Proposal Two: Improvements to Work Study and College internships

23 Sep

Proposal Two: Improvements to Work Study and College internships

Funds for work study positions on campus should be increased. Additional funds should be allocated to subsidize internships at start-up firms. Student interns at federal agencies and departments should be paid at least a minimum wage.

Background on work study programs: Around 700,000 students per year receive federal work study positions, mostly in jobs on campus. Work study positions are disproportionately used at private four-year colleges. The use of work study has fallen by 25 percent in real inflation adjusted terms between 2000 and 2015.

Discussion on internship issues: Increasingly, internships are a necessary step towards a first job. Students from lower income households may not be able to afford to take an unpaid position. The percent of students taking unpaid internships to obtain job experience has risen substantially in recent decades. Many students taking unpaid internships rather than normal jobs end up incurring more college debt.

Private firms hire unpaid internships often find themselves in violation of state and federal minimum wage laws. Start-up firms often do not have the cash to pay interns salaries. The use of federal funds for work study positions at start-ups would enable these firms to hire interns.

One concern with unpaid and paid internships involves the possible displacement of full time hires. This concern is mitigated by limiting the duration of the internship to six months and by limiting eligibility to students enrolled in a university.

I don’t have much to say about this proposal except that government should lead by example. Budgets are always tight at federal agencies but believe me budgets are generally much tighter at start-up firms, which often find it difficult to take on unpaid interns due to minimum wage laws.

Next set of issues:
The next set of proposals involve providing debt relief to students who find themselves over-extended. Many conservatives have taken a really harsh view of debt relief and bankruptcy. I believe their approach is shortsighted because debt relief efforts can closely target people with the greatest need. Debt relief efforts can in some circumstances benefit taxpayers. Also, debt relief for the most vulnerable make austerity programs and budget cuts more humane.

I have three posts on debt relief, one on possible changes to the income based replacement plan, one on issues related to public service debt forgiveness programs, and the third on rules governing bankruptcy.



Proposal One: Increased Financial Assistance for First-Year Students

23 Sep

Proposal One: Increased Financial Assistance for First-Year Students

The objective of this program is to eliminate or at least substantially reduce the amount of debt incurred by first-year students. Schools that wish to participate in this program would be required to match 25 percent of the federal contribution. The program would be open to all accredited private and public schools. Schools would be required to publish information on the percent of first-year students incurring debt along with information on the income of their student body.

There are three reasons why most increases in financial assistance should be targeted towards first-year students.

First, a program targeting financial aid for students entering their freshman year is the most effective way to encourage additional study and training for people who might otherwise be deterred because of financial risk.

Second, either the student borrower or the government must pay interest on student loans as soon as the loan is granted. As a result, debt incurred in the freshman year is more expensive to either the borrower or the government than debt incurred later in the student’s career.

Third, many students drop out of college early in their academic career and these students who leave college early in their career often have problems repaying their loans because they have lower starting salaries than those who stay in school. As a result, a reduction in student debt incurred during the freshman year should have a larger impact on student loan default and delinquency rates than a reduction in student debt incurred by upper class students or graduate students.

The proposal presented here is less ambitious than the ones offered by Bernie Sanders and Hillary Clinton.

It is also less administratively burdensome more fiscally responsible and fairer towards private universities.

Hillary Clinton’s proposal would provide grants for tuition assistance only in states that fund public universities at a high level. Her proposal also includes penalties for universities that fail to meet certain goals including reducing costs, earnings of graduates, and reduced tuition. These conditions are problematic because state differ in their resources and priorities. Moreover, this approach would favor state university systems that emphasized research over teaching.

This proposal requires schools to contribute 25 percent of the cost of grants to first-year students. Schools could reasonably choose to forego the grants if they did not want to contribute their share. Schools and states should be able to maintain this contribution level during economic down turns.

The proposal should require universities to publish information about the percent of students with debt after their first year of school. The federal government should provide information about how this statistic differs for different types of schools and is affected by other variables like the percent of students from lower income families.

The tuition assistance grants should be available for private as well as public institutions. Any accredited institution that is willing to contribute 25 percent of the cost of the grants should be eligible for the program. The Clinton or Sanders approaches would both have reduced enrollment at private schools. This approach might encourage more people to transfer from private to public schools after completion of their first year of college.

The second proposal involves the allocation of work-study funds for positions at private companies.

How to Reduce College Debt Burdens — Introduction

23 Sep

How to Reduce College Debt Burdens — Introduction

Many older voters who borrowed for their education and repaid their loans are unconcerned about the recent increase in student debt. I believe this view is shortsighted. Current and recent college students are incurring more college debt than previous cohorts of college students. This debt will have economic and financial impacts on future generations.

Some Statistics:

• The average student debt for a person with college debt completing a four-year degree rose from 12,876 in 2003/2004 to 20,163 in 2011/2012.

• The percent of undergraduates completing a four-year program with college debt rose from 60.8 percent in 2003/2004 to 65.2 percent in 2011/2012.

• The percent of parents with dependent students with a PLUS loan rose from 5.06 in 1996 to 9.27 in 2012. The increase in the use of PLUS loans by parents for undergraduates was even larger for parents in the lower income quartile.

• The number of Americans over age 60 with a student debt rose from 700,000 in 2005 to 2,800,0000 in 2015. The average amount of student debt held by borrowers over age 60 rose from $12,100 to $23,500 in the same period.

Economic Impacts:

• The increased use of student debt is having a substantial impact on household finances. People with student debt have a hard time qualifying for a mortgage, may have to pay higher interest rates or will only qualify for a small mortgage and often delay purchasing their first home. These factors will reduce house equity, an important component of retirement savings for future generations.

• People with large student debt totals and limited wage income must choose between contributing to their 401(k) plan at work or maintaining payments of student debt. Financial planners often urge borrowers to emphasize 401(k) contributions over student debt repayments. However, the correct choice is not obvious and given limited wages there is a clear tradeoff between debt reduction and saving for retirement.

I believe that Congress must adopt policies that reduce the costs of college and provide assistance to student borrowers who become over-extended.

In the 2016, presidential campaign Bernie Sanders advocated for free public universities and Hillary Clinton argued for debt-free college tuition at public universities for all students in households with less than $125,000 per year. The free or debt-free college proposals had little support among economists.

First, people have little incentive to wisely consume a free good. Free education would provide a motivation for students to stay in school regardless of whether they were learning. Second, in a world where there are many needs and problems to be fixed free education is wasteful and economically inefficient. An economically efficient subsidy must either persuade people to make a choice that they would not otherwise maker or help people truly in need.

The free college approach achieves neither of these objectives. First, assistance is provided to people who would have completed college under any circumstance. Second, assistance is provided to people who do not help. Third, the offer of assistance will result in people saving less for their own education and the educational needs of their family members.

This paper proposes four types of policy levers to achieve reductions in the number of people with unstainable student debt. The four policy levers are: (1) increased student financial assistance, (2) improvements in loan forgiveness policies, and (3) improvements in on-time graduation rates and (4) increased information on school quality and costs for students and parents.

The four-pronged approach is far less costly than the free-college or debt-free college programs offered by Sanders and Clinton. The four-pronged approach to the student debt problem targets assistance towards those most likely to not complete their education or people with the highest needs or vulnerabilities.

The first three proposals are designed to reduce the cost of college for some students. The first proposal calls for a massive increase in financial assistance targeted towards first-year students

Go here for a description of the program for an increase in financial assistance for first-year students.

Reprint of seven ways to provide student loan debt relief

17 Sep

The National Association of Student Financial Aid Administrators originally published this article.   I am grateful to them for allowing me to reprint it here.

The original link for the article is here.



Seven Ways to Provide Student Loan Debt Relief

The current generation of students is leaving school with more debt than any previous generation. While postsecondary education remains a good investment for the average student loan borrower, some borrowers will never be able to repay their student loans in full. Moreover, current bankruptcy law and procedures make it very difficult for borrowers with student debt to ever obtain a fresh financial start.

At the federal level, there is some interest in policies that might alleviate student loan debt burdens. The desire to provide student debt relief to borrowers is tempered by concern about the cost to taxpayers when this government guaranteed debt isn’t fully repaid. In my view, it is possible to provide a modest level of student debt relief to borrowers without imposing substantial costs on taxpayers. This could be accomplished by modifying the Income Based Replacement (IBR) Loan Program and through changes to the bankruptcy code.

The IBR program, enacted in 2009, provides four benefits to student loan borrowers.

1.     Reduction in student loan payments when household income is low in relation to qualified student debt,

2.     Reduction in interest payments when IBR payments do not cover interest due,

3.     Limits on the capitalization of interest for loans in deferment or forbearance, and

4.     Forgiveness of a remaining loan balance 25 years after the student loan enters repayment.

In addition, some student loan borrowers who maintain payments through the IBR program will be able to utilize public loan forgiveness programs

The primary purpose of the IBR program is to prevent borrowers from defaulting on their student loan when their household income is low compared to qualified student loan debt. Only student loan borrowers with chronically low levels of household income can receive some debt forgiveness. Borrowers who receive lower payments through the IBR program will often pay more on their loan than if they remain in the standard 10-year payment plan.

The IBR program is complex and does not offer assistance to many overextended student loan borrowers. First, the IBR program does not cover PLUS loans made to parents, private loans, or consolidated loans that include a parent PLUS loan or a private student loan. The decision to consolidate 10-year loans into a 20-year loan could also make borrowers ineligible for the IBR program. To fully benefit from the IBR program, borrowers need to be aware of IBR rules long before they are aware that they will need IBR, when they are borrowing or consolidating federal student loans.

Second, the IBR program often provides little or no relief to a household that has high levels of both consumer debt and student loans. The IBR program is especially complex for married households.  A single person who qualifies for the reduced IBR loan payment could lose this benefit if he or she marries someone with high levels of consumer debt, even if household debt-to-income ratios increased after marriage. Married individuals could choose to file separate tax returns to take advantage of the IBR program, but that decision usually results in a larger tax obligation.

It is impossible to modify the IBR program to account for consumer debt without creating an incentive for additional borrowing.  Borrowers with high levels of student debt and consumer loans might seek relief in bankruptcy courts.  However, current bankruptcy laws and procedures offer little relief for borrowers with student loan debt.

There are two ways debtors can seek student loan debt relief in bankruptcy. First, the debtor could petition the court for a complete or partial discharge of student debt. Second, in a Chapter 13 bankruptcy the debtor could petition the court for a payment plan that favors the repayment of student loans over the repayment of other unsecured loans. Neither remedy is easily obtained.

To discharge student debt in bankruptcy, the borrower must prove that he or she has an “undue hardship.” Most courts require that the borrower show a “certainty of hopelessness” for his or her financial situation over the repayment term of the loan. A certainty for hopelessness is extremely difficult to demonstrate because there is some probability circumstances will improve, even for individuals in extremely dire circumstances. An August 31, 2012, New York Times article describing the petition of a legally blind, unemployed man illustrated the hurdles a student loan borrower must clear in order to have student debt discharged in bankruptcy.

Any proposal that makes it easy to discharge government guaranteed student loans in bankruptcy entails some additional cost to the taxpayer. However, it is easy to envision a less stringent student loan discharge rule that does not significantly increase taxpayer costs. Such a rule would rely on objective criteria rather than the subjective “undue hardship” concept. For example, student loan discharge could be limited to individuals with incomes near poverty level, contingent on participation in the IBR program, favor individuals with medical problems, and allow for partial, rather than full, loan cancellation.

Two other aspects of the bankruptcy code have a substantial impact on financial outcomes for student loan borrowers in bankruptcy and for the government agencies that hold or guarantee student debt.  First, financial outcomes are affected by the rules governing whether a debtor can obtain a Chapter 7 bankruptcy or a Chapter 13 bankruptcy.  Second, financial outcomes are affected by the rules governing repayment of student debt and other unsecured consumer loans under a Chapter 13 repayment plan.

Under a Chapter 7 bankruptcy, the bankruptcy court will immediately discharge most unsecured consumer loans. In a Chapter 13 bankruptcy plan, debtors must file repayment plans with the bankruptcy court. The repayment plan determines how much debtors can repay creditors and the amount received by each creditor. Prior to the 2005 bankruptcy law, debtors could choose to either file under Chapter 7 or Chapter 13. The 2005 bankruptcy law created a means test that required many individuals with incomes over the household median to file Chapter 13 rather than Chapter 7.

When student loans are dismissed under Chapter 7 bankruptcy, the borrower gets an immediate fresh start and can use all the newly available funds for the repayment of student debt. A borrower who obtained a deferment prior to bankruptcy can immediately renew payments on his or her student loan. By contrast, when borrowers are placed into a Chapter 13 repayment plan, the amount allocated to the payment of student loans might not even cover interest and, in many circumstances, the debtor will leave bankruptcy with a substantial student debt intact.

Student loan borrowers in Chapter 13 can petition the bankruptcy court to allocate a greater amount of their payment plan to the repayment of student loans and a lower amount to the repayment of other unsecured credit card debt. However, most courts tend to favor a payment plan that does not discriminate against any class of unsecured creditors. As a result, many student loan debtors emerge from the bankruptcy process five years older with a substantial amount of unpaid student loans. Many individuals experience decreases in income and have fewer job prospects after age 50. A delay in repayment of student loans caused by a forced entry into a Chapter 7 bankruptcy plan will increase financial exposure to taxpayers, increase student loan default rates, and decrease collection rates.

A revision of Chapter 13 bankruptcy rules that gives priority to student debt payments over other unsecured debt payments in bankruptcy would provide student loan debtors with a fresh financial start and would ultimately reduce taxpayer losses. Unsecured creditors would still enjoy greater collection rights than existed prior to the 2005 bankruptcy law.

Under current law, very little debt relief is offered to overextended student loan borrowers experiencing substantial economic hardship. Several policy changes might provide modest debt relief to these borrowers, maintain strong incentives against default, and protect taxpayer interests.  These policies include:

·      Allowing married couples to obtain IBR debt reduction without having to actually file separate tax returns,

·      Making PLUS loans to parents and consolidated student loans with a PLUS loan eligible for the IBR loan program,

·      Allowing private student loans to be discharged in bankruptcy,

·      Basing the decision to discharge student loans in bankruptcy on objective criteria pertaining to the economic status of the bankruptcy applicant rather than the subjective “undue hardship”  concept,

·      Allowing for quicker loan forgiveness under the IBR program for individuals in dire economic circumstances,

·      Repealing or modify the Chapter 13 means test, 

·      Providing priority to student debt over other unsecured loans in Chapter 13.

The goal of debt forgiveness policies inside and outside of bankruptcy is to balance two competing objectives: providing overextended borrowers a fresh start, and fair treatment towards creditors. The pendulum may have swung too close to the creditor, especially with regard to the treatment of student debt.

The author is a retired economist who worked in the Office of Economic Policy of the U.S. Treasury from 1988 to 2012. He publishes a blog

Business Cycle Announcement Delays

26 Aug

Questions on the ability of the NBER to Announce Recessions

Question One: The NBER is the official arbiter of when a recession ends or begins.   The peak date is the date the recession begins (or the date the boom cycle ends) and the trough is the last date of the recession (or the date the boom begins).

What is the typical gap in months between the announcement of the event (trough or peak) and the actual date of the event?

Has the NBER ever announced a recession after the recession actually ended?


Gap Between NBER Business Cycle Event and Announcement
Turning Point Date Peak or Trough Announcement Date with Link Gap Between Event and Announcement Date
Jun-09 Trough 20-Sep-10 15
Dec-07 Peak 1-Dec-08 12
Nov-01 Trough 17-Jul-03 20
Mar-01 Peak 26-Nov-01 8
Mar-91 Trough 22-Dec-92 21
Jul-90 Peak 25-Apr-91 9
Nov-82 Trough 8-Jul-83 8
Jul-81 Peak 6-Jan-82 6
Jul-80 Trough 8-Jul-81 12
Jan-80 Peak 3-Jun-80 5


Analysis:   The Peak and trough date data and the announcement link data was taken from the NBER web page.

A discussion of how to use the turning point data and announcement date in excel to calculate the gap between actual event and announcement will be placed at shortly.


The gap between announcement date and event date ranges from 5 months to 20 months.

The average gap between announcement and event is 11.6 months

The median gap between announcement and event is 10.5 months.

The average gap between business cycle peak (the last month of the boom) and the announcement of the peak is 8 months.

The average gap between business cycle trough (the last month of the recession) and the announcement of the end of the recession is 15.2 months.

The median gap between business cycle peak (the end of the boom) and the announcement that the boom ends is 8 months.

The median gap between business cycle trough (the last day of the recession) and the announcement that the recession ends is 15 months.

The issue of declaring a recession after it actually ends:

The NBER is not adding value when it declares the country is in a recession after the recession has actually ended.   This occurred whenever the announcement of the business cycle peak occurred after the actual trough.     When did this occur?

On November 26, 2001, the NBER issued a peak announcement.   The actual trough of the 2001 recession occurred in November 2001.   The trough was not announced until 2003.

On April 25, 1991 the NBER announces an end to the boom period.   The actual recession ended a Month early but the NBER did not make the end of recession call until December 1992.

Concluding Thought: In order to prevent a recession by stimulating the economy economists need to know where the economy is and where it is heading. The data presented here indicates that economists often don’t know whether the economy is weak or strong and don’t know whether the economy is in or out of a recession until several months after the event. In fact, some times economists don’t declare the existence of a recession until after the even actually ended.

The inability of economists to accurately track the economy in a timely fashion is one of the impediments to the successful implementation of counter-cyclical fiscal and monetary policy.

Some notes on these calculations can be found in my math blog.

The link to this math post is below.