As the war in Ukraine grinds on, a look at the economic battlefield and how the conflict might permanently reshape the global economy. Diane talks to Sebastian Mallaby, senior fellow for international economics at the Council on Foreign Relations.
A new report from the Federal Reserve Bank of New York finds people who have taken out student loans are increasingly having trouble paying them back. This comes as delinquency rates for other kind of debt like mortgages has improved, according to the same report. Forty-three million borrowers have taken out nearly $1.3 trillion in student loans and that number is expected to double in the next decade. All of this has the 2016 presidential candidates paying attention. We look at ballooning student debt and what the presidential candidates are saying about soaring college costs.
- Jeffrey Selingo Regular contributor on higher education, the Washington Post; author, "College Unbound: the Future of Higher Education and What it Means for Students" and the forthcoming "There is Life After College"
- Dean Baker Co-director, Center for Economic and Policy Research and blogger, Beat the Press; author of "The End of Loser Liberalism: Making Markets Progressive"
- Beth Akers Fellow, Brookings Institution’s Brown Center on Education Policy
MS. DIANE REHMThanks for joining us. I'm Diane Rehm. A recent poll from Harvard University's Institute of Politics found that 57 percent of people under 30 believe that student debt is a major problem for young people. It's not surprising then that the presidential candidates for 2016 are starting to talk about the issue. Here to discuss ballooning student debt and soaring college costs, Jeffrey Selingo, regular contributor on higher education to The Washington Post, Beth Aker's fellow at the Brookings Institution Brown Center on Education Policy and Dean Baker, co-director of the Center For Economic and Policy Research.
MS. DIANE REHMThroughout the hour, we'll be happy to take your calls, comments. Join us by phone at 800-433-8850. Send an email to firstname.lastname@example.org. Follow us on Facebook or Twitter. And thank you all for being here.
MR. JEFFREY SELINGOIt's great to be here.
MS. BETH AKERSThanks for having us.
MR. DEAN BAKERThanks for having me on.
REHMJeff Selingo, $1.3 trillion in student debt. Who holds the debt?
SELINGOWell, it's mostly, obviously, former students mostly in their 20s and early 30s where the biggest growth has been over the last decade or so. You know, back in -- just about six years ago, it was about $700 billion. That’s when it passed auto loans. Five years ago, it was about $800 billion. That's when it passed credit cards. So we've seen this big increase mostly in recent years. And part of what worries me, Diane, is that a lot of those 20-somethings are not necessarily getting degrees.
SELINGOSo what's happening now is that some of the biggest numbers of dropouts are recent college students who did not get a degree and have some debt, which is probably the worst situation to be in.
REHMDo I also understand that the parents, age 40 to 59 also have...
SELINGOYeah. I mean, some of that obviously is -- are people going back to school, but one of the big increases and a story that the Chronicle of Higher Education and ProPublica did a couple of years ago showed big increases in student -- Parent Plus loans, which are federal government loans that parents sign for, are allowed to take out to pay for the difference in what the school is offering and what the student is allowed to pay.
SELINGOThere's no cap on those loans so parents can take out as much as they want and those have higher interest rates than a lot of other loans as well.
REHMSo the debt has become intergenerational.
SELINGOYes. And what worries me is that a student, you know, in his or her 20s has a lot of their life left to pay this off and I personally think they should have some skin in the game. What worries are parents in their 50s who take on a lot debt because they want to please their son or daughter by doing to the best college or university -- they think the best college or university and they're only maybe 10 years away from retirement.
REHMThe CBO estimates that the amount borrowed will double by 2025. Extraordinary.
SELINGOIt's a big issue and I think it's why we see a lot of the presidential candidates -- I know we're going to be talking about that in this hour -- a lot of the presidential candidates talking about this issue, I think, how to solve it, though, is a very, very difficult problem that's not as easy as a couple of bullet points.
REHMDean Baker, why is this number so large? Why is it growing?
BAKERWell, a couple things here. One is a reduction in public support for colleges, public universities so there's been an explosion in cost in public universities. Used to be fairly cheap, you know, when I was in school, to go to most state universities. You know, you could afford that. Middle class income parents could pay, students working summer jobs. You didn't have to take out a lot of debt. That's not longer true and that's because there's been a big cutback in public support for those universities.
BAKERThe other part of the story is exploding college costs. I mean, if you look at the rate of inflation, college costs have increased about three times the overall rate of inflation since 1980. Now, a little bit of that is a confusion in how you count that. That's taking gross. If you took financial aid, it'd be a little less than that. But nonetheless, college costs have hugely outpaced inflation. A lot of different causes there, but one things that I, you know, really sticks out to me is a lot of these high end administrators -- I go back to 2008/2009 during the crisis years and, you know, a lot of schools were freezing, cutting back pay for their, you know, their staff, their faculty, you know, the custodians.
BAKERAnd then you had some university presidents saying, well, I'm going to be a good person. I'm going to take a cut as well. And what struck me was, you know, I knew the president of Harvard gets lots of money, but there was a lot of places that weren't Harvard. People were getting $800, $900,000 plus salaries. And that seems to me a little hard to justify and, you know, you really, I think, have to do something about that. I mean, one of the things I like to point to is the president of the United States gets $400,000 a year.
BAKERKind of seems to me you could say to a university, you should be able to find good help for $400,000 a year.
REHMBeth Akers, why has this federal report said our delinquency rate's higher for student loans than even for mortgage debt?
AKERSSure. So we actually have some new evidence that shows that families, individuals pay their debts last or their student debts last.
REHMStudent debts last.
AKERSYeah. So some of what we're seeing is a change in the financial hardship that the households are facing because we're really on the heels of a financial crisis and growing out of recession right now so some of it's actually real financial hardship. But the differences you see on the delinquency rates across different types of household credit have a lot to do with people's behaviors and choosing which bill to pay first. And it does look like, from some focus group work that we've seen coming out of New America that these may be the bills that people choose to pay last.
REHMSo what's the average student debt?
AKERSYou know, so I think maybe somebody could help with the exact number here. We have -- people are leaving bachelor's degree programs with an average of...
BAKERIt's around $30,000 in total.
AKERS$30,000. Yeah. And, you know, we see a sight of the really large numbers a lot in the media and I think it's really important that we talk about that these are outliers, you know, the folks who have $100,000, $200,000 in student loan debt, these people are in real crisis and we want to think about then, but that's really not the typical situation for student borrowers.
REHMSo it's $30,000. Around $30,000.
REHMBut Jeff, what does that mean for their future, for their planning, for their thinking about buying a home or getting married or whatever.
SELINGOWell, I've been spending a lot of time with 20-somethings recently. I'm working on another book called "There Is Life After College" that will come out next year and spending a lot of time with these students around how they're launching after college into their careers and the choices they make. And one of the things that I'm finding anecdotally is the choices -- the job choices that students are able to make who have little or no debt. They have a lot more flexibility.
SELINGOThey can move to different cities. They can take lower paying jobs. They could take free internships, although I don't necessarily support internships not paying, but they could do a lot of things to launch quickly out of college where students who have more debt sometimes have to move back home with their parents, sometimes have to take a job just to have a job and that has incredible impact on their careers. The other thing, and this just comes from some research from Gallup, is that students who have over $10,000 worth of debt and for every thousand dollars worth of debt, they're less likely to become an entrepreneur.
SELINGOSo, you know, we have a lot of young people now starting their own business, developing apps and technology and so forth. And the more debt they have, the less likely they are to become an entrepreneur. What I don't think we know yet, although there is some research on this and some anecdotal evidence is well, is what is the impact on them buying houses, starting families, buying cars and everything else. And I think it may be a little while until we see the real impact of some of that.
REHMBut back up. Who is it that have the outlier loans, the $100,000, the $200,000 in debt? Who is that?
AKERSYou know, a lot of the people who have these really high debt figures are people who went on to professional school. You know, so through the federal loan system, you're capped at a relatively reasonable amount of debt that you can take on. So if you go through the system relying only on federal aid, you're going to get to a reasonable number and then get cut off. If then you go on and take out Plus loans, which is an unlimited program, in essence, up till the cost of attendance, which includes living expenses and then take on private debt on top of that, you can get pretty high.
AKERSSo folks who are taking on professional degrees, they're probably okay with those big numbers, but the people who are kind of just, you know, sticking around in programs longer than they really need to and maybe not ending up with a degree, those are the people who we really want to worry about that have those big dollar figures.
REHMInteresting. And Dean Baker, the overall effect on the economy, what do you think that is?
BAKERWell, I don't think it's a huge negative effect. I mean, if you sort of snapped your fingers and said suppose we had the debt levels we had, you know, eight years ago rather than today, you know, that would mean you'd free up a lot of money. We'd see some increased consumption. It wouldn't be a qualitatively different picture. And one of the things, you know, I know people were enthusiastic about, you know, let's get rid of the debt and then we'd see a big boom in the economy. Important to keep in mind sort of the larger picture.
BAKERI don't want, you know, to derail the show here, but, you know, we have the Federal Reserve board prepared to raise the interest rates because they think the economy's growing too fast. We have too many jobs. So if we envision a world where we suddenly had, you know, gotten rid of half the debt and, you know, these younger people were spending more, well, we'd have the Federal Reserve board slamming on the brakes more quickly. So I don't think, you know, we can look at the overall economy and say, oh, the economy's weak because of student loan debt.
BAKERClearly, we would've recovered more quickly had you envisioned a world of recent grads with much lower debt levels. But where we sit today, that would not be much of a remedy.
REHMSo there is this wide variance. You have some young people with $30,000 in debt. How able are they to pay it off?
BAKERWell, I think in most cases, they will be able to pay it off. I mean, one important thing to keep in mind is interest rates are considerably lower today than they were 10 years ago so that is a big advantage. So even though you might have more debt, odds are you're paying considerably lower interest rate. Not in every case, but certainly in most cases. The other point to keep in mind is the labor market's very, very weak. Really, the story here will depend what the labor market looks like, what their earnings look like going forward.
REHMDean Baker, he's co-director of the Center For Economic and Policy Research. Short break here, right back.
REHMWelcome back. We're talking in this hour about student loan debt with Beth Akers of the Brookings Institution, Dean Baker -- pardon me -- of the Economic and Policy Research Center, and Jeff Selingo, he's a regular contributor to The Washington Post. He has a forthcoming book titled, "There is Life After College." Beth, give us a sense of how many people get private loans, how many people get public loans and the differences.
AKERSSure. So, you know, when folks go to school, the first dollar they're borrowing -- up to the federal loan limit -- is going to be through the federal loan system, because that's a much lower interest rate than the private markets.
REHMAnd what's the federal loan limit?
AKERSSo, it varies. The -- I don't have off the top of my head the numbers by year. But it increases from freshman, sophomore, junior and senior year. And so it'll increase over time. And a lot of people will go into the private loan market to make up the difference, to make ends meet, to cover the additional costs of attendance. But if you look at the pool of outstanding student loan debt, the vast majority of that is through the federal loan system. And the private federal loan pools -- or the private loan pool is much smaller, in fact.
REHMAnd, Jeffrey, what are the key differences between the two?
SELINGOWell, there's a lot of difference. It's actually a pretty confusing system. So in the public side, from the government, you also have subsidized and unsubsidized loans. Subsidized loans mean that the government pays your interest rate while you're in school. Unsubsidized means that it's racking up while you're in school and you have to pay that off -- you have to pay that starting six months after graduation. Subsidized loans goes to students who have financial need. The overall limit for undergraduates is about, I think, $23,000 for subsidized loans and $31,000 for unsubsidized loans. And as Beth said, then students then go into the private market after they use up all that money.
SELINGOBut what part of the problem is, is that when schools package these and when you get a -- when you get accepted, you get a financial aid package from the institution, usually a couple months later. And you look at all these numbers. They're very confusing, the letters that you get from schools. There's been a lot of research on these letters. It looks like, in some cases, you're getting a great deal because you might get, you know, some loans that are subsidized, unsubsidized. You might get some other private loans from -- through the institution. So it's really important for students and parents to ask a lot of questions about their loans. Because one of the things I have found is that students are very confused about these different loan systems.
REHMThey don't know the differences.
SELINGOAnd they just don't know. They don't know the differences and they don't know what they're going to end up paying afterwards.
REHMAnd the differences could make a big deal when it comes to paying them off.
SELINGORight. And you can also have big differences between institutions. So if you're accepted to multiple institutions and you get multiple loan -- or financial aid packages from them, you could have very big differences between them. And I think, again, it's important. And what happens is these letters usually come like a month before you have to make a decision, unfortunately, to a college. So here you've been searching for a college for years...
SELINGO...and then a couple of weeks before you have to make a decision, you're looking at the financial aspects of it.
BAKERJust a couple of points. One of the things that -- one of the differences between the government loans and private loans, is government loans you can't declare bankruptcy and get out of, whereas private loans, in general, you can. Now, oftentimes you'll have a parent as a co-signer so, you know, that's not going to be an easy thing to do. But that's at least an option, which isn't there with government loans. The other thing is that in general -- now I think there are some exceptions -- but in general the government loans are actually administered by private agencies.
BAKERAnd this often has been an issue where you've had cases where there have been allegations of abuse where, you know, the same sort of things that come up with mortgages, that you have people trying to collect on the loans that are making threats that might be inappropriate, charging fees that might be inappropriate. This has been a big concern for, you know, at least many students who feel that they've been treated unfairly.
REHMBut declaring bankruptcy on a student loan would not look so great on your record.
BAKERIt's not something you want to do.
BAKEROn the other hand, if you get out of school with a large amount of debt -- and, you know, and keep in mind again, it's, I think, a very important thing to understand -- Jeff alluded to this, that a lot of people take out loans, they don't even graduate. So you end up, you know, you've walked out with $20,000, $25,000 in debt. You don't have a degree. And that's going to be a very, very bad situation. I mean I would never...
REHM...got to get a job.
BAKERYeah. You don't have an easy situation in the job market. You know, and as I was pointing out, even college grads have not done particularly well in the job market in the last, you know, since the downturn. So it's not a good story overall but particularly if you didn't end up with a degree. So, again, it's not something you want to see. Someone just, you know, goes to college. You know, obviously, they hope to do well. Things turn out badly. They end up with a lot of debt and they declare bankruptcy. But in some cases, that would probably be the best thing to see.
AKERSSure. I think the other, you know, big difference that we're missing here is the safety net. So federal loans have a pretty robust safety net system so that, if you come out of school, don't get a job or have a very low income, your payments are going to be made in proportion or even no payments will be due at all. And then, ultimately, if you make those payments for 10 or 20 years, depending on your sector of employment, the debt will be forgiven. That doesn't exist in the private market. And that kind of goes hand in hand with the bankruptcy provisions that Dean was talking about. So, in essence, the federal loans are much more generous because of the lower interest rates, but also because of this really huge safety net for borrowers.
REHMSo, Mike has an email here. He says he has over $100,000 in student loans. He says, "When will Washington take this seriously?" Well, Beth, President Obama's trying to address this. What's been his approach?
AKERSYou know, well he's actually created a pretty generous expansion of the income-driven repayment system, which is the safety net I was just talking about. You know, if you think about debt, I don't think debt in itself is a problem. You know, financing, you know, an education that pays large dividends in the future through debt is actually a great idea if it pays off. When it doesn't -- when it doesn't work well is when those degrees don't pay off and the student doesn't finish or through some fault, you know, no fault of their own, they don't get the labor market payoff that they were expecting. And so it's this expansion of the safety nets that I think is really a step in the right direction.
BAKERSpeaking to exactly that issue, I mean, that's exactly the sort of thing that a private, you know, collector could be -- could be problematic. That they may not tell -- there have been many instances, at least people have alleged they were not told of the income-based repayments. So, you know, they owe $25,000 and they have someone saying, "Okay, you have to pay us $5,000 a year," when under the income-based payment plan, maybe they'd have to pay little or nothing. And they're not told that, so they're being assessed a much higher payment than they really have to make.
REHMHe also pointed out that his $100,000 includes an advanced degree. What if you choose the wrong advanced degree, Jeff?
SELINGOWell, you could, I guess. I mean, and the big numbers that we hear often -- and when I hear a number like $100,000, I always ask a lot of questions, right? Is it undergraduate or does it include graduate degrees? Did they go to a private institution or did they go to a public institution? Again, there's a lot of choice in higher ed.
SELINGOPeople can start at community colleges, very inexpensive community colleges. There's a lot of grant programs, a lot of scholarship programs. So there's a lot of choice. So with somebody who's taking -- who decides to take on $100,000 in debt at the undergraduate level, I'm sorry, I think there were a lot of decisions that he or she made and the parents made early on that they probably shouldn't have made in those cases. Now, at the graduate level, different story now, right? So now you have, you know, those numbers are usually very common among people who go to law school, medical school and business school. I still think that business school and medical school pay off. We have a lot of questions now about law school.
SELINGOAnd that's the biggest issue right now, is we're -- you have large numbers of people coming out of law school in a very poor market or in a market that doesn't pay as well as it used to.
REHMTell us about Hillary Clinton's plan.
SELINGOSo Hillary Clinton has a plan that she came out with now, I guess about a week or two ago, that wants to increase the federal investment in higher education -- about $350 billion over 10 years. And most of that money would go to the states to encourage them to give money to their public institutions so that they could have no-loan public institutions. So students could go to public institutions. They would still have to pay something. But that they wouldn't have to take out loans. As Dean mentioned earlier, one of the biggest issues is -- are public institutions in general, you know, 80 percent of Americans go to two- or four-year public institutions.
SELINGOTuition there has increased drastically, particularly over the last decade, as states have cut back appropriations to those institutions. And so she wants to focus in that area. Now, part of the problem though is you're giving money to try to encourage states to do something. They don't have to do it. And we've seen this with the health care law, right? They don't necessarily have to follow what the federal government wants. And in some cases, they may not want to. They may want to increase tuition. So, you know, she's going to use the power of that purse to try to get them to do what she wants to do. But I think beyond the fact of how she's going to pay for it, I think then the problem is how do you persuade all the states to do this?
REHMWhat do you think, Beth?
AKERSYou know, I think, at first glance -- I looked at this provision that we were just talking about, the increase in subsidies to states -- and my initial concern was, well, when you press on states to make college more affordable, you're essentially, you know, looking to degrade quality in a way, right? Sort of the unintended side effect. But the really exciting piece, I think, in this proposal is that she's also introduced something I would call "skin in the game," which is holding institutions accountable if their graduates don't do well financially after they complete. So essentially, if they're borrowers or former students can't make payments on their loans or just end up with a really bad track record, we're going to hold them accountable with fees.
AKERSAnd I think that's a -- it's a pretty...
AKERSHold the institutions accountable.
AKERSRight? So they have some incentive to invest in those individuals that come and enroll at their school and make sure that they have good financial outcomes in the long run. So the combination of those two pieces, I think, is a really nice and clever plan.
REHMWhat do you think, Dean?
BAKERWell, I think it is very much in the right direction. I should point out Senator Sanders had a similar plan, also calling for making public universities free for four years. So it's similar. I haven't -- you'd have to look more carefully to see the specifics. I think his intention is to be somewhat more generous but same basic point. But getting to this last issue about, you know, insuring that people get decent outcomes, this has been a big issue particularly with the for-profit sector. And there you have, you know, what I'd just consider kind of, you know, predatory universities, colleges, where, you know, they see students as intermediaries to get federal funds. And, you know, the Obama administration has been trying to crack to crack down on this.
BAKERAnd it's been kind of an irony, at least to me, that you've had resistance in the Republican congress, that they're big fans of the free market, but they want these private colleges, private universities, for-profit universities, to be able to, in effect, profit off the taxpayers by having students come in there, take out loans for degrees that are often worthless. And, you know, if we could do something to crack down on that -- because that's not helping anyone. I mean, we're just getting people to go to schools that oftentimes they don't even finish them. But even when they do, they get a degree that's not going to help them in the labor markets.
REHMGive me an example of one of these institutions, Jeff.
SELINGODo you mean in the for-profit institutions?
SELINGOWell, you know, we have a lot of career colleges, you know, the University of Phoenix and DeVry and Capella and others. Some of those are very good players within that for-profit market but many of them are not. And the Obama administration has done a lot in recent years to crack down on this. There's been pushback from Congress. There's been a lot of regulations that they've pushed in terms of getting...
REHMBut how can kids know which are the good ones?
SELINGOThat's a good question. You know, there's been a lot of push, again, by the Obama administration to try to increase transparency of college. You know, they wanted to put together a ratings plan so that parents and students would have something beyond the U.S. News and World Report rankings to try to judge the quality of colleges. And recently they dropped that plan after there was opposition from colleges and universities. It's amazing, colleges and universities want to take all this money from the states and the federal government, but they really don't want any responsibility for how they spend it.
AKERSYou know, I'll say, if I were shopping for a college right now -- something that I didn't know when I went to school -- was that we have a huge completion problem in this country. So if there's one thing I'd be looking at as a potential student, it's how well does an institution do in graduating their students? And it's the single best predictor of being able to successfully repay your loans. So if I'm shopping, that's the one thing I'm going to be paying close attention to. And that's available on the government website.
SELINGORight. And just piggybacking on what Beth said, not only completion rates but completion rates for people like me. So completion rates differ greatly for people who are first in their family to go to college. They differ between men and women. They differ by major. And they differ incredibly by institution. The other thing you should look at is debt level. I mean, there's a lot of information on average debt level among those who borrow per institution. So you can see the differences by institution. All this is available on government websites. But, again, college is a very emotional issue for a lot of students and parents. They fall in love with a particular campus.
SELINGOAnd then the financial realities kind of start to play in. And emotion, I think, unfortunately takes over.
REHMAnd you're listening to "The Diane Rehm Show." From Twitter, Amanda says, "What about financially illiterate 17- and 18-year-olds who have no grasp of the debt they're expected to take out?" Dean.
BAKERWell, this is a very big issue.
BAKERAnd this is, you know, we have the Consumer Financial Protection Bureau, with the idea that, you know, we understand people are not experts in finance. And, you know, there's a very perverse incentive from the standpoint of the person at the other side, that, you know, you have people who are very sophisticated and writing up contracts that -- could write up contracts people don't understand, which is why, I think, there's a very big role for the government to ensure that this is as transparent as possible, make information available about, you know, what your payments are going to be, what this looks like. And, again, as both Jeff and Beth had said, you know, completion rates.
BAKERAnd, you know, one more thing to toss into that thing about differences, very big differences by race -- and particularly black men, very low completion rates. It's a very, very big issue. And I think debt is part of that story. So a lot of times you have someone who's been in college, you know, a couple of years. They've accumulated some debt. And then they're going, "Okay, do I want to continue, accumulate more debt with an uncertain labor market outcome?" So that could be a very, very big issue.
REHMDean, you were talking about the salaries that university executives are being paid. I wonder why else college costs are going up so quickly?
BAKERWell, that's a big part of the picture. There is also proliferation of administrators in general. So you both have the administrators that were there -- I mean, you always had your president and your provost, whatever -- you know, you always had those people. But there's a lot more of those people. You know, there's an assistant provost, assistant dean, dean for this, dean for that. Some of those things are probably needed. But, you know, you do want to scrutinize the bureaucracy and, you know, I think there is importance.
BAKERYou know, it's a very similar story to health care, how we're had this explosion in health care costs that really, you know, you don't see elsewhere in the world. Similar with college, you know, our college costs have just exploded over the last three, four decades. And that's because there's no effective check on those expenditures.
SELINGOVery true on those fronts. It also has increased because it can. I mean, the market has been there. People have been going because they see the payoff. I mean, you have people lining up at some institutions, you know, 10 and 12 deep, willing to get in. And so the fact of the matter is, is that colleges know this and they've been able to push those tuition prices up.
REHMAnd Jennifer in Norman, Okla., says, "Can we gain some perspective? The aggregate amount of student loan debt is the highest it's ever been because more people than ever are going to college."
SELINGOTrue. And I guess we do have to put it in perspective. I mean, you know, $30,000 of average -- you know, we have to really do -- we have to look at these averages. Also if you look at the monthly payments, we're talking about, you know, a couple of hundred dollars over the course of 10 years of paying those loans back. I think part of the problem right now is because so many young people are having trouble launching into a job market that is pretty tough for them. And I think that's why we have so much anxiety over this. Plus we have the graduate school debt as well adding into this, professional schools and so forth.
REHMBeth, very quickly.
AKERSYou know, sure, if you look at the typical household, they're paying 4 percent of their monthly income on repayment of their student loan debt. So for the typical individual, this is a really reasonable thing.
REHMAll right. Short break here. When we come back, we'll open the phones, your comments, questions. I look forward to speaking with you.
REHMAnd welcome back. As we talk about college loans, the debt that young people face, not only young people, but, in fact, their parents as well. And here's an interesting question from Roberta in Indiana. Do your panelists think the availability of student loan money might have fueled the rise in tuition costs? Beth.
AKERSYou know, I think a lot of folks are thinking that's the case right now, and we have some new research, just came out of the New York Fed suggesting that's the case. Or putting a number on it, in a sense. What's happening here is that people feel richer because they have access to more money. They spend less thriftily when it comes to making decisions about college. And in the long run, that means the institutions are able to increase prices. If we had savvier shoppers who were shopping with fewer dollars in their pocket, the market would ensure that these institutions were keeping prices low.
AKERSAnd that's -- it's not the reality of our world and unfortunately, it's a necessary evil that comes when we subsidize any market.
REHMWhat do you think, Jeff?
SELINGOI mean, this has been well debated since Bill Bennett suggested this back in the 1980s, when college was a lot less expensive, and when there were a lot fewer student loans. And economists have come down on both sides of this. One of the things that worries me, or bothers me about this is that colleges themselves don't really have any skin in this game, right? So, all this money out there, available to students, are not the dollars of the colleges themselves. And there have been some calls for colleges to have some skin in this game.
SELINGOSo that when they admit a student and let that student borrow, that some of that money is actually coming from the coffers of the college itself. So that when the student pays back that loan, they're actually also responsible to the college. Because then the college might change their mind about certain types of students to admit, but more so, give them better advice about taking out these loans.
REHMAll right. Let's open the phones to Gibsonville, North Carolina. Hi there, Richard, you're on the air. Go right ahead.
RICHARDWell, thanks very much. My question for the panel stems from what was mentioned just a little bit ago about the nontraditional payment plans. I'm enrolled in one myself. I have about $35,000 for my master's and my bachelor's, and my particular plan is, I think, income-based or income -- I forget the term, but it's either income-based or income dependent. And my concern, I guess, is that when I was applying for this payment plan, I read, or at least I think I read, that any remaining balance after the loan is forgiven could be considered taxable income.
RICHARDSo my concern is that even if I wind up not paying the Department of Education all this money, I may wind up paying the IRS all this money.
AKERSYou know, I almost love the way that question was asked because the caller said I'm not really sure what the name of the plan is, and that is precisely the problem with our income-driven repayment system right now. It's incredibly complex, and it also has this kind of weird nuance that when you have your debt forgiven in the end, if we don't see any legislative change before then, these individuals will see a tax bill for that, as if it were income. I can imagine that we'll get there. As soon as that first bill comes in, I'm sure that folks will be, you know, on Capitol Hill making sure we get that change made.
AKERSThis is the exact same thing as with mortgage write-downs. You know, the exact same problem that if you had a mortgage write-down you had, you know, $300,000 debt, it was written down to $200,000, then in principle there's $100,000 taxable income. Now, Congress exempted that, but it's the same sort of issue.
REHMInteresting. All right, to Troy, Michigan, Lalit (sp?), you're on the air.
LALITYes, good morning, and thanks for taking my call.
LALITI'm born actually in India, and I was born in India and then moved to Germany. I did my basic education, as well as my engineering studies, in Germany. And then I moved to the U.S., and I've got two daughters. One is in graduate school. The other one is in one of the Michigan schools. And what I experienced that in India, I mean, people hardly play much money, even though this is a poor country, but India is paying for their students most of their studies' cost.
LALITSame is really for Germany, a developed country. So that means there's a lot of focus on education in those countries, that they do best to provide their student the best opportunity to go for their studies. Why in the U.S., being a developed country, the focus is so different that people have to pay a lot of money. Like me, I make decent money, I'm in the automotive industry, and I make 100K+, but I'm not able to pay for my kids' education.
SELINGOIt didn't used to be this way. I mean, we used to think of higher education as a public good that was supported largely by public funds, especially at public universities, where somebody could go, you know, and University of California didn't charge tuition even until Ronald Reagan was governor. So we used to think of this as a public good. We don't anymore. We think that most of the benefits of higher education, wrongly in my opinion, benefit the individual, and thus the individual should pay. But we have a better democracy, we have better health, we have better everything because of higher education, and it's just the choice that we have made politically.
AKERSYou know, it's interesting. We have, essentially, a socialized system of education through grade 12, and then come grade 13, or that first year of post-secondary, we're popping people into this market. And so when you think of it that way, it's not so crazy when we think about these proposals to make community college free...
AKERSIt's essentially changing that threshold beyond -- at which we move from a socialized to a market system.
BAKERYeah, and, you know, basically the choice here, obviously it has to be paid for one way or another and, you know, the point here, obviously if you go through college, you're likely to have better outcomes, bare labor-market outcomes, but if you have a progressive tax system, then in effect you're getting that back anyhow. So in a lot of ways, you know, here we are talking about these very complex financial aid student loan systems. You get around that if you say okay, we're going to have, we're going to treat this as a public good, as we used to, we'll pay for the school, and we'll get that back, obviously we have to pay for it, we'll get that back through the tax code, through progressive taxes.
REHMAll right, to James in Mansfield, Texas. Hi, you're on the air.
JAMESHi Diane, thanks for taking my call.
JAMESI just wanted to say I'm a student, I've been out of school for 10 years now. I wasn't able to find a career in the major -- I majored in creative writing, haven't written that New York Times bestseller yet, but 10 years later, now I have a family, and recently they started garnishing my check, 15 percent of my discretionary income, which I don't have any discretionary income. We're living check to check. I've gone ahead and gone into these rehabilitation plans and thankfully been able to qualify for the $5 monthly payments going forward for nine months, and then I'm going to consolidate and whatnot.
JAMESBut what I'd like to share with those listening out there is be very careful when you sign those promissory notes because you're actually signing permission for them to collect on you by any means necessary.
SELINGOGreat advice. I mean, it really does come down to this, and I think, again, what happens is college is a very emotional decision for a lot of 18-year-olds, who are not really ready to make that decision on how much money they have to borrow.
REHMBut think about the creativity we're losing.
SELINGOIn terms of, in terms of...
REHMHe took courses in creative writing.
SELINGOWell, and, you know, students who -- I mean, I don't like this idea that students should major in certain, you know, in certain majors because those are the ones that pay off bigger than others. I mean, I do worry about, you know, tying loans to majors and things like that. But there are many options for students. You know, not everybody has to start at a four-year institution. You could start at a less expensive, local community college if you're not quite sure what you want to major in.
SELINGOWhat I think the problem is is that we have this image of American higher education that is, you go off, you travel somewhere, you spend four years on a dorm on a residential campus, and that's not necessarily the dream that we have to sell to everybody. We can't afford it.
REHMAll right, to Jacksonville, Florida, Jason, you're on the air.
JASONHi Diane, thank you for your time and that of your panelists. I'm a professor of humanities at a local community college or two-year college in Florida, and of course I'm a product of the Florida state higher education system myself. One of the things that we really need to point to is the fact that our society, and specifically our state legislatures, have quit investing in higher education. At one point, the state of Florida paid for between 75 and 80 percent of the college tuition for in-state students at both the community colleges and the state college. In the last 15 to 20 years, that has actually decreased to the point that it's almost 45 to 55, 45 paid by the state, 55 by the student.
JASONTo say that the institutions are the reasons for the increase and the greater borrowing and debt is to miss the point that our society, specifically our state legislatures, and Diane, we could even go so far as to say the federal government has quite investing in higher education in favor of a private marketplace that ultimately uses usury to come after the student.
BAKERYeah, I think that experience is typical. Again, I don't know the exact numbers, but if you go back 30, 40 years ago, you would've had 80, 90 percent of the cost covered by states, this is public universities, obviously, whereas today, you know, roughly 50 percent. That, again, will vary by state. But the situation in Florida is not at all atypical. That very much reflects, you know, what we're seeing around the country, and if anything, it's probably getting worse that way.
BAKERSome of you might have seen Governor Walker in Wisconsin recently had large cuts to the University of Wisconsin's budget, which naturally will be made up through higher fees.
AKERSYou know, the caller's not alone in having noticed this, either. There are provisions in both the Clinton and the Sanders plan that are very explicitly aimed at trying to get states to reinvest in their public institutions.
SELINGOAnd we tried to do this during the economic stimulus act a couple of years ago, where the federal government had this maintenance of effort, where states had to invest so much money in their public higher education systems, which actually worked for a couple of years. Public tuitions actually where somewhat leveled off, and then that provision ended, and suddenly tuition started to increase again.
SELINGOSo once we ask the states to maintain a certain level of effort around higher education, we have to make sure they maintain that for a very long time, or else we're just going to see these increases.
REHMAll right, to Hagerstown, Maryland, Esteban, you're on the air.
ESTEBANThanks. So a lot of this sounds like it has a supply and demand factor that more people are going to college, therefore prices are rising, and I feel like coming from the generation that was encouraged strongly to go to college, almost with the consequences of if you don't, you're doomed, I feel like a lot has gone into creating stigmas around vocational work, which in many cases are providing higher incomes and lower debts coming out of.
ESTEBANI feel that it puts a college many times as a barrier between people in entrepreneurship and innovation and creativity. And so I'd like to see more education going into calculating one's own ROI, return on investment, so that people can make the best decisions for themselves instead of just going to college and then feeling entitled that if I get this degree, I am entitled then to a paycheck and a career path.
BAKERVery good points. A couple things to keep in mind. First off, we have been seeing more people have been going to college, and that is true, but it is important, there's a very big gender aspect to that. Much of the rise in the last three decades has been women, and there's many more women on college campuses today than men. Men's enrollment has largely stagnated, which is a very, very interesting question.
BAKERNot a simple answer to it. I think the variance, some men do well, a lot do very poorly. I think that explains a lot of that. But the other point, you know, yeah, college isn't something everyone needs to do, necessarily the best thing. This is a case where the U.S. really lags behind some other countries. Germany always stands out here that they have very good vocational tracks so that people go through their high school equivalent, and they come out as skilled workers.
BAKERSo they can good-paying jobs, secure jobs, middle-class jobs. That's much less true in the United States. So insofar as we can hook people up into vocational tracks, not that that's the only option for them, but that should be a viable option. Someone should be able to get good skills coming at -- many do some post-secondary coming out of, you know, another year or two, but the point is they're not going to go to a four-year college.
REHMAnd you're listening to the Diane Rehm Show. Jeff?
SELINGOWell, I just want to back up Dean's point on vocational education, other pathways. I mean, we have this idea that the only way to success in this country is to go to a college.
SELINGOAnd usually, by the way, we mean a four-year college, and we mean three months after high school graduation, when many students are not ready. Especially men, I think, would be helped by a gap year or other types of experiences. You had a great show, I don't want to repeat what they said on it, a couple weeks ago with the labor secretary.
SELINGOSteve Roberts was flown in that day, great ideas, especially in North Carolina, which I think is very progressive on apprenticeships for students. But the basic fact here is that we need to get more students going into different post-secondary options beyond just a four-year expensive college.
REHMAnd Bill in Eugene, Oregon, has an idea on that. Go right ahead.
BILLHi, thank you for having me. I have a couple suggestions. In Germany, you start in high school, you know, your second or third year in high school, you actually start an apprenticeship program. When you get out half your apprenticeship program, you go into BMW, and you make $40,000, $50,000 a year, and you complete the other two years apprenticeship. So I was an apprentice, and I think Reagan helped -- killed our apprenticeship programs and killed unions because they were the basic of the apprenticeship programs.
BILLAnd I went to college for four -- two and a half years at Tempe University, paid through the nose, and I didn't even -- didn't even get qualified to do what I wanted to do. So I was luckily enough to get back into construction work, which I paid my highway through college and got into. But the ultimate system is what we should do, is in Oregon, Eugene, Oregon, if you qualify with your grades, you go to community college free after high school.
BILLBut I think the perfect system, if schools only get federal funds, you have to -- you go to -- you can go to a community college, a regular college and get your liberal arts out of the way, two years or whatever, but before you can pursue a career, you have to work in that career as an apprentice or as an intern before you can study to be a lawyer or architect or whatever so at least you know you like it, and you have some background. So a combination of that with apprenticeships, internships, and you can't keep -- put out $40,000 to $100,000 loan on something you haven't even worked in yet.
SELINGOGreat idea. Two quick thoughts on that. We talk a lot about Germany. I also think we should look at Switzerland. It's less regulated, very -- more similar to the U.S. system. Also great on apprenticeships. And one of the things the caller brought up is this idea of career exploration.
SELINGOA lot of students are making decisions, taking out big loans, to major in something, they have no idea what they're getting into. And then two or three years later, after they've racked up these loans, then they decide oh, I don't really want to do that anymore, and they're not going to have the labor market outcomes they thought they would.
REHMTwo governors in the presidential race, Scott Walker, John Kasich, are talking about this issue. Scott Walker signed a state budget cutting $250 million from the University of Wisconsin system. John Kasich of Ohio says these costs are a huge problem, we've got to do something about it. So really, people are starting to think hard about it.
BAKERWell, they're thinking hard about it, but I'm not sure if these are steps in the right direction. Again, if you have effective ways to control costs, that's great, but just taking, you know, a hatchet to the budgets, I don't know that that's going to do that. So if either of the governors has a good proposal, here's how you could save, you know, $250 million from your budget, great, but I didn't hear that coming from Governor Walker.
REHMI didn't, either.
AKERSYou know, we have a growing conversation about costs and debt, but I really wonder if we're going in the wrong direction there. You know, if you're thinking about an individual borrowing $30,000 to buy a bachelor's degree that's worth a million over their lifetime, is the cost the problem? I don't think so. You know, my feeling is that the folks who are borrowing $30,000 and not seeing that million dollars. So in a sense it's the risk. It's the risk of higher ed that we should be talking about because it's a gamble when you're going to college these days.
REHMAll right, we'll have to leave it that. Jeffrey Selingo, Beth Akers, Dean Baker, thank you all so much.
REHMAnd thanks, all, for listening. I'm Diane Rehm.
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