Is the recent Presidential Memo a good idea?

President Obama has issued as of 6/9/14 a memo directing the Department of Education to develop regulations concerning to limit the student repayments of loans to a maximum of 10% of the borrower’s income (1).

While on the surface this seems a like a good idea, but right off the bat it seems to me that this is form flat 10% income tax to those who borrower for education from the Bank of Ed. Let us see how the math stacks up.

Using some calculations from a previous posting “Will you make more money with a college degree?” let us assume the loan is capped at 10% of gross income, and is completely forgiven in 20 years (1, 2). I will use the same income and expenses used from my previous post (2).

Total Net Income (20 years, 2013 dollars)
	Less than high school graduate	High school graduate	High school graduate with some college	Associate's degree	Bachelor's degree
10% income College Loan	($53,878.91)	$2,931.01	($9,771.92)	$107,709.59	$294,173.35
w/o College Loan	$2,931.01	$114,601.57	$127,057.65	$285,922.26	$537,625.79
Total Loan Amount Paid over 20 Years	$71,385.51	$111,670.56	$136,829.56	$178,212.68	$243,452.44

Still clearly you will come ahead not taking the loan, but what is interesting is what happens if you end up with a job that makes the median income typically associated with lower educational attainment. 

So this would be you go to college, take out one of these 10% of income loans, and then end up working for a job that requires less than high school education because this all you could get and you get stuck in it for 20 years. Well then you will have really cost yourself more money than had you landed that median Bachelor’s degree job. Bottom line is it appears this loan process will punish those who are unable to obtain that median college income job.

Clearly then it is better to go to a more prestigious university or college, where the debt load will be higher due to more expensive tuition, and hopefully provide you with better opportunity to land that well-paying median job through the extensive alumni network.

Of course what this means politically is that the federal government must now ensure some macroeconomic mechanism that will encourage the growth of these well paying higher educational jobs to keep up with college graduation rates. After all it has a vested interest to do so as the more people who don’t end up with these higher paying jobs will in the increase the costs of national debt since educational loans are nothing but a budget offset.

Hmmm… the idea of a minimum wage based on educational attainment is sounding better and better.

Citations

(1) Office of the President, White House (2014). FACTSHEET: Making Student Loans More Affordable. Retrieved on 6-10-14 from http://www.whitehouse.gov/the-press-office/2014/06/09/factsheet-making-student-loans-more-affordable/

(1) Office of the Press Secretary, White House (2014). Presidential Memorandum -- Federal Student Loan Repayments. Retrieved on 6-10-14 from http://www.whitehouse.gov/the-press-office/2014/06/09/presidential-memorandum-federal-student-loan-repayments

(2) Bureau of Labor Statistics (2014). Consumer Price Index- All Urban Consumers. Series ID: CUSR0000SA0. Databases, Tables & Calculators by Subject. Data. Retrieved on 5-10-14 from http://www.bls.gov/data/  

(2) Bureau of Labor Statistics (2014). (unadj)- Usual weekly earnings (first decile), Employed full time, Wage and salary workers, High school graduates, no college, 25 years and over. Series ID: LEU0252917100. Databases, Tables & Calculators by Subject. Data. Retrieved on 5-10-14 from http://www.bls.gov/data/  

(2) Bureau of Labor Statistics (2014). (unadj)- Usual weekly earnings (first quartile), Employed full time, Wage and salary workers, High school graduates, no college, 25 years and over. Series ID: LEU0252917200. Databases, Tables & Calculators by Subject. Data. Retrieved on 5-10-14 from http://www.bls.gov/data/

(2) Bureau of Labor Statistics (2014). (unadj)- Median usual weekly earnings (second quartile), Employed full time, Wage and salary workers, High school graduates, no college, 25 years and over. Series ID: LEU0252917300. Databases, Tables & Calculators by Subject. Data. Retrieved on 5-10-14 from http://www.bls.gov/data/  

(2) Bureau of Labor Statistics (2014). (unadj)- Median usual weekly earnings (second quartile), Employed full time, Wage and salary workers, High school graduates, no college, 25 years and over. Series ID: LEU0252917300. Databases, Tables & Calculators by Subject. Data. Retrieved on 5-10-14 from http://www.bls.gov/data/

(2) Bureau of Labor Statistics (2014). (unadj)- Usual weekly earnings (third quartile), Employed full time, Wage and salary workers, High school graduates, no college, 25 years and over. Series ID: LEU0252917400. Databases, Tables & Calculators by Subject. Data. Retrieved on 5-10-14 from http://www.bls.gov/data/

(2) Bureau of Labor Statistics (2014). (unadj)- Usual weekly earnings (ninth decile), Employed full time, Wage and salary workers, High school graduates, no college, 25 years and over. Series ID: LEU0252917500. Databases, Tables & Calculators by Subject. Data. Retrieved on 5-10-14 from http://www.bls.gov/data/  

(2) Bureau of Labor Statistics (2014). (unadj)- Usual weekly earnings (first decile), Employed full time, Wage and salary workers, Bachelor's degree only, 25 years and over. Series ID: LEU0252918900. Databases, Tables & Calculators by Subject. Data. Retrieved on 5-10-14 from http://www.bls.gov/data/  

(2) Bureau of Labor Statistics (2014). (unadj)- Usual weekly earnings (first quartile), Employed full time, Wage and salary workers, Bachelor's degree only, 25 years and over Series ID: LEU0252919000. Databases, Tables & Calculators by Subject. Data. Retrieved on 5-10-14 from http://www.bls.gov/data/  

(2) Bureau of Labor Statistics (2014). ((unadj)- Median usual weekly earnings (second quartile), Employed full time, Wage and salary workers, Bachelor's degree only, 25 years and over. Series ID: LEU0252919000. Databases, Tables & Calculators by Subject. Data. Retrieved on 5-10-14 from http://www.bls.gov/data/  

(2) Bureau of Labor Statistics (2014). (unadj)- Usual weekly earnings (first quartile), Employed full time, Wage and salary workers, Bachelor's degree only, 25 years and over Series ID: LEU0252919100. Databases, Tables & Calculators by Subject. Data. Retrieved on 5-10-14 from http://www.bls.gov/data/  

(2) Bureau of Labor Statistics (2014). (unadj)- Usual weekly earnings (third quartile), Employed full time, Wage and salary workers, Bachelor's degree only, 25 years and over. Series ID: LEU0252919200. Databases, Tables & Calculators by Subject. Data. Retrieved on 5-10-14 from http://www.bls.gov/data/  

(2) Bureau of Labor Statistics (2014). (unadj)- Usual weekly earnings (ninth decile), Employed full time, Wage and salary workers, Bachelor's degree only, 25 years and over. Series ID: LEU0252919300. Databases, Tables & Calculators by Subject. Data. Retrieved on 5-10-14 from http://www.bls.gov/data/  

(2) Bureau of Labor Statistics (2013). Table 2010- Highest education level of any member: Annual expenditure means, shares, standard errors, and coefficient of variation, Consumer Expenditure Survey, 2012. Consumer Expenditure Survey. Combined Expenditure, Share, and Standard Error Tables. Retrieved on 5-10-14 from http://www.bls.gov/cex/csxcombined.htm .

How is student debt a macro-economic tool?

Student debt is an excellent macro-economic tool just as much as housing debt is one as well. This is why it is considered by many as a good debt (1 & 2). Although, housing debt is subject to possible speculation and thus causing greater delta in prices, which is why student debt is more preferred as tool because a college degree is non-transferrable to another person and it really doesn’t appreciate or depreciate in value over time. It simply is a cost which is amortized over the life of loan.

From a macro-economic perspective debt like student loans simple eat up potential consumption and savings of individuals and unlike housing doesn’t create an initial increase in consumption caused by the first produced house, nor a potential asset bubble (2). Further it acts like a government tax since currently this debt is controlled by the Federal Government through the direct loan process of the Bank of Ed, or could be considered a form of transfer payment. So despite the interest reducing individuals’ personal income tax, the actual loan is not currently counted as either a tax or income to the person but inherently acts like such a thing and better than that it counts as a revenue offset to government net expenditures in effect lowering the governments expenditures overall (2 & 3). Any boost to the economy would show up through the expansion of the higher education markets which don’t impact the overall economy too much but would increase some amount of GDP through employment and any investment done by the employees and university/college. It is a great way of expanding the money supply without ever having to increase the national debt or print more cash through the Federal Reserve System and it’s only inflationary to the higher education market vs. the rest of the economy. It is just a perfect macro-economic mechanism.

The big problem with student debt as macro-economic tool is the interest rate which currently is controlled by Congress. But even this element is flexible since if the student debt is causing a problem economically Congress can simply add some debt forgiveness or lower the rate as means to free up cash in the macro-economy. Although I think it would be better if these rates were controlled more by the Federal Reserve than Congress.

Long term though this tool may prove to be difficult to manage because it is inherently dependent (like housing loans) on the future income of the individual which is unpredictable in nature (4). What is somewhat predictable is the number of jobs requiring a college education which the Bureau of Labor Statistics periodically produces (5). The current projections for 2022 show an increase mostly in work not requiring college education which presents an interesting problem with the current growth rate of college graduates (5). At the current growth rates there will be a major short fall by 2022 requiring those graduating at that time to have to wait 21 years for a bachelor degree job slot to be freed up through attrition (5 & 6). Basically there will be so many possible people with a 4 year degree older than them that any potential new slot will take longer to open up since the older generations are more than like not going to retire anytime soon depending upon their debt load, and retirement needs.

This problem of overcrowding the college job market with degreed individuals will continue to cause a crowding out of those jobs requiring less education pushing down the overall income potential of a college graduate bringing into question the whole issue of general value if current job creation trends continue as noted in a previous post concerning student loans and accepting lower income jobs. And no doubt as the crowding out continues there is even greater risk of default, which has been mitigated in part by current laws preventing bankruptcy and allowances of garnishments.

What is worse is the fact that as more students apply for college, and seek more loans for college, this causes a runaway flooding of cash into the higher educational system causing localized market inflation or possible hyperinflation depending upon levels. This flood of cash is only limited by the size of the federal deficit since student loans are budgetary offset for the federal government (3).

So while as an excellent macro tool to control consumption once graduated, the problem is controlling the inflationary effects of the front end in since it would seem to require increased government loaning and thus inflationary pressures on micro market of post-secondary education.

These facts seem to be sort of counter-productive to the original purpose of the Higher Educational Act of 1965 (7). The idea was to allow for a greater number of people to achieve a higher education with the goal of building a better society overall. But it seems to me that with the use of student debt it is building instead a culture of a basic educational tax to obtain that society, with no guarantees of having a secured future. The reason is the job market is not keeping in pace with the production of an educated workforce, and it seems that no one really cares about this fact.

Since a majority of U.S. higher education degrees continue to be in business vs. any other possible field by little over 4 to 1, very clearly we need to increase work opportunities in the business markets overall (8). Or we need to encourage that entrepreneurial spirit of America through increased small business loans to allow all that education to mature (maybe a bit of a debt swap—educational loan folded into a small business loan).

So overall college debt is a great macro-economic tool and is very versatile, provided you don’t mind the fact the future supporting income is unknown and not guaranteed currently, and there is the potential of hyperinflation with the costs of college overall requiring a spiraling need for more cash to flow into the system as more people pile into the system.

Citations 

(1) Supiano, Beckie (2012). What Does $1-Trillion in Student Debt Really Mean? Maybe Not That Much. The Chronicle of Higher Education. Retrieved on 5/27/14 from http://chronicle.com/article/What-Does-1-Trillion-Mean-/131900/

(1)Wolber, Thomas K. (2012). Student-Loan Debt is Real Threat to Economy. Letters to the Editor. The Chronicle of Higher Education. Retrieved on 5/27/14 from http://chronicle.com/article/Student-Loan-Debt-Is-Real/132655

(2) Bureau of Economic Analysis (u.d.). A Guide to NIPAs. PDF. Retrieved on 5/27/14 from http://www.bea.gov/national/pdf/nipaguid.pdf

(3) Bureau of the Fiscal Service (2013). Combined Statement of Receipts, Outlays, and Balances- Current Report. Retrieved on 4/29/14 from http://fms.treas.gov/annualreport/cs2013/sc1.pdf%20on%204/29/14

(3) U.S. Government Accountability Office (u.d.). Capital Assets. Retrieved on 4/29/14 from http://www.gao.gov/fiscal_outlook/measuring_the_federal_deficit/interactive_graphic/capital_assets

(4) Executive Summary (2006). Dealing With Debt: 1992-93 Bachelor's Degree Recipients 10 Years Later, 1. NCES 2006156. Retrieved on 5/27/14 from http://nces.ed.gov/pubsearch/pubsinfo.asp?pubid=2006156

(5) Bureau of Labor (2013). Employment Projections: 2012-2022 Summary. Retrieved on 5/27/14 from http://www.bls.gov/news.release/ecopro.nr0.htm

(6) United States Census Bureau, Population Division (2012). PEPSYASEXN-Geography-United States: Annual Estimates of the Resident Population by Single Year of Age and Sex for the United States: April 1, 2010 to July 1, 2012. Data. Retrieved on 5/27/14 from http://factfinder2.census.gov/faces/tableservices/jsf/pages/productview.xhtml?src=bkmk

(7) Cervantes, A., Creusere, M., McMillion, R., McQueen, C., Short, M., Steiner, M., & ... Texas Guaranteed Student Loan, C. (2005). Opening the Doors to Higher Education: Perspectives on the Higher Education Act 40 Years Later. TG (Texas Guaranteed Student Loan Corporation).

(8) U.S. Department of Education, National Center for Education Statistics, Higher Education General Information Survey (HEGIS) (2012). "Degrees and Other Formal Awards Conferred" surveys, 1970-71 through 1985-86; Integrated Postsecondary Education Data System (IPEDS), "Completions Survey" (IPEDS-C:91-99); and IPEDS Fall 2000 through Fall 2011, Completions component. Retrieved on 5/27/14 from http://nces.ed.gov/programs/digest/d12/tables/dt12_313.asp