its direct costs are approximately zero.
But the indirect budgetary and economic benefits of student loans are huge. Federal student loans help finance higher quality and more economically valuable higher education and boost the size of the educated work force. Better education increases earnings, reduces unemployment, and facilitates economic growth and innovation. Around 30 to 40 cents of every extra dollar earned because of higher education goes into the U.S treasury’s coffers through income and payroll taxes, which account for the overwhelming majority of federal revenue.
The real crisis in higher education is that the government is underinvesting in it.
Some have argued that when the government invests in education, education ends up costing more, and have noted recent increases in tuition. But the largest percentage increases in tuition have taken place at state public institutions, which, unlike private non-profit institutions, have seen state public funding per student cut.
Some increases in tuition remain after accounting for cuts to state public funding. Those tuition increases have funded increases in the quality and value of non-profit and public higher education, as well as increases in financial aid and broader access. (Whether for-profit educational quality improves with greater revenue is less clear, since revenue can be paid out as dividends to investors).
The fact that higher education costs more than it used to cost several decades ago is neither surprising nor is it a cause for alarm. The value of education is also much higher today than it was several decades ago. Higher education earnings premiums are higher on an annual basis. They likely last longer, since life expectancy among the educated is longer. Interest rates are lower throughout the economy, so the same stream of future benefits is worth more in present value terms. Within race and institution type, completion rates have increased (at least at non-profit private and public institutions). In sum, there are many signs that increases in the cost of education parallel increases in its quality and value added.
By contrast, stories about market or regulatory failures leading to runaway costs seem implausible given the very large number of educational institutions—literally thousands—and the decentralized regulation thereof through state accreditation agencies, and the intense competition between institutions for students. This competition often takes the form of competition on price through scholarships. Such competition can keep the costs of education down and lead to more of the surplus going to students.
 This discount rate may be a little high, and $200 trillion may therefore be a little too low, considering spending growth rates, GDP growth and federal borrowing costs.
. The Knowledge Tax, at 2036 tbl.1, 2037 tbl.2.
.Matteo Cervellati & Uwe Sunde, Human Capital Formation, Life Expectancy, and the Process of Development, 95 Am. Econ. Rev. 1653, 1659 (2005); Seema Jayachandran & Adriana Lleras-Muney, Life Expectancy and Human Capital Investments: Evidence from Maternal Mortality Declines, 124
Q. J. Econ. 349 passim (2009); Ellen R. Meara et al., The Gap Gets Bigger: Changes in Mortality and Life Expectancy, by Education, 1981–2000, 27 Health Aff. 350, 350 (2008); S. Jay Olshansky et al.,
Differences in Life Expectancy Due to Race and Educational Differences Are Widening, and Many May Not Catch Up, 31 Health Aff. 1803, 1804 (2012); Emily Oster et al., Limited Life Expectancy, Human Capital and Health Investments, 103 Am. Econ. Rev. 1977, 1997 (2013); Gopal K. Singh & Mohammad Siahpush, Widening Socioeconomic Inequalities in U.S. Life Expectancy, 1980–2000, 35 Int’l
J. Epidemiology 969, 977 (2006).
. Thomas Snyder et al., Nat’l Ctr. for Educ. Statistics, U.S. Dep’t
of Educ., Digest of Educ. Statistics 2015, at 679–84 tbl.326.10 (51st
ed. Dec. 2016), https://nces.ed.gov/pubs2016/2016014.pdf [https://perma.cc/Q7CX-UD4B]; A.B.A., Sec. Leg. Educ. Admissions Bar, Enrollment and Degrees Awarded 1963–2012
Academic Years (2014), https://www.americanbar.org/content/dam/aba/administrative/legal_education_and_admissions_to_the_bar/statistics/enrollment_degrees_awarded.authcheckdam.pdf [https://perma.cc/P522-PSSW].
. See Lucie Lapovsky, Institutional Financial Health: Tuition Discounting and Enrollment Management, in 2 Study of College Costs and Prices, 1988–89 to 1997–98, at 57, 58, 71 (Alisa F. Cunningham et al. eds., Nat’l Ctr. Educ. Stat. 2001) (finding that the percentage of students who received institutional financial aid increased from 63.7% in 1990 to 79.4% in 1999 and predicting that competition among institutions of higher education will result in an increase in character-based aid); Gordon C. Winston, Higher Education’s Costs, Prices, and Subsidies: Some Economic Facts and Fundamentals, in 2 Study of College Costs and Prices, 1988-89 to 1997-98, at 117, 124–25 (Alisa F. Cunningham et al. eds., Nat’l Ctr. Educ. Stat. 2001) (“[T]he competition for student quality depends on a school’s position. That means, simply, that a school’s fortunes can change either because of what it does or because of what its competitors do. That, in turn, has all the characteristics of an arms race.”).
Almost all ABA-approved law schools offer at least some scholarships that cover half or full tuition. At twenty-five law schools, 30% or more of full-time students receive such large scholarships. 2014 LSAC Official Guide to ABA-Approved Law Schools, https://officialguide.lsac.org/release/OfficialGuide_Default.aspx [https://perma.cc/39BV-FLBC] (last visited Jan. 14, 2014).
[9.See Lapovsky, supra note 26, at 63 (finding that the discount rate—“defined as institutional financial aid dollars divided by the gross tuition and fee revenue”—has increased, on average, from 27.7% to 37.3% from 1990 to 1999); id. at 66 (“Institutional aid is an enrollment management tool. The granting of aid to a significant percentage of the class is necessary to fill the class with the number and quality of students needed, as most institutions are unable to enroll an adequate number of qualified students at their published price.”).