Tuesday, June 10, 2014

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 postingWill 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 .


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