Game of Loans

This is Future youe with Jeff Salingo and Michael Horn.

Welcome to Future youe. I'm Jeff Salingo, and we're joined today by Beth Akers, who's a senior fellow at the Manhattan Institute, where her work focuses on labor economics and the economics of higher education. It's great to have you here with us today, Beth.

Thank you for having me.

Great. So a question that we ask almost all of our guests who come on the show is, is out of all the things in the world you could work in or research about why higher education, what led you to higher education?

Sure. So short answer is I just fell right into it. I'll give you the long version, though. So many, many years ago, I was pursuing a PhD in economics and really kind of hating every minute of it and was looking for an escape, but wasn't quite sure I wanted to stop pursuing my degree altogether. So into my inbox landed an opportunity to go work with the Council of Economic under the Bush administration, which is this really neat office in administrations that it's staffed largely by academic economists. So I had the chance to go spend a year there, work in policy, and then go back to graduate school. And so during that year was the beginning of the financial crisis caused by the problems with mortgage lending. And so at that time, there was also a corresponding crisis with student lending. There was liquidity problems caused by the same reasons there were problems with liquidity in other financial markets. Congress acted really quickly to pass the Ensuring Continued Access to Student Loans act, and I was part of a small team of economists that worked with Department of Education to implement that legislation to make sure that loans were made for the fall semester. So I really got down and dirty with student loan higher education policy very quickly and then went back to graduate school to try to figure out what I was going to write my dissertation on. So I spoke to my mentor at that time about some ideas I had about what to write on. I think I was thinking about writing on human resource economics or something equally academic and boring. And Eddie Lazear said to me very nicely, that's great, but you're going to write on student loans because that's really the only thing you knew anything about. I had come straight from undergraduate before starting my PhD, and so I took his advice, which turned out to be great advice, and wrote my dissertation on student loans. At that time, it was a hot issue in the popular news, and so think tanks were looking for people to write on that issue. And after graduating with a Ph.D. i started writing at Brookings on the issues of higher ed finance.

So perfect transition, I think, into an issue that is still on the minds of many. And in the headlines of student loan forgiveness and student debt hitting over $1.5 trillion and all these headlines that you read a lot about, what's your take, particularly on the political side of this Right now in the Democratic presidential primary, we see a lot of policy proposals around student lo forgiveness. Who would those proposals help? Who would they hurt? Are there alternatives to them? What problem are they trying to solve and so forth.

Yeah, well, first of all, I'll say it's kind of exciting to have my issue, that is higher ed finance be really a central issue in this campaign. I never thought that I'd see the day where, you know, the first question in the Democratic debate was about higher education finance policy. So that's kind of crazy. And I absolutely never thought that we'd be talking about student loan forgiveness. To me, that's sort of just, you know, this pie in the sky idea that came out of nowhere and came really quickly. I'm an academic economist. So the idea that you invest in education and use debt to do so and then it pays back over the course of a lifetime is a reasonable way of approaching the issue of higher ed finance. So the idea of just wiping away is a bit of a in conflict with that notion. And so, you know, practically speaking, the proposals that we have both from Senator Sanders and Senator Warren are largely regressive in their design and that they're giving a lot of benefits to people who probably really don't need them. And you know, there's been a lot of quibbling over who exactly they benefit and which segments of the income distribution will or will not be benefited. But what seems very obvious to me is that the people who are going to benefit, a lot of them have a lot of debt and they also have very high earnings. If you look at who is struggling with their student debt, surprisingly it's not the people who have large balances. The highest rates of default are seen among people who have less than $5,000 in debt. So we've designed this supposed solution that's very expensive and delivering a lot of benefit to the people who are really in great shape. People who have college degrees often have debt, but then go on to be the most well off people in our economy.

So what would you. So what would be a good alternative to this? In other words, what's the problem to be solved? Maybe there isn't even a problem to be solved, but what's the problem to be solved. And how would you solve it? Around kind of debt financing?

So there is a problem. So the fact that people use debt to pay for education, to me is not a problem. But the fact that sometimes that education doesn't pay off is a problem. And it's that education is investing. Education is risky. And it's gotten even more risky as the price tag has continued to tick up year after year after year. And so solutions that make it less risky for students are the right solutions. Interestingly, the solution that I think is the right one we sort of already have in place, but it doesn't work very well at all. And most people don't even know it exists.

And what's that?

That is income based repayment. So missing from the dialogue, particularly among candidates for president, is this idea that people who are struggling with student loans today because they have low income are already eligible to make low payments that are affordable based on how much they're earning. And if they continue to be unaffordable for an extended period of time, those debts will be wiped away and forgiven. So what that is is a mechanism that's designed to say, look, income fluctuates over time. There may be periods when these debts are going to cause an undue burden on individuals. Let's make a program that works around that. And if it seems like the degree is not paying off, let's then wipe away that debt so that we don't burden a generation of people with debts that are truly unaffordable. We already have that system in place. The problem is it doesn't work well at all. It's very difficult for people to apply to those programs and people don't know they exist. And so the utilization is very low. And even for those who are utilizing it, they're not happy with how it's working.

So in other words, maybe one of the policy proposals to make this easier, is that really the biggest issue?

Yeah, very simply. And you know, of course the devil is in the details of how you make that happen. But it needs to be a streamlined system in which people know if I borrow debt, my degree does not pay off. I am not going to be held accountable for a debt that is really, truly unaffordable to me. Of course we can, you know, quibble over what does that mean, truly unaffordable. Right. And we're probably always going to disagree about that. But it seems to me like that should be the frame in which we're designing a solution.

So I have two places that I want to go, but I think I'll start with one on the media side of this, which is that it seems like the media contributes to the misunderstanding around what you just said about the stats of who has debt and who defaults on debt and so forth and where it pays off. How do we help media better cover this question? Because it seems like they're always resorting to averages which is masking this variability.

Or outliers. I mean, even a member, even myself as a member of the media sometimes, I always get annoyed when they profile a student 100 plus thousand dollars in debt just from undergraduate. Clearly that is much more of an outlier than the normal student. So how can we change that narrative?

Well, I think that's a real challenge because if I were writing newspaper stories, to write an article that says student borrows $30,000 and then pays it off with relative ease over the course of a lifetime is absolutely a terrible headline. Right. And so we get stories like the one about the dentist in Salt Lake City with a million dollars in outstanding debt, which is just. I mean, I had to read that.

Very astounding.

It's astounding. And even as a supposed expert, I had to read very closely to figure out how he had to do that. Yeah,

that seems worthy of congratulations to the dentist. Well, so let me segue then. It seems like that's going to continue to be intractable. But the income based repayment plans, as you said, are an option. Legislation could make them more of a default and more understood potentially. But there's this other notion that you've written a lot about. Income share agreements, ISAs. We've had Mitch Daniels on the show talking about their ISA at Purdue University. Can you talk about how ISAs are a. What are they a solution to? How are they different from the income based repayment plans and sort of your views on them as a mechanism in all of this?

Yeah, sure. So just to put it very simply, to start, an ISA is a substitute for a loan. Basically, it allows a student to take cash up front to pay for their school. But instead of making fixed monthly payments to pay it back, they're paying back a fixed percentage of their income. In a sense, it's like equity using equity rather than debt to pay for college. So the problem that ISAs are solving is this problem of risk. Students are leveraging themselves to a huge degree because college is so expensive today. And they're doing it largely with debt, which means that they take on the risk themselves if it doesn't pay off, if it doesn't lead to A job and a career that's really worthwhile for them financially, they're the one who's on the hook to pay back. Right. And ISA shifts that onto either the institution who's issuing the income share agreement, or in theory, it could be a third party investor who is issuing the income share agreement. So what it does is it, it allows students to continue to make that investment in themselves, but to put the onus on somebody else to shoulder that risk. Individual students, particularly young students who don't have much wealth, which is most students, are in a terrible position to take on that risk. In contrast, institutions with huge endowments or financial entities with sophisticated financial tools are in a great position to take on risk. We see this happening in all aspects of the financial marketplace. Insurance companies are, are specializing in doing exactly this. Shifting risk off of people who really can't afford to have it onto people who can afford to have it, and also pooling across individuals so that overall it's a less risky proposition. And so ISAs in theory work really well. Something I'm waiting to find out and see is if students really like ISAs, because I think that's going to be the determining factor of whether or not they play a huge role in the future landscape.

And when you say, I'm sorry, a huge role, where do you think it would reduce, Would it reduce student loans? Would it reduce parent plus loans? Like, where do you think the biggest benefit of an expanded and much bigger ISA program would be?

Sure. So right now we're seeing traditional institutions offer income share agreements, but they're using income share agreements only to fill a gap after they've already exhausted all of their federal financial eligibility for loans and grants. That's because the subsidies in the federal loan program make federal student loans really cheap relative to anything else that you could offer that's privately financed, like income share agreements. And so it's not a replacement for federal student loans right now. It's a replacement for private student loans, which we know are challenging for students because they don't have those sorts of protections, or for parent and parent plus loans, which also don't have the income based repayment protections. And so their role in the traditional higher ed marketplace is, is relatively narrow. Right now. Where we're seeing more rapid growth is actually outside of the accredited regulated higher education institutions at places like boot camps that are not able to tap into federal resources to pay for the degrees, where students are financing up to 100% of their cost of attendance using an income share agreement. And so in those instances the entities offering that education only get paid for when the students themselves succeed.

So they stand next to then income based repayment plans as like a next step. If you can't use federal financial aid in that way to fill in that gap. Is that a fair understanding?

Yeah, that's exactly right. So their role in the traditional space will be constrained by the generosity of the federal lending program.

Gotcha. And then some people have said income share agreements should play a role in the federal lending program itself as well. I think Jason delisle wrote a piece, if I'm not mistaken for you all at the Manhattan Institute about a proposal to do just that. Yeah, we think about that versus income based repayment plans. Yeah.

So we want to be really careful because I think what some people are thinking about is federal funds being put towards the financing of privately originated income share agreements, something like akin to the FELP program, which is now defunct, where private companies are originating the ISAs. I don't think anybody is advocating for that. But what I would love to see and really what Jason proposed in that paper is a movement of the existing federal loan program in the income based protection to a redesign that looks more like an income share agreement. So income share agreements are really an elegant solution to this problem of needing cash up front and needing something to accommodate this risk. And so if we take lessons from what that mechanism can do and apply it to a redesign of the overall higher ed finance system, I think we'd be in a much better place.

Beth, you're working on a new book.

That's right.

Well, I love the title of your last one, Game of Loans. And so what are you working on now?

Yeah, so Game of Loans really tried to debunk the myth that we have a student loan crisis in which the sky is falling and every dollar of debt leaves a student worse off.

And it was a great book.

Thank you.

So why isn't the sky falling? And then can you tell us about the new book?

Yes. And so the sky isn't falling, if you take the perspective that people are using debt as a tool to make investments in themselves that more often than not pay back huge dividends in terms of their future income. Statistics tell us that on average degrees that are worth, you know, people are borrowing $30,000 to get are worth a million dollars over the course of a lifetime. So it's a pretty reasonable deal. And so, you know, that book of course pushed back on that narrative largely and kind of made me look like a bad guy, of course, and that I was kind of pooh poohing the problems that everyone was having with their student loan repayment. But the conclusion of the book was really that the problem is not that the sky is falling. The problem is that education is a really risky venture for students. And so the book didn't expand in great detail on those issues. So what the new book will be talking about is, you know, what happens when we reframe the problems that are having in higher education around this idea of risk. What sort of solutions does that lead us to? And, you know, how can we redesign federal policy to work better for students in that light? What kinds of things can the private marketplace do to address the issue of risk? And what are the mechanisms that are popping up?

Do you have a title for it and when can we expect it?

Well, we can expect it next summer and there's no title quite yet. But I'm hoping that my editor for this book is as clever as the last editor who was generous enough to come up with Game of Loans.

Well, we'll make sure we keep an eye out for it. And thanks so much for joining us on Future youe. We'll be right back.

This episode of Future youe was made possible with support from the Academy for Innovative Higher Education Leadership. The Academy is a partnership between Arizona State University and Georgetown University and is the premier training ground for those who aspire to senior leadership positions in higher education and those who want to lead organizational change at colleges and universities in the future. This episode was also made possible with support from Entangled Solutions. If you want to shape the future of education, Entangled Solutions would like to hear from you. Entangled Solutions is hiring smart, mission driven team members interested in helping world class institutions solve their most vexing challenges in learning and education. Learn more at Entangled Solutions.

Welcome back to Future youe Off a great conversation with Beth Akers of the Manhattan Institute and Jeff, you know, I asked the question and then I sort of cut off after she said, I don't know, it's kind of hopeless. But I, you know, will the media ever give subtlety to this question of the student debt question and sort of dig beneath the averages to give and outrageous stories of lots and lots of debt to give sort of, you know, what they found in Game of Loans, a more measured take that for a lot of students the debt problem is not a problem but a reasonable investment and for those that it is a problem and it's actually often students that took out very little in debt but aren't going to complete so not going to get the wage bump and it's going to become a big, significant problem for them. Will we get that measure of subtlety?

I'm. Well, I'm not here to defend the media, but no, I doubt it. For some reason, this is, you know, finding those outlier cases, you know, the dentist, as she said, or the, you know, the people I'm always amazed at are these people who come close to around $100,000 in debt who got an undergraduate degree from a public university.

Yeah.

And I'm just thinking, how did, how did that happen? Including in state? Right. Obviously, they're borrowing much more than they needed. And the other thing about any of these stories, I remember following up years ago on a student who wrote a letter to the editor of her student newspaper at one of the SUNY schools. And I called her up because I was really confused by what she said her debt level was. And when I called her up to talk to her about it, she actually couldn't really talk about her debt level because she didn't know was one subsidized. She didn't know the difference between subsidized loans, unsubsidized loans. Her parents had parent plus loans, but it was unclear whether that was a parent plus loan for her or her sister. So once you started digging a little bit more deeply, they actually couldn't tell their story. And I always would tell reporters, whenever we did when I was at the Chronicle and we ever did a story on debt, I said get their, you know, get the info from their financial aid packages, right? Like, get as much specific written information as you can. Do not go on there based on their memory. Because most students have no idea, to be honest with you, what they're, what they're borrowing. I mean, at the end of the day, this is like, you know, a dog bites man story, Right. You know, we only want to write the story when the, you know, the man bites the dog, Right? Yeah, yeah. No, it's, I mean, different.

It's a good point.

And I think that's, I think that's part of it. What I thought was fascinating about Beth was that we don't talk about the gdp, right? We don't talk about what this investment buys us. And as she was talking, I realized, my God, you know, I, you know, when I graduated from college in 1980, 95, I had, I think, you know, I had under $10,000 in debt. I don't even remember my own debt level, but it was under $10,000. And I'll never forget six months after graduation. Back then, you get Those little coupons from Sallie Mae. And I think it was something like $50 a month or something like that. And I think now about how great of a deal that was right where I am now in my life and all that that education provided me. And here it was less than $10,000. And of course, I got married and I inherited my wife's law school debt. I think for both of us, it was a great investment. And I'm not quite sure if this is a generational thing. Right. We're both Gen Xers. Right. I don't know if the millennials kind of changed this narrative, but debt hasn't increased that much. Right. The average debt is something like 30,000, I think now for the average undergraduate who takes out loans. So 6,000 in 1995, $30,000 here, it's not, you know, based on inflation, it's not a huge difference. So I'm not quite sure if this is generational or what happened.

Yeah. And it's interesting. I mean, if Ryan Craig were here, he'd say, well, the underemployment question is different. And so therefore the. There's reasons to question whether the return on investment is the same that it has been.

But. But there's more programs, as bet.

Totally, totally. And my take also would be when you have stories like yours where it turns out really well, it's a good investment. We as individuals do not connect that success back to the investment question. Right. So it's easy to forget that good moment, but it's very easy to remember the challenging one and to get that outlier story and so forth. But it's. It's one of the reasons, like Beth, I'm very interested to follow the income share agreement story to see will it actually capture the attention of students? Will it be something that they migrate to? Because it does protect you on the downside, if you don't get that great job of having to pay back those debt payments on a monthly basis. And so it's a good protection, and it does protect you somewhat on the upside, which is to say if you're going to return over, say, 2x, what you put in, that's all you're going to put in.

So what is the future, then of the isa? I mean, could it be big enough where it's not just a small stopgap now, as I think largely using it, but truly a significant financing option for students?

My sense is it's going to replace the private student loan market. That is my own hypothesis. Not a bad thing, which is, I Think probably a good thing. Right. I think the question is, as we see people clamping down on parent plus loans and things of that nature, does it also get into that space? And then the other side of it, I think, is the income based repayment side of this. On the federal government side, do we see that take up more and more share as the default option as opposed to the, you have to figure out how to opt into this option and so forth. And you know, she was talking a lot about who bears the risk in these transactions. And right now her point is the learner bears the risk, whereas colleges have the balance sheets to do so, or investors might. You know, the federal government could bear, you know, a lot of the risk as well, and they do with debt payments. But. But could we make that more explicit with the income based repayment plans? And what's the appetite, I guess, in the public for doing so over time? Seems to me a question we don't know the answer to yet.

So, Michael, what is the. We asked her a little bit about the agenda now of on the Democratic side of the primary. You know, two major candidates have proposed kind of debt forgiveness besides being politically expedient. I mean, why not? Why do you think if you were, you know, advising any of these candidates, why not offer, you know, expanded income, contingent repayments, expanded ISAs, like why haven't the candidates gone in, in that direction?

That's a great question. I think my sense is that it's probably too subtle a message to win, too complicated. Right. To win headlines and you'd have to start to, you know, explain some of these narratives. I also think, you know, it was interesting. We had Mitch on a couple shows ago, Mitch Daniels, president of Purdue, and he talked about how income agreements were the rare issue that had bipartisan support. That's not my memory of how ISAs developed. I think it was an idea that got lift off on the right very early and that a lot of folks on the left were initially quite skeptical of. I think it's evolved significantly to the point we're taping this podcast where it feels like it's much more. It's much more bipartisan now. Yeah, and that's my impression too, except I don't think that's true on the extreme left. And so I wonder in the Democratic primary where you see a run to the left right now to issue grab and so forth, if it just doesn't work as a soundbite.

Well, and again, I also wonder if it's a generational thing to appeal particularly to you know, millennial voters.

That's a great question.

Or Gen Z, because we know particularly millennials took on a bulk of student loans. Perhaps Gen Xers are interested because for their own kids. But, but I really saw after both Warren and Sanders put out their plans, you know, on social media and on Facebook, among friends and things like that there, you know, people who went to school when we did are a little bit more skeptical. Like, well, even if they're supportive of their other policies, they're like, eh, I'm not quite sure why, you know, I had to take out loans and I paid them back. So I think there's a little bit less sympathy.

Yeah, there is an interesting question of contracts, I think, and sort of what you live up to and I guess a reinforcing maybe of the stereotype around millennials that they want to play by different rules.

So we've been asking our listeners to submit questions which is going to be kind of a new feature of Future youe in this third season. So you know, just message Michael or I on Twitter or on any of our social media platforms and just if you have any questions for Future youe and Michael, we had some questions come in and why don't we take on one of those this week?

Yeah, we got actually several questions. I'm scrolling through the list right now and get to pick out one. I'm going to change it up on you, Jeff. So we got one from Jeff Penta who asked the question. I think it's perfect for this topic of the future financing models for higher ed. We've talked about this obviously on a past issue, past episode of Future you with with Mitch Daniels and the report that we did there. I think the point being though to bring it up again is we just had an entire show about income based repayment and share agreements. I think this will be a significant piece of the future of higher education. We've seen a lot this play out in other countries like Australia and so forth. So it's not like it's a blank slate going into it. And I expect, I expect this to grow as a movement not to shrink. And I think the folks that are building support for this have been very savvy in terms of building it both outside of the system where those boot camp type programs rely on these alternative financing models as well as frankly inside the system with leaders like Mitch Daniels at Purdue, but University of Utah and a whole Host of Clarkson etc. Of other institutions the list is building. I think you're going to start to see some consumer protections come in that very clearly say you cannot create contracts that, that, that put people in disadvantaged places where they're going to be paying disproportionate shares of their income back to their institution. And I think it'll become a much bigger part of the, of the future over the next five, 10 years.

And something's going to have to give. Right. This, this financing system that we have now essentially has its roots in the Higher Education act back in the 1960s when college cost a lot less and fewer students went there. And the fact now is that family income is flat and falling for most Americans. The cost of college is going up. The cost of discounting for colleges is going up. They have nowhere else to turn for money. And yet we have this kind of antiquated student loan system that's based on college costing a lot less, I think. And this idea that, you know, there's these caps on loans, which is probably appropriate, but then you have to start paying back your loans a couple months after graduation, you're expected to pay them back in this 10 year period. We have so many different ways now of financing houses and cars and everything else. It just seems to make sense that student loans are next.

Yeah, I think that's right. There was a great article in the Wall Street Journal several months ago about the origins of that Higher ed financing and the Higher Ed act and so forth. And my takeaway was, you know, for every action there is unintended consequences and we didn't see how much it would succeed in terms of opening up access to students. And now we have to figure out some new models.

Well, Michael, it was great to be with you here again for another episode of Future youe. And thank you for tuning in and we'll see you next time.

Hey, folks, Michael Horn here. Hope you enjoyed the latest episode of Future youe. And just a reminder to please subscribe to us on your favorite podcast platform and if you like the podcast, rate us so that others can find us and find out about the good conversations that we're having here. As always, thanks so much for listening.