The Good, the Bad, and the Ugly about Income-Driven Repayment Diana G. Carew

1. The Good, the Bad, and the Ugly about Income-Driven Repayment Diana G. Carew Progressive Policy Institute November 5, 2013

2. 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

3. 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

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

6. Young College Grads: Most Affected

7. 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

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 18-31 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 • It’s the principal, 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

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 topics: HEA, Private loan market, Higher-edmodel & accountability, and Pay As You Earn (PAYE)

13. 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

14. 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

15. 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

16. 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!

17. 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

18. 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

19. 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

20. 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?

21. 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?

22. Questions? THANK YOU! dcarew@ppionline.org