Investing in Young America: Addressing Student Debt. Diana G. Carew Progressive Policy Institute September 27, 2013

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1 Investing in Young America: Addressing Student Debt Diana G. Carew Progressive Policy Institute September 27, 2013

2 Agenda Economics of young Americans Student debt as an economic obstacle PPI s work on student debt Previous research on existing burden Working group formation Current focus: Income-Based Repayment (IBR) HEA: What s at stake

3 Why Should We Care About Young Americans? Young Americans age 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

4 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

5 Young Workers Real Earnings Fell While Average Earnings Rose Slightly Bumpy Ride: Young Workers' Real Earnings Fall (In 2012 $, 2000=1) Full-time Workers Age 18 and Over Full-time Workers Age Full-time Workers Age Source: Census Bureau, PPI

6 Young College Grads: Most Affected Long Way Up: Real Annual Average Earnings of Young College Grads, * $68,000 $66,000 $64,000 $62,000 $60,000 $58,000 $56,000 $54,000 $52,000 $50, *Earnings of people working full-time age with a Bachelor's degree only, in constant 2012 dollars Source: Census Bureau, PPI

7 Why: The Great Squeeze Middle-tier jobs are disappearing National Employment Law Project found 60% of recessionary job losses were midwage 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

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

9 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 still living at home Reduced wealth and asset building

10 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 The principal is the real issue, not interest rates

11 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 Allow private student debt to be dischargeable in bankruptcy

12 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: HEA reauthorization and Income-Based Repayment option

13 PPI Hot Topic: Income-Based Repayment (IBR) Commonly 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 A more generous version of previous income-contingent repayment plans

14 IBR: 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 IBR participation next year

15 IBR: 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 will end up footing the bill for higher tuition and lower returns on investment

16 Sustainability of IBR In the same speech where President Obama announced IBR expansion campaign, he also said federal student aid system in its current form was unsustainable Not clear how IBR expansion will enhance sustainability of federal student aid programs This makes it an important subject for future research

17 Addressing Student Debt: What s at Stake w/hea? Future of federal higher education funding programs and general higher education funding Future of post-secondary education sector Future of workforce preparedness Future of young Americans financial security Even the future of U.S. competitiveness

18 Questions? THANK YOU!

Student Debt Investment Fund (SDIF): A Preliminary Proposal for Addressing the Student Debt Crisis

POLICY PROPOSAL Student Debt Investment Fund (SDIF): A Preliminary Proposal for Addressing the Student Debt Crisis BY DIANA G. CAREW, JASON GOLD & MICHAEL MANDEL MARCH 2013 The Progressive Policy Institute