Making College Pay

Hi and welcome to the Future of Education. I'm Michael Horne and joined with a guest today that I've spoken to in the past on podcasts, Beth Akers. She's at the American Enterprise Institute and the author of a brand new book came out last week, I believe, called Making College Pay, which really puts this, I think for many people, scary conversation of how do you think about the finances behind college in proper perspective and really frame it as an economist would, but in a way that will really land, I think, for individuals trying to figure out this big investment in their future. So first, Beth, welcome and thanks for joining me.

Thanks so much for having me. I'm really glad to be able to speak with your audience today.

Yeah, I'm looking forward to the conversation and I'd love to start sort of big picture about why you wrote this book because you obviously teamed up a few years ago to write a terrific book, Game of Loans, that I trot out all the time to try to correct people's misperceptions about the loan game and who actually holds what loans and the amounts and so forth. So what sort of led you then to this second book of Making College Pay?

Yeah, so this one's really different. That first one was kind of like for wonky type folks like you and I to have that data to flash in meetings and things like that. And this one's totally different. I'm speaking to a general audience, specifically people who are aspiring to go to college and their families who are helping them to make that happen. The idea was, I look around in our discussions about higher education and and they are just saturated with regret. All of the conversation about student loan cancellation, for example, it's all stems from this idea that people feel duped, they feel like they've gone through this process and they regret the decisions that they've made, whether they be the financial aspect of it or where they wanted to go. I think a big part of that is that we've been telling everyone college is a golden ticket, right? It's the springboard to whatever you want it to be. And that's not really true. Right. College is a tool. It's an investment, but it's a tool and an investment that need to be wielded wisely with critical decision making, data oriented decisions. And my book describes how to do that. And the goal is that by doing that, people will be least less likely to make decisions that will lead them to feel regret in the future, whether it be about the financial side of things, what they've studied, or where they've chosen to go to school.

Yeah. So it's an interesting set of points you just raised around the regret because you do look at the surveys and I think it's like 51% or something like that of students say that they would change something about their experience, where they went their major, and you start to dig into that and unpack. Like, what really are the decision points, if you will, that really matter to making college pay off? Can you talk a little bit about that?

Yeah. So there's a couple decision points where you go, of course. And what was surprising to me in doing research for this book was that what you study is actually perhaps a more consequential decision when it comes to the financial outcomes that you're going to face. So in the book, I talk about working backwards. You know, a lot of times we think college is just the next step after high school or the next step for someone who wants to move ahead in their career. I think that's the wrong way of thinking about it because you're sort of wandering down this very expensive path to kind of hoping that, you know, something will click and you'll jump onto a pathway that will lead you to a successful career. I much prefer the idea of having an endpoint in mind and then using that to work backwards. So maybe that's a career that you want to work in a company that you'd like to work for, figure out what kinds of majors they're hiring and from what institutions. And when you do that, you're less likely to spend money on something that does does not deliver you to where you want to be. So it's major and it's institution. And the primary sources of data for that are the collegescorecard.gov which is this awesome resource that did not exist when I or you went to college. And you can go there if you want to be an economist about this decision. You can say, here's what I'm going to have to pay to go to this school because I've got my financial aid package already. Here's what the average economics major makes coming out of that college. And I can see what is the financial trade of that I'm actually making for this specific investment. And I don't want to suggest that that's the only thing that matters when you go to school. But for someone who doesn't have a trust fund, it's critically important. For the most part, their degree pays off. So that's kind of the process that I coach people to go through in.

The book yeah, it's interesting hearing you say that because something I found in researching my book, Choosing College was just how many people don't actually even view it as an investment. They view it almost as a benefit or something that they're doing because it's just sort of the next logical step. So they're not even thinking about some of these decision points that you outline in the book and this framework. What are the other big messages that sort of came out of your research that you say people ought to be paying attention to this because it is an investment. Right. This is not a. This is not a small decision that you're making both financially and also in terms of investment in time.

The big theme that's throughout the book that I've really been trying to impress on aspiring students, but also in the policy community that I talk to is this idea that college is actually incredibly risky. Everyone says that college is too expensive. And I sometimes get the stink eye for saying, well, I don't know, college isn't always too expensive because a lot of times it offers a great return. So the problem to solve, whether it be for policymakers crafting policy or a young person thinking about how to invest in their own college experience, the problem to solve is risk. It's that you're making an investment in yourself that may or may not pay off. And how do you deal with that? And acknowledging that that exists as a problem is the first step. And it's something that I think way too few people are actually doing.

Yeah, it's a really good point. And I think it also speaks to some of the stuff we're finding in public polling also right now, which is people seem not super excited actually about free community college and some of these proposals coming out. What they really want to know is that there's going to be value from that college experience, that there's going to be something out on the other end. Are you finding that the message maybe that you're pushing is breaking through more in this conversation, that people are more aware sort of that or.

I think there's been a growing taste for this idea of value in shopping for college over the past decade even. And I think Covid kind of pushed us forward really quickly on that dimension. So we had colleges kind of defending their high price tag for a long time, saying we're delivering you this all inclusive experience and every aspect of it is so important and critical to your development as a, as a student. And then they all switched to online and charged the same price and said, oh wait, no, you're it's all, it's all, you're getting everything still, even though you're sitting in your parents basement taking your classes online. And I really think that pushed a lot of people to say, wait a minute, what am I paying for? What part of this is an investment? And what part of this is, you know, as an economist would call consumption or you know, if you go to like a fancy private school, some aspects of what you're paying for are the country club experience, the four year country club membership paired with an education. And I think people are starting to see that and say I'm not always going to be willing to pay that. And that may make college more affordable to some people if we untether those two things.

Yeah. And that disentangling or unbundling of those and sorting out what are we paying for and is it consumption versus investment? That's a construct, frankly. That came out in your first book, Game of Loans as well. Right. Of thinking about this in the proper terms, which then lends into this risk mitigation idea. So a big piece of the risk mitigation, it sounds like, is making good decisions once you're on campus and choosing the right majors, maybe connecting with the right people, figuring out what you want to do. How much do you have advice around how to frame that so people are not just sort of going for the major that seems to pay off the most right now, but is also something that they'll fundamentally want to do that they're good at doing. Like how do you balance out those considerations?

Well, I feel like the goal of going to the data to examine this economic trade off that I'm talking about is not to pick the highest paying major. And I don't think people are doing that. I mean, I don't think anyone's going to read my book and think, oh, what I should do is go pick the highest paying major at the highest paying college I could find and go there. I think people naturally know that they have preferences and wouldn't want to study something that wasn't fun for them or they didn't have an aptitude into doing it. So I think that people naturally have an ability to balance those things in making the choice. And so what I like to say is basically when you're checking the financial outcomes of students who have come before you, the point is to make sure that they're okay financially. It's not to make sure that they're earning more than every other major or every other person from every other college. It's to make sure that they're okay and if you ended up like them, that you could pay back the money that you borrowed to get that degree without putting yourself into poverty. And once that's kind of covered, you know, go wild, basically.

Do what you love.

You do you. But I'm trying to make sure that people realize that there are decisions that they could be making that put them on a predictable path towards not being able to repay their debt, towards having financial challenges, and using the data can just help you to avoid that outcome. I think that's the most important role of the data here.

Yeah, it makes a ton of sense, and it plays into this idea of risk mitigation. Right. Creating the floor and making sure that you're protected against the downside. How else? You know, in the book, you talk about some financial vehicles that people can use, but before we even get there, just for someone who doesn't know a lot about the college scorecard jumping on there, it can be intimidating, right, to look at that and try to sort through it. How do you recommend even reading it and thinking about the notion of positive ROI and knowing, you know, they're representing averages up there, obviously. Right. And so understanding what's the downside and do I feel like I'm not going to land in that, like, how do you read the data? Fundamentally.

So an economist's dream is sort of that everybody is thinking in this ROI framework. And, you know, we're all speaking the same financial language, investment language. The reality is that as an individual, your job is to understand how much you're paying, to understand how much you're borrowing or will need to borrow over the course of your career and, and then know what that means for you after graduation. I have some original survey research that shows that people don't know how much they're borrowing, and they definitely don't know how much it's going to cost them on a monthly basis to repay. So getting a handle on that, pairing that with information on how alumni from the colleges you're looking at have done in terms of their earnings after graduation will give you a sense of if it's affordable and, you know, look at a budget. But we don't. We don't encourage people to do that at all. Every other type of consumer loan, we talk about the monthly payment at the time of origination. Right. You go to a car dealership, they barely want to tell you how much the car costs. They're just going to tell you what the monthly payment is going to be. In contrast, student loans, we Talk only about that top line number. And almost nobody has a sense of what it's going to translate for them in terms of monthly payment. So even just doing that very basic analysis, which is not easy, I will say, you know, projecting how much you'd borrow over four years, take some work and then knowing what that means on a monthly basis for you, I think you can then look at the earnings that you're seeing on the college court card and say, if I end up like the graduates of yesterday, does this amount to an affordable payment for me?

That makes a ton of sense. Where are you seeing out there Right now? We're getting questions from the audience about where people can get more accurate estimates for what the college will actually cost. Given the net discounting obviously of tuition being rampant across the landscape, trying to get a sense on the front end and program level earnings might be on the other side. Are there certain sites that do a good job of breaking that down for folks and giving projections up front?

So there's not a satisfying answer for this one. Unfortunately, the way that our college pricing system works is that you really don't have any sense of what it is that you're going to be asked to pay until you've applied and been accepted. And that's kind of a terrible way to have to shop for something. It's like going into the grocery store. Nothing has a price tag and you have to bring everything with you up to the counter and check the prices as you're checking out. Right. It's like crazy. But that is the reality. So there are net price calculators on college websites that was required by regulation. And the idea was we got to get people advance information about how much they're going to pay. Research has shown that those are actually not accurate. And so, you know, if you go to those, you can get some sense of what your net price could be. But there's no, there's no, you can't necessarily rely on that as an indication. Average net prices for institutions are published as well. So that can give you a sense of is this an institution that does a lot of discounting off of their price? Are you a lower income student at that institution? Then you might be someone who's eligible for more of that, but it's totally a guessing game until you get that data. You know, if you're a low income person and applying to a number of schools creates a financial problem for you, application fee waivers are actually pretty readily available. So unfortunately the advice is to apply wherever you think that you might consider going and so that you can get an option and a menu of prices.

Yeah, it makes a ton of sense. And obviously there's also tools like Tuition Fit or Admit out there. Trying to demystify that somewhat right now and give you a deeper sense based on your background. But like you said, and it's similar actually to my advice in choosing college that drove some people nuts was don't limit yourself before you see what's actually out there, because you might be surprised to your point. But I guess I want to dig into something that you talk a lot about in the book, and not just the book you've written a lot about in general, which is the notion of income share agreements, income based repayments, things that effectively, from my perspective, seem like insurance. Against that downside, can you describe for folks what those different vehicles are and some of what you describe in the book and recommend people think about these tools?

Absolutely. So college is risky, essentially means you can come out much worse off than where you started. Right? You can make an investment and basically it's a bus. You pick the lemon college, you can't graduate. Whatever reason, you end up worse off. Whenever we have that kind of circumstance in our financial lives, we tend to create insurance for it. We put ourselves in a risky financial position by driving our cars around, and so we have car insurance. We put ourselves in a risky position by housing valuable items in our rental properties. And so we have renters insurance. Insurance is a mechanism that basically protects you at some cost from the downside. So there has been an evolution of the use of these sorts of financial products in higher education. I think starting about 10 years ago now is when we saw the first steps being taken by Purdue University to create an income share agreement program. What that means is that students get money from the financier and in exchange they don't offer to pay a flat monthly payment like you typically would on a loan. Instead they say, okay, you're giving me this $10,000 to help me pay my tuition, I'm going to give you 3% of my income after I graduate for five years. So what does that do? If I don't graduate or I graduate and I'm working at McDonald's or Starbucks, I'm going to pay back little to nothing on that financial contract that I made. On the other hand, if I end up with a decent or high earnings job, I may pay back pretty close to what they gave me up front or maybe even more. The idea is that we share the risk across individuals through this financial tool. And so in case that you are the one who has that bad financial outcome, you're not going to be stuck on the hook to pay for it. What's nice is that when you do this, the amount that someone pays for college can be set according to basically how much their degree was worth to them. So it's a way of connecting price and value. It's important to say that income share agreements are kind of a niche market right now. They exist at multitude of institutions, but because federal financial aid is in fact so generous, they basically are only covering the piece that's left, the piece that's left uncovered by federal financial aid. But it's a market that I'm really excited to follow. We're seeing other products, like, more explicitly that look like insurance, like degree insurance is a new company that's selling literal insurance for your college degree. I'm really excited about this because I think it really touches on the core of the challenge, which is risk.

Yeah. And so one, I guess I want you to comment on one of the detractor comments about ISAs and insurance and things like that, which is that it can cost more to those individuals that in effect win the game. How do you think about. I may have just led the witness by sort of the way I asked the question. But like, how do you think about that argument about, well, gee, you might be taking advantage of certain learners that will have upside and therefore will pay more to finance those that were protecting against the downside case, in effect?

Well, in practice, these programs or their contracts really between the student and the financier have caps. So if you become Mark Zuckerberg right after college, you are not on the hook to pay billions of dollars back for the 10,000 that you initially took on. And so financiers put those caps in place because it turns out students all think that they're going to be Mark Zuckerberg. And so they all are really afraid of that outcome, even though it's actually pretty unlikely. So that's one protection. The other way I look at it is like this. You know, I didn't get sick much this year because I was stuck in my basement office with COVID But I don't feel bad about paying my health insurance premiums. In fact, it feels like a pretty good outcome that I didn't get sick. So I'm willing to pay some money to reduce the risk, the downside risk, in case something bad happens. And it may be that insurance is not right for everybody who's pursuing higher education. But there are some groups who I think would benefit from that. And also who would be okay paying some small premium if they do end up winning big?

Makes a ton of sense. So let's dive into the flip side of then that, which is the federal policy about moving the loan repayment into income based repayment. What's your take on that and how that further hedges risk or not?

Yeah, so I love the income Driven Repayment program. It actually it works very appropriately to offer insurance for people who borrow to pay for college. In fact, I even recommend in the book, if you've got cash sitting on the sidelines and could pay for college, you might want to consider borrowing instead. That's because the interest rate is low, but also because there are these potentially very generous safety nets if you're someone whose college experience just does not pay dividends. So what does income driven repayment mean? It's very similar to the income share agreement model in that rather than applying a flat monthly payment on your student loans, you can opt into a repayment plan that sets your monthly payment according to your income. And if your income is sufficiently low, you'll have, you'll have a zero monthly balance to pay. And without penalty, your balance will just continue to accrue interest until you either become a high enough earner to start paying it down, or after 10 years for people in the public sector, 20 years for people in the private sector, any remaining balances are forgiven. So in theory, this is a great program. In practice, this program is actually several different programs cobbled together which actually in theory create universal coverage, but they're not working well and there's a lot of work to be done to make them more consumer friendly.

So are you optimistic the administration just put out that negotiated rulemaking. Are you optimistic we'll see some cleanup there or what's your prediction?

I'm a bit concerned. Maybe five years ago I felt like there was a lot of agreement across the aisle that reform of income driven repayment was necessary. Right now, it seems with Democrats arguing for widespread loan cancellation, you know, the idea of reforming IDR, I think politically almost undermines that position. And so I haven't seen as much support for income driven repayment reform from Democrats as I would have liked to see. But that said, I also don't think that President Biden is really excited about student loan cancellation. And so if he's got a say, which I think he's does, it may be that income driven repayment gets that fix that it needs.

Well, we'll keep hoping for it and watching it eagerly, but just Two other topics as we sort of come come to a close here. I'm curious because, you know, you made the point. College can be enormously rewarding. It is risky. What about all these college quote, alternatives that are starting to pop up in the market, like these new, you know, whether it's last mile training providers and boot camps on the one hand, or sort of gap year combined with boot camp type programs that we're starting to see emerge. What's your take on that sector and how individuals who are in high school right now maybe ought to think about that.

So I love these innovative models that are emerging. I like to say, you know, basically we have come to a system where every career that requires a college degree in this country is basically saying the exact number of years of training that you need for this job is four. Four years in a bachelor's degree program. And then magically, that's the right amount of training for this career that you're going to embark on. I mean, that's bonkers. We know that can't be true. We've all just kind of settled in to the bachelor's degree as being the default. And so there's a lot of reasons for that. A lot of it's because the federal financial aid system kind of reinforces that college should look like it has always looked. That's not terrible. But it has constrained growth in these new models. So things like coding boot camps, for example, have actually proven really successful in getting people into quick, low cost training programs that succeed in connecting the student to the workforce. I had really hoped with the book to be able to give people directions to databases of these types of programs. And what I learned very quickly is that those databases do not exist and that you have to sort of stumble upon one of these programs in order to find them. And then there isn't a lot of information on their outcomes either. So if you are an entrepreneurial spirit and want to seek out these opportunities, I think there's a lot of really great ones out there, but I would not blindly walk into them the same way that you might blindly walk into a community college. You need to do your homework on them and make sure that they've got good outcomes, but they're competing on that dimension because they know that's all they've got. So a lot of them are really transparent with what it is that they've been able to produce for their previous students.

And as an individual, I imagine income share agreements have taken hold. It seems more in that space than they have in the traditional College space. That might be a place to say, hey, are you offering an isa? Are you offering some program that will hire me out if I graduate and then effectively guarantee me a job on the other side or at least know that you're going to work for me to get a job?

Exactly. That's actually really nice. So you can't use federal financial loan or federal financial aid or student loans to go to these programs, which can make it risky because you've got to use your own cash. And so the evolution has been that they're saying, okay, you don't pay us anything until we get you that great job and then you start paying us back as a percentage of your income, which is the structure of an isa. So, so if you go and nothing comes of it, you don't get a job, you're still working where you were before, you've lost some time, but you're not out any money. And so that's actually a great deal. It aligns the incentives for the institution to want to help you get that job, which is always a good thing.

Yeah, no, it's, I mean, the alignment of incentives in all this, I think is incredibly important. As you discussed last question as we wrap up, which is what was the biggest set of surprises, disappointments, whatever unexpected things that you found in researching and writing this book that stood out to you that you think others ought to focus on?

So I'll give you kind of a positive and negative. So the positive was how much major mattered relative to institutions. So, you know, young people are just killing themselves these days to get into the right college, to get into a good college. And I think knowing that the variation across majors in terms of income outcomes is actually much greater than across institutions means that you can worry a bit less about that because the institution may matter less, in fact, than people previously thought. If you really care about that financial outcome, focus on major and go to the best college that you can go to. And that's, that's better than having to, you know, stay up at night worrying about getting into the perfect college. On the downside, I had really hoped to be able to help people navigate credential programs, training programs outside of the degree based system. And I was disappointed to learn that it's actually incredibly hard even for experts to navigate this space. There's no website I can send you to and say, here's the list of all of the certificate training programs that I'd recommend. It doesn't exist. And so I hope in time that that will come about. And I guess I'll have to write another book when that happens.

Well, we'll keep working so that that's the case and you can continue to add insight and wisdom for folks making this incredibly important investment in their future. So, Beth, just huge thanks for being with us today. And for all of you tuning in, appreciate it as well. And we'll see you next time on the Future of Education.