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Re: <nettime> conjunctural analysis

Brookings on one aspect of the student loan / higher ed costs vector




Refinancing Outstanding Student Loans: Not as Progressive as it Seems
Matthew M. Chingos and Beth Akers | March 19, 2014 11:00am

Student loan debt is back in the [71]news with the launch of a
campaign by progressive education advocates, dubbed "Higher Ed,
Not Debt," aimed at aiding borrowers and reducing college costs.
A leading voice in this effort is Senator Elizabeth Warren of
Massachusetts, who plans to introduce legislation that would
allow borrowers to refinance their existing loans at lower
interest rates.  Sen. Warren's proposal has some intuitive appeal,
as she [72]describes it: "The idea is pretty simple. When interest
rates are low, homeowners can refinance their mortgages. Big
corporations can swap more expensive debt for cheaper debt ...
But a graduate who took out an unsubsidized loan before July 1
of last year is locked into an interest rate of nearly 7 percent.
Older loans run 8%, 9% and higher."

This plan also has obvious appeal in light of frequent media
coverage about households struggling to repay student loan debts.
But it represents a fundamental shift from a federal lending
program that has historically acted more or less like a bank--with
the goal that student loans will be roughly budget neutral in
the long run--to something that more closely resembles an
entitlement program.  Allowing borrowers to refinance their loans
at below-market rates with the government would lead to a
potentially large increase in the cost of the program, which
would have to be funded through a general increase in interest
rates or revenue from other sources.

The proposal pursues the latter course, suggesting that loan
refinancing could be paid for by a tax increase on wealthy
individuals commonly called the "Buffett Rule."  Government
programs that redistribute resources, usually from wealthier to
less well-off individuals, are not uncommon.  And it seems, as
the narrative about the proposal suggests, that reducing interest
rates on outstanding debts would put money back into the pockets
of the households that need it the most.  Unfortunately, the
plan fails to achieve this objective.  In fact, the plan is
largely regressive and not the least bit progressive.

Refinancing loans provides the greatest benefit to borrowers
with large outstanding debts.[73][i] This doesn't seem like such
a bad thing until you realize that households with large outstanding
debts tend, on average, to be high-income households.  Many
borrowers who take on large debts do so in order to pursue degrees
that lead to high incomes, in fields such as law and medicine.
These are not the same households who are struggling financially
and are perhaps in need of a bailout.  We illustrate this point
using data from the 2010 Survey of Consumer Finances (SCF), a
nationally representative survey of U.S. households administered
by the Federal Reserve Board.  We calculate how much outstanding
education debt is held by each household headed by individual(s)
aged 25-40, and relate it to the total income of the household.[74][ii]
Households with more debt will receive greater benefits from a
reduction in interest rates.

The figure below shows that higher-income households hold a
disproportionate share of student loan debt.  The richest 25
percent of families hold 40 percent of the student loans, so
would receive roughly 40 percent of the benefits of a proposal
that allowed all loan debt to be refinanced at lower rates.  On
the other side of the income spectrum, the poorest quarter of
households would receive less than one-fifth of the benefits of
such a proposal.  Student Loan Debt is Disproportionately Held
by High-Income Families

[ graph depicting student loan debt Source: Authors' calculations
from 2010 Survey of Consumer Finances, households with average
age 25-40. ]

It's clear that this plan fails to redistribute wealth in a
progressive manner, but it also has another problem.  Subsidies
to education exist in order to encourage changes in behavior
that advance society's goals.  For instance, students from
disadvantaged households receive Pell grants with the hope that
they will be able to enroll in and graduate from college when
they would not have otherwise.  Subsidies that do not change
behavior, as would be the case with loan refinancing, simply
amount to wealth redistribution.[75][iii]

The SCF data make clear that universal refinancing flies in the
face of progressive values by benefiting the affluent at the
expense of the disadvantaged.  To be sure, struggling borrowers
would benefit from lower interest rates, but successful college
and graduate degree holders would benefit even more.  Is there
a less blunt instrument to aid those who struggle to make their
loan payments without big handouts to the least needy borrowers?

Fortunately, such programs already exist.  The federal government
offers a variety of repayment [76]plans to student borrowers
that cap their payments based on their income.  The best-known
plans are Income-Based Repayment (IBR) and Pay as You Earn (PAYE).
These programs allow borrowers who experience periods of low
income to delay making their full payments without harming their
creditworthiness, and forgive outstanding loan balances after a
certain number of payments.

There is no doubt that these repayment programs are in need of
improvement, and President Obama proposed several [77]reforms
in his 2015 budget request.  A reduction in interest rates for
struggling borrowers might make sense as part of the reform
debate, perhaps as an alternative to loan forgiveness.  But it
is clear that providing the same interest-rate cut to all borrowers
is about as progressive as providing the same tax-rate cut to
all Americans.


[i] In technical terms, the size of the interest-rate benefit
is proportional to the outstanding loan balance at the time of
refinancing.  A mathematical explanation of this proposition is
available from the authors upon request.

[ii] Specifically, we restrict the analysis to households with
an average age (among the adults in the household) of 25-40.  We
use this range in order to exclude likely college students as
well as older adults who may have taken on education debt to
finance their children's education.

[iii] A policy that enabled refinancing at lower rates for future
borrowers could impact their college-going behavior.  It is not
clear whether Senator Warren's proposal will apply to future
borrowers or only existing borrowers.


71. http://www.insidehighered.com/news/2014/03/07/progressive-groups-launch-new-campaign-tackle-student-debt-college-affordability
72. http://www.warren.senate.gov/files/documents/2014-2-12%20Floor%20Speech%20on%20Student%20Loans.pdf
73. http://www.brookings.edu/blogs/brown-center-chalkboard/posts/2014/03/19-regressive-loan-refinance-chingos-akers#ednref1
74. http://www.brookings.edu/blogs/brown-center-chalkboard/posts/2014/03/19-regressive-loan-refinance-chingos-akers#ednref2
75. http://www.brookings.edu/blogs/brown-center-chalkboard/posts/2014/03/19-regressive-loan-refinance-chingos-akers#ednref3
76. http://studentaid.ed.gov/repay-loans/understand/plans
77. http://www.edcentral.org/obama-administration-announces-major-reforms-income-based-repayment/

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