Pay-As-You-Earn Pays Off for Young Grads

In recent posts, we’ve discussed student debt, rising tuition, competency-based credit, technology in education, and accountability for graduation rates and debt load, among other topics. Well, it turns out that Obama has been reading some of the same blogs we have. His education plan, introduced last week, includes several proposals relating to these very issues. Let’s take a look at them, starting today with student debt.

The plan calls for an expansion of the Pay-As-You-Earn plan, which caps monthly student debt payments at 10% of income, with loans forgiven after 20 years, or 10 years for those working in the public sector. The original law setting the precedent for this was passed back in 2007, with the caps lowered to 10% and time until forgiveness shortened last year from 25 to 20 years.

Pay-As-You-Earn, Obama education reform

Obama’s Pay-As-You-Earn program allows recent graduates to limit their monthly student loan payments to 10% of monthly income

At the moment, only students that took out their first loans after 2008 and their most recent loans after 2011 are eligible for the Pay-As-You-Earn program. Obama wants to expand the program to include all federal student loan borrowers. So far, only 2.5 million of 37 million federal borrowers are enrolled in income-based repayment programs, including the previous versions. Part of the reason is eligibility. Another part is awareness.

Many borrowers don’t know that they qualify for lower payments. For that reason, as another part of Obama’s plan, the government will spend money to teach graduates to save money through these programs. Maybe the government can advertise them on twelve packs of cheap beer.

I don’t mean to imply that all indebted, recent college grads are sitting around drinking cheap beer. I mean to imply that I sat around drinking cheap beer when I was recently graduated and in debt. I am sure some recent grads are still doing that.

I am also sure some recent grads are struggling to move beyond part-time jobs at restaurants and retail stores and into career-building work. Some less recent grads are, too. Those transitions into better paying jobs take time, especially in a weak job market, and a 10% cap on loan payments will help during that process.

The awareness campaign will focus on educating guidance counselors and tax specialists, as well as graduates with debt. They may need it. I had a hard time understanding some details, especially in relation to earlier versions of the plan. This proposal may do away with those earlier versions. Or maybe it won’t. See, I’m not clear on this.

To better explain such details, the Department of Education will set up “one-stop shops” with resources on the income-based payment plans. The challenge will be to keep those shops up-to-date and motivated to get the message out. It would be easy to set up a booth on campus and sit around drinking smoothies all day. I don’t mean to imply that all Education Dept. employees like smoothies. I mean to imply that I like smoothies.

In our next post, we’ll look at loan forgiveness and some mild moral hazard.

Education in Debt: Part Three

With costs soaring and debts deepening, many students, universities, and lovers of learning are turning to online and blended programs that reduce or eliminate physical class time. Georgia Tech, for example, recently rolled out an online computer science master’s program incorporating large scale lectures, smaller online discussions, and individual assignments. The program costs less than half of the price of its on-campus master’s degree. Until college fees come down, or even if they do, we will probably see more and more of these hybrid programs. In fact, Rukuku hopes that we can host many of them here.

Recent graduates look for education alternatives to avoid student debt

Recent graduates look for education alternatives to avoid student debt

Beyond the move to online learning environments, greater accountability will help. Writing on behalf of the non-profit think tank Educational Sector, Andrew Gillen recommends that the Department of Education provide information pairing graduation rates and student loan default rates at colleges and universities. In this way, students can make better informed decisions. And for their part, students need to pay more attention to graduation rates and average debt loads for graduates at perspective universities. Some of President Obama’s recent proposals on higher education relate to this accountability issue, and we will discuss those in our next post.

Overall, more universities should realize that the music may soon stop on this higher education game, and less expensive-online competitors are quickly filling the seats behind them. The US is known worldwide for the quality of education provided at its universities. The costs are also well-known and sadly becoming the more prominent feature. With the internet greatly expanding the avenues for education, some universities may find they’ve priced themselves out of the market.

Education in Debt: Part Two

So what are the effects of all this student debt? For one, the whole backpacking around Europe after graduation is much less cool than it used to be. So is everything else that used to be cool, like bar tending, ski bumming, trail blazing, or starting a software company in your mom’s garage. Actually, that last one may still be cool, if it was ever cool, but it is clearly more difficult to do with student loan payments to make.


The long term effects of all this debt are surprisingly significant, a recent study from the New York-based Demos Group shows. A dual-headed household, in which both partners graduated with bachelor’s degrees and an average debt load, earns $208,000 less than households of graduates with no student debt, according to the study.

That’s a huge difference and it all relates to early investment. Young adults in debt put off projects such as home ownership and retirement planning to pay off those student loans. Demos estimates that two thirds of the difference in lifetime earnings stems from diminished retirement savings and another third is lost because indebted households build less home equity.

On another note, less easy to quantify, young graduates in debt are less likely to take risks, entrepreneurial or otherwise. The twenties is a time to take some risks, to travel, to explore, to open a bar with a buddy or buy a house in a cool, but rough part of town. Or for those overachievers, it is time to get started on building a life in a place with a job and a house. But it is tougher for recent graduates to do any of these things these days, and student debt is one of the primary reasons.

Education in Debt: Part One

College is a great investment.  Graduates from bachelor’s programs earn about $500,000 more during their lifetimes than peers with only high school diplomas. In fact, even those that go to college but don’t graduate will get around $100,000 more in lifetime earnings than high school only graduates, according the DC-based Hamilton Project, which is part of the Brookings Institution. In a June study, the group concluded that investment in a college education offers returns two to three times higher, on average, than those from investments such as stocks, bonds, gold, treasury bills, and housing.

Student debt, young graduate debt

Young graduates struggle to stay ahead of their student debt payments

Still, college is expensive, even if it is a good investment. And it is getting more expensive. Educational costs rose 165% from 1993 to 2011, more than broad inflation and medical care costs, which were up 56% and 100% respectively, according to Emily Dai of the Federal Reserve Bank of St. Louis. Several factors are involved.

One is that, once upon a time, most people that worked at universities were in the classroom teaching. Nowadays, there are more administrators, vice-provosts, assistant deans and chairpersons of committees on something or another. There are more researchers as well. A report from the DC-based Delta Cost Project showed that the proportion of education spending set aside for instruction decreased from 2000 to 2010, with costs related to research, student services, academic and institutional services all growing more quickly. Student-to-teacher ratio has hardly changed in thirty years.

Schools are also spending more money on facilities that will attract quality students and well-known professors. That sounds reasonable. Everyone wants good students and teachers. At the same time, I am not sure if you want your students to stay because of a nice swimming pool. Well, except that if they drop out, or even if they get accepted but decide not to come, that affects your school’s ranking in the college books and magazine ratings.

While spending has gone up, financial support at the state and local levels has dropped off significantly. Most universities have tried to fill the gap, or at least some of it, with higher tuition. In 2010, for the first time ever, tuition contributed more toward education expenses at public research and master’s institutions than local and state government appropriations, according to Delta.

Luckily, or sort of luckily, there are many programs to help students pay for school, including scholarships, grants, loans, and work-study programs. Most students, 71% according to the Department of Education, receive some form of financial aid. Forty two percent take out federal student loans.

Those loans can easily be repaid once these students are all out in the real world and making big bucks. Only that doesn’t always happen. As it turns out, not every business venture needs a philosopher (my major, by the way). Few 18-year olds truly understand the amount of risk and responsibility they take on when signing those loan papers. Many of them don’t know to separate colors from whites in the laundry either.

With this in mind, it is easy to draw parallels to the conditions preceding the mortgage crisis. Abundant credit is readily available to inexperienced buyers, a situation which feeds market bubbles. In real estate, we know how that story ends, or least the most recent chapter. Housing prices inflated, then popped, wreaking havoc on the national economy, then the global economy. In the case of education, it is the tuition prices inflating, and we don’t yet know the consequences. In other words, student loans, which help individuals go to school, are pushing up prices for college attendees as a whole.

Emily Dai of the St. Louis Federal Reserve Bank explains, “A college education, like home ownership before the financial crisis, is increasingly viewed as a social good – but one that could quickly become a liability. And the maximum federal loan amount available to students continues to increase, underpinning the fear of the size of the potential liability.”

Defaults are already rising. A study released from the Consumer Financial Protection Bureau earlier this month finds that almost one third of all federal borrowers are in default, deferment, or forbearance.

Nationally, outstanding student debt now totals more than $1 trillion, doubling since 2007.  That total is still less than mortgage debt, but more than outstanding credit card debt or automotive debt. And it is more difficult to escape than credit card or mortgage debt as well. You can give a house back to the bank and declare bankruptcy for most other debts, but that won’t erase student loans.

In our next post, we’ll look at some of the effects this debt has on young graduates.

Georgia Tech experiments with Master’s and MOOCs

Georgia Tech announced last week that the school would offer a $6,600, accredited, MOOC-based Master’s program in Computer Science. Thus far, massive open online courses (MOOCs) have failed to shake up the traditional educational model. This program, offering real credit from a respected US university, will be an interesting one to watch.