The Good, the Bad, and the Ugly about Income-Driven

Repayment

Diana G. CarewProgressive Policy Institute

November 5, 2013

Agenda• Background on young Americans• Student debt as an economic obstacle• PPI’s work on student debt– Previous research– Working group– Current focus: Income-driven repayment and

Pay As You Earn (PAYE)– PAYE Factsheet– RADD Advisory Panel

• What’s at stake for higher-ed

Why Should We Care About Young Americans?

• Young Americans – age 16-34 – make up over 1/3 of the U.S. labor force

• Young people pay into the nation’s entitlement programs that seniors and low-income households depend on

• Young people will shape the U.S. and world economy tomorrow – jobs, consumption, and wealth

• That means their economic well-being and financial security are important

What’s Going On With Young Americans?

• Young people have had a rough decade:– Falling real average earnings– High unemployment rate– Declining labor force participation rates

that cannot be attributed solely to increased college enrollment

• Young college grads are among the worst affected:– Larger drops in earnings than youth

average

Young Workers’ Real Earnings Fell While Average Earnings Rose Slightly

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 0.850

0.900

0.950

1.000

1.050

1.100

Bumpy Ride: Young Workers' Real Earnings Fall (In 2012 $, 2000=1)

Full-time Workers Age 18 and Over

Full-time Workers Age 18-24

Full-time Workers Age 25-34

Source: Census Bureau, PPI

Young College Grads: Most Affected

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 $50,000

$52,000

$54,000

$56,000

$58,000

$60,000

$62,000

$64,000

$66,000

$68,000

Long Way Up: Real Annual Average Earnings of Young College Grads, 2000-2012*

*Earnings of people working full-time age 25-34 with a Bachelor's degree only, in constant 2012 dollars

Source: Census Bureau, PPI

Why: The Great Squeeze• Middle-tier jobs are disappearing– National Employment Law Project found

60% of recessionary job losses were mid-wage while 60% of recovery job gains are low-wage

• Young people aren’t well-prepared for today’s high-skill, high-wage jobs

• Result: Half of recent college grads are underemployed or underemployed

• Squeezing down and out of labor force

Jumping Off or Being Pushed? Young People Are Leaving the Labor Force

Student Debt: Growing Problem for Young Americans

• Over $1.3 trillion; mostly held by U.S. government• New debt issuance by Dept. of Education now

over $100 billion annually• Fed: Number of borrowers and average balance

per borrower up 70% since 2004• For many, it means putting off large purchases like

homes and cars, affecting the pace of economic recovery– Pew: 36% young Americans age 18-31 still living at

home• Reduced wealth and asset building

My Take• Tuition – and therefore debt – is

rising right as college graduates are having a harder time paying it off– PPI research found it was 58% more economically

stressful for college graduates in 2010 to pay down their loans relative to the class of 2000

• It’s easier to blame private lenders for woes than to villainize colleges– It’s the principal, not interest rates

PPI Proposal to Address Existing Student Debt

• There is a role for private student loan market

• PPI’s Student Debt Investment Fund (SDIF) calls for a public-private partnership to engage private capital– A secondary market fund that keeps Dept. of

Education as loan originator– Matches need with capital availability

through repatriated profits– Puts the cost of refinancing debt onto private

sector

PPI Student Debt Working Group• Created as a forum for policy conversation

surrounding student debt proposals in Congress

• Includes various stakeholders:– Government– Higher education– Advocacy groups– Private investors

• Future discussion topics: HEA, Private loan market, Higher-ed model & accountability, and Pay As You Earn (PAYE)

PPI Research: Income-Driven Loan Repayment

• Latest iteration referred to as “Pay as You Earn” (PAYE)– Borrowers with financial hardship pay 10%

of monthly earnings– Remaining debt forgiven after 20 years

• Announced by President Obama in 2011; Effective as of December 2012

• Will be main version of income-driven repayment going forward

PAYE: Policy Tool to Address Student Debt

• Designed to be the policy fix for problems affecting prospective students and college graduates– Encourages higher enrollments by making

college more affordable– Provides a financial safety net for struggling

college graduates• Major Obama Administration policy

response to the crisis in college affordability– Recently announced major campaign to

increase PAYE participation next year

How much more generous is PAYE?

• Consider example of entry-level college graduate who majored in psychology– Starting salary = $30,000/year

• Possible to think of scenarios where net present value (NPV) of PAYE is much less than IBR and standard plan

• Analysis of scenarios may explain why IBR enrollment traditionally low

PAYE FAQ Sheet• Closes the earnings gap?– Not necessarily

• Is 10 or 20 year repayment better?– It depends

• Affect on private student loan market?– Already shrinking

• Government profitability?– All in the accounting

• One size fits all?– That is the question!

PAYE: Potential Unintended Consequences

• For Students– Reduced incentive to make good decisions regarding

school/major that reflect true cost of investment• For Post-Secondary Institutions– Reduced accountability to prepare students for

workforce– Reduced incentive to control costs or improve

organizational structure• For Government– Taxpayers could end up footing the bill for higher

tuition and lower returns on investment

Is PAYE Sustainable?• In the same speech where President

Obama announced PAYE expansion campaign, he also said federal student aid system in its current form was unsustainable

• Not clear how PAYE expansion will enhance sustainability of federal student aid programs

• This makes it an important subject for future research

RADD Consortium• Reimagining Aid Design and Delivery• Nine organizations plus Advisory Panel• Phase II• Spring 2014 completion• Consortium considering future of

federal student aid• Borrower welfare is the priority• Discussions in early stages

At Stake: Future of Higher-Ed• Rising tuition/debt and evolution of

workforce demands calls into question the pre-eminence of the four-year model

• Will higher-ed integrate broadband and tech into curriculum or reorganize?

• Will lower cost post-secondary workforce training alternatives gain popularity?

• Do federal aid programs like PAYE hurt higher-ed industry more than it helps?

At Stake: HEA• Future of federal higher education

funding programs could change• Will funding integrate modified

outcome-based rankings?• Or student performance rankings?• What about tighter lending caps?• “Know Before You Owe”?• Could PAYE or income-driven

repayment alternative become default?

Questions?

THANK YOU!dcarew@ppionline.org