Fall 2015 Brookings Panel on Economic Activity Weblogging: Gaming the Student Loan System

Fall 2015 BPEA 11:45 AM Fr: With respect to Looney and Yannelis…

If I recall correctly, back in the 1950s, the then-president of the University of California, Clark Kerr, took a look at the situation and foresaw that come 2000 ten times as many students would be qualified to benefit from a University of California undergraduate education as in his day–50,000 a year rather than 5,000 or so. In his vision, UC had to expand tenfold, and of course tuition would still be free. Then in the 1970s we started to retrench–both in numbers of slots, and in public subsidy per slot. The number of slots did not grow as fast as projected, and tuition at public universities rose from next to nothing to what are now very healthy amounts. This was a very defensible decision from a standard public finance perspective: college attendees are richer than average and the college wage premium appeared very low in the 1970s.

Now it seems reasonably clear that this decision to shift from grant- to loan-financing of attendance at public universities has probably not been a net plus for non-college workers, has kept a substantial number who really ought to be going to college from doing so–handing over long-term human capital-investment decisions to adolescents not being that good idea–and has landed us with a large for-profit university-driven student loan problem.

Andrei Shleifer taught me two decades ago with the example of privatized prisons that there are some places where we really do not want hard market profit-and-loss incentives operating without sociological checks. In addition to prisons, pensions, health insurance, research and development, and other information goods come to mind. And now I would add higher education.

Adam Looney and Constantine Yannelis: A Crisis in Student Loans? How Changes in the Characteristics of Borrowers and in the Institutions they Attended Contributed to Rising Loan Defaults: “This paper examines the rise in student loan delinquency and default…

…drawing on a unique set of administrative data on federal student borrowing, matched to earnings records from de-identified tax records. Most of the increase in default is associated with the rise in the number of borrowers at for-profit schools and, to a lesser extent, 2-year institutions and certain other non-selective institutions, whose students historically composed only a small share of borrowers. These non-traditional borrowers were drawn from lower income families, attended institutions with relatively weak educational outcomes, and experienced poor labor market outcomes after leaving school. In contrast, default rates among borrowers attending most 4-year public and non-profit private institutions and graduate borrowers—borrowers who represent the vast majority of the federal loan portfolio—have remained low, despite the severe recession and their relatively high loan balances. Their higher earnings, low rates of unemployment, and greater family resources appear to have enabled them to avoid adverse loan outcomes even during times of hardship. Decomposition analysis indicates that changes in characteristics of borrowers and the institutions they attended are associated with much of the doubling in default rates between 2000 and 2011. Changes in the type of schools attended, debt burdens, and labor market outcomes of non-traditional borrowers at for-profit and 2-year colleges explain the largest share.