Financing College Education and Its Consequences

Paper Session

Saturday, Jan. 7, 2017 10:15 AM – 12:15 PM

Swissotel Chicago, St Gallen 3
Hosted By: Association for Social Economics & Association for Evolutionary Economics
  • Chair: Christian E. Weller, University of Massachusetts-Boston

The Influence of Education-Related Debt on Financial Distress and Consumption

Jeffrey Thompson
,
Federal Reserve Board

Abstract

By examining how student borrowers fare financially after graduation, we attempt to further the existing knowledge of the costs associated with education debt and the manageability of the typical debt burden. We use data from the Survey of Consumer Finances, and compare the financial stability of individuals who have borrowed for education to similar individuals who have not. Using the SCF repeated cross-sections from 1989 to 2010, and an IV approach (Gicheva and Thompson, 2015) we show that, keeping education constant, more student debt is associated with higher probability of being credit constrained and greater likelihood of declaring bankruptcy, particularly for individuals who accumulate debt but do not complete a Bachelor’s degree. We find evidence that homeownership rates may also be affected by education loans. Controlling for earnings tends to strengthen these relationships, which is consistent with omitted variable bias combined with positive return to student loans.Using the SCF 2007 to 2009 panel (Bricker and Thompson, 2016) we show that families with student loans in 2007 have higher levels of financial distress than families without such loans, and these families also transitioned to financial distress at higher rates during the early stages of the Great Recession. This correlation persists once we control for a host of other demographic, work-status, and household balance sheet measures. Families with an average level of student loans were 3.1 percentage points more likely to be 60 days late paying bills and 3 percentage points more likely to be denied credit. Families with other types of consumer debt were no more or less likely to be financially distressed.
Additional work will explore the impacts of student borrowing (in both the SCF panel and cross-sections) on consumption.

Student Debt: Rhetoric and Reality

Sandy Baum
,
Urban Institute

Abstract

The public discourse about student debt suggests that borrowing for college creates inordinate burdens for large numbers of students, damaging both individual lives and the economy as a whole. This paper examines the economic arguments for and against credit financing for higher education; describes the distribution of education debt based on both pre-borrowing and post-borrowing financial circumstances; reviews the evidence about the actual impact of student debt; explores the reasons for widespread misperceptions; and evaluates potential policies designed to mitigate the very real problems created by the current student loan system. The fact that outstanding student debt now exceeds outstanding credit card debt is frequently cited as an indicator of a student debt “crisis.” But it is the debt levels of individual students, rather than aggregate levels, that signal potential problems. Education debt funds investments in individuals, and it is the failure of those investment to yield positive returns that should be cause for concern. Analysis of changes in the debt levels of students with different demographic characteristics and different educational histories yields insights into where the problems lie. The data indicate that that many students are accruing debt without earning credentials with labor market value. This paper highlights changing patterns and evaluates potential solutions.

A Veblenian Analysis of For-Profit Universities

John Watkins
,
Westminster College
James E. Seidelman
,
Westminster College

Abstract

Education policy has been guided by two seemingly opposing forces: broaden the access to the community’s knowledge base and privatize the costs of that access. Broadening access entails helping marginal students—the poor, minorities, single women, veterans and so on. Privatizing access involves government-provided loans and grants totaling $138 billion from 2010 to 2016 to students attending for-profit schools. This policy resulted in low-graduation rates while enriching stock holders, providing them “something for nothing.” Addressing low-graduation rates requires changing the accreditation of for-profit schools, a change that affects the allocation of federal funds, changes that the Obama administration is currently trying to implement. The issue raises several questions. First, how would Thorstein Veblen view efforts to expand educational opportunities for students? Second, what factors gave rise to for-profit schools? And third, what policies can we enact to provide students access to a higher education?

529 Plans: A Better Way to Save for College?

Steven Pressman
,
Colorado State University
Robert H. Scott, III
,
Monmouth University

Abstract

This paper studies how families save for college education. Specifically we focus on 529 plans and Education Savings Accounts as the primary savings vehicles for families. Using the Federal Reserve’s Survey of Consumer Finances we find that less than 2% of families in the United States have investment savings for their child(ren)’s college. We further find that most of the people who save in 529 plans and other investment savings vehicles for college have much higher incomes and levels of education. There are a few reasons 529 plans are under-utilized. First, they are complicated to figure out—only knowledgeable investors can confidently navigate the 529 landscape. Second, because each state has its own plan the rules vary from state to state making comparisons difficult and also creates difficulty when seeking advice about where and how to invest. Third, other than states that offer tax breaks the advantages are made unclear—a few states have proposed matching programs (up to a certain amount) to incentivize more involvement, which we concur with. Fourth, money invested into 529 plans are limited in use. They can be passed on to different family members, used for graduate school etc., but a more flexible spending option (e.g., use for retirement savings etc.) would make them much more attractive. This paper explores the nuances of 529 plans and in so doing we make recommendations for improving them so that more families invest sufficiently for their child(ren)’s college education.
Discussant(s)
Timothy A. Wunder
,
University of Texas-Arlington
Thomas Kemp
,
University of Wisconsin-Eau Claire
Christina Curley
,
Colorado State University
Jeffrey Wenger
,
RAND Corporation
JEL Classifications
  • H0 - General
  • I0 - General