follow the instruction and finish the Essay 3

Lecture 6

Secondary and Post-Secondary Education

Joseph Rossetti

Dept. of Economics, the Ohio State University

06-22-2017

Student Debt

The trend:

I Student Load Debt Clock

Student Debt

Student Debt

Is this a bubble?

I A bubble would mean that the value of education is not high enough to justify the debt

I The asset is the human capital you get from college I It has a market value in the future, and you can borrow against

this value I

If the value is high you can borrow more

I In a bubble people would be borrowing more than the value of the asset

Student Debt

While debt has increased so has the college wage premium:

I The premium of the college wage over the high school wage I Doubled over last 3 decades

I Great recession has not done much to mitigate this: I In 2011 unemployment among those with college degrees was

4.4% I In the same year without a college degree unemployment was

8.5% I With some college the rate was 7.6%

Student Debt

Enrollment rates and loan rates are rising from 1980 to 2009:

I Enrollment: 10.5 million to 17.6 million I Federal Loans: 2.3 million to 10.9 million

Student Debt

Student loans are a pretty significant innovation in the economy:

I In the past it was not possible to invest in human capital in the traditional sense

I Physical capital can easily be collateralized by the actual asset I Human capital is more difficult to collateralize

I Difficult to know market value of a student prior to entry to labor market

I Difficult to know effort level of student in school will be as high as investor would want

I Student can also make choices in labor market that investor would disagree with

Student Debt

I Federal government chooses to ignore these issues in order to subsidize investment in human capital

I Additionally to overcome lack of willingness on the part of state governments

I Private lending uses asset-backed securitization to pool the risk from multiple student loans

I Both have probably been a positive thing from the perspective of human capital market inefficiency

Student Debt

Students may borrow too much:

I College wage premiums may be driven by selection I High ability students that would do well in the labor market

self-select to attend college I College may still be needed as a signal mechanism

I College wage premiums are generally given as averages I The premium is likely to be highly heterogenous across

students, colleges, and careers I Students may not be able to forecast their premium accurately

I It is also possible students are not borrowing enough

Student Debt

Student Debt

Student Debt

Student Debt

It seems that with these kinds of lifetime earnings differences a college degree is worth it:

I Value of Ohio State I Borrowing to get one could be worth it if you face liquidity

constraints or desire to smooth consumption I Borrowing is even worth it on average just to get that premium I Interest rate when article was written for unsubsidized loans

was 6.8% I Estimating cost of me attending Ohio State to be $160,000 I Median salary of college graduate is ~$45,000 I Loan estimates

Student Debt

Heterogeneity across students throws a wrench into this nice story:

I In particular many expect to be able to complete college in ~4 years

I But they fail to do so

Student Debt

Student Debt

Major has a big effect on earnings potential:

I The average lifetime earnings of a high school graduate is $780,000

I Comparing that to the lower earning degrees shows the premium being eroded significantly

Student Debt

Student Debt

I A significant portion of the gains to college degrees may be accruing to those who go on to get professional or graduate degrees or certificates.

I Variance in general has risen

Student Debt

Student Debt

Student Debt

Student Debt

The mean monthly loan payment to income ratio for borrowers who have begun repaying loans after 6 years is 10.5%

I This is considered manageable by loan industry standards I Those graduating from private schools have a default almost 3

times as high

Student Debt

Student Debt

I Outside of the cases of over borrowing in private for profit institutions

I It seems students are doing well on average given the size of the wage premium

I In order to hit repayment costs near 10% of income students need to make around $25000

I This is not impossible, but is well below the median income of college graduates

Student Debt

I There is some limited evidence of under-borrowing I About half of students who work more than 20hrs a week had

0 loans I

Working while in school is correlated with slower completion

and lower performance

I Many students have credit card debt (37.7%) I

Instead of relying on high interest debt to finance consumption

I Finance college at the lower college loan interest rate

Making College Free

I Making college free will undoubtedly increase the quantity of education while lowering the price paid by students/workers

I Demand curves slope downward

I There is an important fairness concern I Boils down to the idea that some people currently pay far more

for education than others I If college becomes free and there are persistent differences in

peoples willingness to pay for college I

Then those who tend to pay more already benefit more

(simply arithmetic)

I Who pays more? People who have more resources I

The wealthy

Making College Free

I Suppose people come in two types I High ability, and low ability

I Types may represent: I something innate about people I Or human capital accumulation prior to the education decision

Making College Free

I High types: I Cost of education ch(e) I Education is productive (raises their MPL) according to yh(e) I Utility of wealth u(w � ch(e)

I Similar for low types I But y l(e) < yh(e) point-wise I And cl(e) > ch(e) point-wise

I Tuition is the same for both types: t(e) I Under these conditions and some technical conditions on the

function forms there is a truthful equilibrium where I high types buy more education and get higher wages the low

types

Making College Free

I Free college will increase average education (increase average productivity)

I At one point Clinton’s plan was estimated to cost $500 billion dollars, that’s a large tax increase

I May not get rid of wage inequality due to signaling I High ability workers may still try to differentiate themselves

I If income expansion paths differ for education then the policy may benefit the rich more than poor

I Seems to be primary policy concern beyond total cost