Normative Narratives


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Transparency Report: Debt, Depression, and College Drop-Outs

The graphs in this blog come from a recent report co-authored by the Pell Institute and The University of Pennsylvania:

graduation rates

In addition to the direct (tuition, room and board, cost of living) and “opportunity cost” (foregone wages) of attending college, there is mounting evidence that suggests there is an emotional / psychological cost associated with taking out student loans.

Despite the intense interest in this issue among researchers, this is the first paper that attempts to understand the emotional cost of carrying student loan debt.  This question is, in fact, more fundamental than the others being posed in this genre of research, since it could help to explain the mechanism through which debt may be affecting other outcomes (i.e. emotional health, graduation rates).

Based on their analysis, the authors report, “cumulative student loans were significantly and inversely associated with better psychological functioning.”  In other words, individuals with more student debt reported lower levels of psychological health, when other things are held constant (including occupation, income, education and family wealth).  The effect is statistically significant, but it is quite small.  They also find that “the amount of yearly student loans borrowed was inversely associated with psychological functioning,” which implies that taking on debt is emotionally costly for students.

Unfortunately, this emotional / psychological “cost” seems to be affecting a greater number of incoming college students:

High numbers of students are beginning college having felt depressed and overwhelmed during the previous year, according to an annual survey released on Thursday, reinforcing some experts’ concern about the emotional health of college freshmen.

The survey of more than 150,000 students nationwide, “The American Freshman: National Norms Fall 2014,” found that 9.5 percent of respondents had frequently “felt depressed” during the past year, a significant rise over the 6.1 percent reported five years ago. Those who “felt overwhelmed” by schoolwork and other commitments rose to 34.6 percent from 27.1 percent.

Not coincidentally, the frequency and magnitude of student loan debt has increased greatly during this period of increasing student unease and depression, according to data released by the NY Fed:

More U.S. students continued to borrow larger sums for their college education last year, according to data from the Federal Reserve Bank of New York, while total student loan balances tripled over the last decade.

At 43 million, the number of student borrowers jumped 92 percent from 2004 to 2014, while their average balances climbed 74 percent, according to New York Fed researchers. The average balance was some $27,000.

Obviously correlation does not prove causation. But given the logical link between debt, depression, and dropping-out of school, these trends cannot be purely coincidental–more research on the subject is needed.

“It’s a public health issue,” said Dr. Anthony L. Rostain, a psychiatrist and co-chairman of a University of Pennsylvania task force on students’ emotional health. “We’re expecting more of students: There’s a sense of having to compete in a global economy, and they think they have to be on top of their game all the time. It’s no wonder they feel overwhelmed.”

While I cannot speak personally about the burden of student loan debt, I have experienced depression first hand, and understand how being depressed could make one more likely to drop out of school.

Depression is particularly difficult to battle in a college atmosphere. The pressure to maintain a social life, despite anxiety and financial issues, can reinforce negative feelings associated with depression. The abundance of drugs and alcohol certainly does not help the situation either.

The general pessimism which accompanies depression compromises a person’s ability to clearly assess long term goals, such as completing a degree. Depression also affects ones cognitive abilities, hampering academic outcomes.

I can only imagine the pressure on someone who is both depressed and has student loan debt to consider; some combination of the two surely accounts for more low-income drop-outs than is currently recognized.

I had to take a semester off to get myself back in the proper state of mind to complete my degree; not everyone has this luxury. However, everyone should have the support needed to realize their educational and emotional potential.

Due to my personal experiences and knowledge of economics, I vehemently support President Obama’s proposed Community College plan. Lower income students could learn if pursuing a bachelor’s degree is “for them” without taking out tens of thousands of dollars in loans, likely leading to better emotional, educational, and economic outcomes.

Furthermore, community colleges are more likely to have the the social counseling and financial advising services missing from for-profit universities, which predominantly attract low income students.

collegetypebyincome

The Obama administration is attempting break the vicious cycle of student debt, emotional suffering, and dropping-out of college. Dropping out of college with student loan debt in a competitive global economy is a poverty trap for low income individuals, and has become a drag on economic growth in the macro.

By expanding mental health parity through the ACA, getting treatment for depression is no longer a luxury reserved for the wealthy. If our lawmakers pass a free community college bill, the synergy between these two public policies would go a long way towards bringing equity to America’s higher education system and reinvigorating the American Dream.


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Economic Outlook: Neo-Classical Economics, Perfect Competition, and the Cost(s) of Attending College

https://normativenarratives.files.wordpress.com/2013/08/1f86a-student-debt-cartoon-big.jpg

Student loan debt in America is a controversial subject. Some countries subsidize higher education, the U.S. does not. In the context of the past decades in America, marked by increasing inequality and decreasing social mobility, the issue has become even more controversial. Yong adults, often without parental support, are sold the panacea of higher education as a means to a better future. While it is true that college graduates make more and experience lower unemployment rates, simply “getting a degree” can often be counter productive. If the degree is in a field with very limited job opportunities, or due to cyclical economic factors outside individual’s control (i.e. a prolonged recession), a young adult may be saddled with student loan debt; far from enabling social mobility, an ill planned college decision can leave a person with a lifetime of debt and actually push them into a “poverty-trap”. Further exacerbating the problem, the importance of a college degree has drastically increased the demand of a college education, pushing up the average cost of attending college.

In America, public student loan debt is somewhere between $900bn and $1 trillion dollars–most economists agree that student loan debt and poor job prospects have caused young adults to put off moving out, depressing overall consumption and further prolonging the (growth) recession. Against this backdrop, the Obama administration has attempted to stymie the rapidly increasing costs of college education. Obama’s plan is essentially two fold, 1) subsidize student loan debt with fixed preferential rates, and 2) rank institutions–based on tuition, graduation and retention rates, student makeup and graduates’ earnings–and then tie federal aid to those rankings.

The Obama administration has already passed a watered down version of its proposed student loan plan. The plan will tie rates to the government borrowing rate (T-bill) plus a premium depending on the level of the degree being pursued. While a short term fix while the economy stagnates, a capped rate of 8.25% does not provide the stability or low costs of fixed subsidized rates that many were hoping for. The Obama administration kicked the can down the road; how far down the road remains to be seen and is largely independent of the merits of a college education.  Hopefully this short-term fix remains a fix for a while, and only becomes an issue again in a less contentious economic and political climate.

The second part of Obama’s plan, revealed yesterday at the University of Buffalo, proposes to publish information to make the decision process more transparent for prospective college students. Ultimately, Obama wants to tie federal aid to these rankings, creating an incentive for schools to keep costs down. If this part of the plan does not pass through congress, at least the information campaign segment of the plan is isolated from political gridlock. Opponents of the plan say that and results based plan will compromise the integrity of a degree, causing schools to make graduation easier. I find it hard to believe that a school would give up quality control over its most valuable asset–a degree–simply for student loan money.

Opponents of both of these plans contend that the government should get out of the student aid business and allow market forces to determine the price of a college education / student loan. At the root of this argument is the belief of neo-classical economics that perfect competition produces optimal outcomes for consumers, producers, and society as a whole. However, empirical evidence suggests a different outcome–rising costs of a college education without a related increase in the benefits of that education (and arguably decreasing benefits, as an undergraduate college degree becomes more commonplace and therefore less of a differential in hiring decisions). How could this be? Have people been duped into believing college is more valuable than it really is? While poor decision making by borrowers and lenders has surely exacerbated the problem of student loan debt and college tuition increases, the real culprit is in the assumptions underlying neo-classical economics and perfect competition. While no market in the real world completely fits these assumptions, the markets for college education and student loans are particularly ill matched.

Neo-Classical Assumptions:

  1.  People have rational preferences among outcomes — This could not be further from the truth. I have never met someone who is 100% rational (think Spock from Star-Trek). Some people are mostly rational, but in general people tend to be very short-sighted with consumption and investment decisions (or lack-thereof)–particularly those at the bottom of society who have little reason to be optimistic about their futures;
  2.  Individuals maximize utility and firms maximize profits — Well it is certainly true that firms (in this case schools) move to maximize their profits. However, maximizing utility is more difficult to evaluate–everyone values things differently, has different discount rates for consuming now vs. saving for later, different values work vs. leisure time, etc. This assumption cannot be refuted, but really does not tell us much because of its ambiguity (peoples preferences are different and cannot be compared);
  3.  People act independently on the basis of full and relevant information — Far from full and relevant information, often times power and knowledge asymmetries lead to very poor decision making. The second part of Obama’s plan intends to overcome this information gap.


Perfect Competition:

Perfectly competitive markets exhibit the following characteristics:

  1. There is perfect knowledge, with no information failure or time lags.  Knowledge is freely available to all participants, which means that risk-taking is minimal and the role of the entrepreneur is limited. — The role of the entrepreneur (in this case the student) is not minimal. The availability of information and guidance can make the difference between a “good decision” (for example going to a public college for a STEM degree) vs. a “bad decision” (for example going to a private party school for a poetry degree). The time-lag is particularly pronounced in education decisions, college often requires a large upfront cost based on the belief that the net benefit (higher earnings – college costs – student loan fees – opportunity cost to attend college) will be positive. Even with perfect information today (which is very difficult to obtain) due to uncertainty about future borrowing costs (argument for fixing student loan rates) / job availability / degree obsolescence (the field advances or becomes irrelevant), the decision to attend college is largely a leap of faith–a leap that is continuing to fall short for many people (which is why college costs must be reigned in, to align the costs and benefits of a college education);
  2. There are no barriers to entry into or exit out of the market. — While there are no real explicit barriers to entry, the implicit barriers to entry are huge. Colleges require huge start-up costs, and take time in order to establish “prestige”. The best colleges have an implicit oligopoly (this is not necessarily a bad thing, but it should be noted); while they may partner with public institutions / community colleges, their demand for their services are rival, demand inelastic, and constantly in short supply. Public Colleges, technical schools, community colleges, and more recently online schools or “MOOCs” have become cheaper alternatives;
  3. Firms produce homogeneous, identical, units of output that are not branded. — Related to the previous point; while alternatives to “traditional schooling” are now available, they are generally not seen as comparable to University education (Public colleges are, but community colleges / MOOCs typically are not). Part of this has to do with the stigma attached to these alternative channels of education. Guidance counselors, college advisers, unemployment trainers  and even employers should all promote these differentiated services based on the needs and desires of potential applicants. Sometimes going to a technical college / pursuing an associates degree is more beneficial and (always) costs less than going to a traditional 4 year college–sometimes these options can be “stepping stones” to more advanced degrees as the young adult matures and reevaluates his/her priorities;
  4. Each unit of input, such as units of labour, are also homogeneous. — Each “input” is not homogenous–people go to college to explore their potential and study any number of diverse fields. Neither “inputs” nor “outputs” of colleges are in any way homogenous;
  5. No single firm can influence the market price, or market conditions. The single firm is said to be a price taker, taking its price from the whole industry. — No “market price” for colleges; inelastic demand, imperfect information and a shortage of spaces allow certain colleges to essentially charge whatever tuition rate they want;
  6. There are a very large numbers of firms in the market. — True, but this has not led to true competition due to increasing demand;
  7. There is no need for government regulation, except to make markets more competitive. — Well that’s the point…
  8. There are assumed to be no externalities, that is no external costs or benefits. — Certainly not true; there are undeniable positive externalities of college education for both individuals and society as a whole.
  9. Firms can only make normal profits in the long run, but they can make abnormal profits in the short run. — There is no end in sight to the rising cost of schooling without government intervention.

Empirical evidence and a baseline analysis of neo-liberal economics refutes the idea that the costs of college should be left for the markets to decide. One would hope our elected officials would be more educated on the subject, and could offer an alternative other than unfettered belief in the power of markets to produce optimal outcomes. Obama’s proposals seem to hit at the root causes of rising college costs; lets hope his plans are implemented. Even if they are not fully implemented, the short-term student loan rate fix and upcoming information campaign should provide temporary relief and begin reversing the trend of rising college costs.

Please do not get me wrong, I am a strong proponent of higher education. But it is no panacea and it can actually be counter productive if not addressed within a C-B framework. It is the job of the government to keep costs down (as self-regulation of college tuition simply does not exist), and subsidize college education (both loans and tuition) to reward the positive externalities of higher education. It is the job of people, aided by advisers, parents, and in the near future government collected data, to consider the benefits and costs of college, and make appropriate decisions for themselves. Underlying this C-B analysis should be fixed loan rates, otherwise a robust analysis is impossible.

Note: The inspiration for this blog is “Development Economic Through the Lens of Psychology” , an excellent journal article I highly suggest to my readers.


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Economic Outlook: U.S. Senate Fails to Pass a Bill Preventing the Doubling of Student Loan Rates

The U.S. Senate on Thursday thwarted two rival bills aimed at stopping interest rates on millions of federal student loans doubling in less than a month.”

Student loan debt in America now surpasses $1 trillion, according to the U.S. Consumer Financial Protection Bureau, and is already hindering young people from making important economic decisions such as purchasing new homes or cars.

Last year lawmakers agreed to extend a previous rate-increase freeze on student loans for another year. Unless Congress comes to an alternative agreement, interest rates will double to 6.8 percent on July 1, adding an extra $1,000 to borrowers’ payments every year.”

“The Comprehensive Student Loan Protection Act, a bill introduced by Republican Senators Tom Coburn of Oklahoma, Richard Burr of North Carolina and Lamar Alexander of Tennessee, would have pegged the interest rates to the U.S. Treasury 10-year rate, plus 3 percentage points.

Democrats say that plan would only hurt borrowers by causing them to pay higher rates in the future as the economy recovers and interest rates climb.”

“The Democrat bill introduced by Tom Harkin of Iowa, Jack Reed of Rhode Island, and Majority Leader Harry Reid of Nevada would have frozen interest rates on subsidized Stafford student loans at their current 3.4 percent for two more years.

Democrats said their plan would protect borrowers and give lawmakers time to work on a more comprehensive, long-term solution. Republicans, such as Senate Republican leader Mitch McConnell of Kentucky say any solution should be a permanent one, rather than a “short-term political patch.”

“[Richard] Burr (Senator-R-NC) said Republicans want to provide a predictable mechanism to set interest rates for students, rather than returning to the table every year.’ Congress shouldn’t be sitting in Washington deciding with a dartboard what student loan interest rates should be,’ he said.

“President Barack Obama has also proposed a market-based plan. Under his proposal the borrowing rates would remain fixed for the life of the loan.”

Wait a minute, haven’t we seen this before? Congress creating a short-term fix and putting an “unthinkable” consequence for not passing a longer term plan within a certain time-frame? Why yes, yes we have. It is essentially the same progression as the “debt-ceiling”, the “fiscal cliff”, and the “sequester”. If we have learned one thing from recently political gridlock it’s that this tactic is ineffective—in Washington today politicians on both sides of the political spectrum are willing to let “unthinkable” events pass in order to avoid compromising (although not evenly distributed between both sides, I’ll let you guess which side I think is more reasonable).

While it is true that another month remains before rates are set to double, anyone banking on a compromise within that time is either incredibly optimistic or has not been following politics for the past half decade.

Recent statements by Senator Bob Dole on “Fox News Sunday”, highlighted in a NYT article, show that not only liberals think Tea Party Politics are hurting America:

“It seems to be almost unreal that we can’t get together on a budget or legislation,” said Mr. Dole, the former Senate majority leader and presidential candidate. “I mean, we weren’t perfect by a long shot, but at least we got our work done.”

The current Congress can’t even do that, thanks to a furiously oppositional Republican Party, and that’s what has left mainstream conservatives like Mr. Dole and Senator John McCain shaking their heads in disgust.

The difference between the current crop of Tea Party lawmakers and Mr. Dole’s generation is not simply one of ideology. While the Tea Partiers are undoubtedly more extreme, Mr. Dole spent years pushing big tax cuts, railing at regulations and blocking international treaties. His party actively courted the religious right in the 1980s and relied on racial innuendo to win elections. But when the time came to actually govern, Republicans used to set aside their grandstanding, recognize that a two-party system requires compromise and make deals to keep the government working on the people’s behalf. “

Barbara Bush, first lady to President George H W Bush, had similar thoughts in the issue of partisan divide:

“’They are going to have to compromise,’ said Barbara, the wife of former President George H.W. Bush. ‘It’s not a dirty word.’”

This position is unsurprising considering her husbands political history. “To reach agreement with Democrats who controlled both the House and the Senate, [H W] Bush accepted a deficit-reduction plan that raised income-tax rates—breaking his “read my lips” tax pledge from the 1988 presidential campaign. In protest, Newt Gingrich, then the House minority whip, quit the talks and led a rebellion that ultimately persuaded nearly half of Republicans in the chamber to abandon Bush and oppose the deal.

Bush’s budget package established the foundation for further deficit reduction under President Clinton in 1993 and 1997. Those agreements fueled the 1990s economic boom and produced three consecutive balanced budgets in Clinton’s second term. But it was Gingrich’s revolt in the name of inviolate principle, not the elder Bush’s flexibility in the face of divided government, that left a lasting imprint on the GOP.”

Economic advisor to Presidents H W Bush and Reagan, Bruce Bartlett, is an Economix blogger for the NYT, and a prominent example of a conservative turned liberal due to the G.O.P’s philosophy on political economy.

Tea Bagger’s cannot claim core Republican values from some “Golden Age” in the 1980s and 90s, because the very people who were running the G.O.P. back then have renounced the Tea Bag movement:

“I’m not all that interested in the way things have always been done around here,” Senator Marco Rubio of Florida told The Times last week.

I hate to beat a dead horse (elephant?), but if you look at congressional approval ratings over time, perhaps it would make more sense to defer to the more experienced and knowledgeable politicians who once ran your party.

A primary function of the legislative branch, known as “vertical accountability”, is to represent citizen’s voice in government agenda-setting and policy making processes. With only 16% satisfaction, can there be any question that partisan politics have prevented legislators from doing their jobs?

Many countries have mechanism for a disillusion of parliament, based on differing criteria. Perhaps the time has come to consider a Constitutional amendment stipulating instances in which either the House and / or Senate can be dissolved due to incompetence.

It is not too far ahead to look forward to the 2014 midterm elections. These elections represent a major turning point in U.S. political history. An absolute majority for the democrats will further embolden the mandate Obama believes his re-election signified—a more progressive, meritocratic, and egalitarian vision of America. If democrats fail to seize this opportunity, we can expect two more years or relative government inaction leading up to the 2016 elections.

Back on subject, I believe that Obama’s plan is a reasonable compromise between the two sides. I agree with Senate Republican leader Mitch McConnell that short-term patchwork policies are no way to treat any legislation, particularly one with such long-term implications as student loan repayment. But I also agree with general democratic opposition to tie rates to market values, as the volatility in U.S. bond markets does not offer much security to potential student-loan candidates.

The Obama plan is good because while the current market sets the rate, there is the stability of having that rate locked in place. When the economy is doing well, and there is low unemployment, rates will be higher; signaling that a prospective student may be better served joining the labor force. When there is a lack of jobs, and the opportunity cost of attending college is lower, this will be reinforced by lower borrowing rates (as we see now).

Of course the ultimate factor of how much student debt one accumulates is the cost of their institution. Public state, city, and community colleges offer an affordable alternative that leaves students with much less debt, which mitigates the effect of changes in student loan rates in general (as opposed to someone who takes on more debt at a private college).

Needs-based grants are often available to students who show academic promise but cannot afford to attend schools. Changing affirmative action to a more needs-based socio-economic program, instead of a race-based program, could make the program work as it was originally intended, which was to help disenfranchised Americans realize the “American Dream” of social mobility.

One criticism of this policy is that it is somewhat deterministic, in that at times when T-bill rates are high, many students who would benefit from going to college may decide they cannot afford it.

The opposition to the Obama plan is that by fixing rates at a certain level for the life of the loan, the U.S. government may be on the hook for a large subsidy when T-bill rates go up. Let’s say I lock in a loan at 2%, and the government now has to pay 8% interest to borrow money, the government is taking a large loss there.

But that is the government’s job, to provide financing for important programs. Schooling should be subsidized for all the benefits it produces. Senator Burr is correct, the U.S. government should not unilaterally set rates. It should, however, provide Students with the security of knowing at what rate they will have to pay back student loans, given the long-term benefits that education gives and the financial uncertainty facing 99.99% of Americans (basically anyone who cannot fall back on family wealthy).

Subsidizing student loans, changing affirmative action to a needs based program, and making available cheaper public education alternatives, is three-sided approach that can drastically increase social mobility in America.