Yesterday, The Association has discussed in its BLOG, the impossible task for selected College graduates in paying their student loans because of lower return on their investment.

Therefore, the Association is not surprised when CNBC has reported in its September 22, 2018 article.  The signs of failures are all over the map.  It is just a matter of time, either a broad loans bailed-out scenario (loans moratorium) will happen or the Adam Smith’s invisible hand will make the correction.  If the market make the corrections, the consequences will be more painful.  It seems that more and more people, who got into the deep trap of their student loans take it into the extreme level, in that, they do not even care to pay their debts anymore.

They just give up in paying, even trying to convince themselves mentally that they do not have any loans.  This level of frustration occurs because their loans are ballooning far beyond all their combined wealth.  It is truly sad situation if a country fail miserably to pursuit of its citizens happiness as it has been stated in the second paragraph of the Declaration of Independence.  There are 8 million people who are defaulting their loans–that means 2.45% of the US total population in 2018 cannot pay their student loans at due date.  That is the same way to say that 8 millions graduates potentially will be impossible to pay their student debts, ever.

Reading the article closely, one may notice two important facts (1). Some students have attended the for-profit schools where employers may not in favor to employ graduates from these schools and (2). Most of them major in soft science (Example, humanities majors).  The reason is obvious–lower ROI (Return on Investment) as discussed before.

About two weeks ago, AAEA has written in its BLOG, short analyses on the student loans interest rate. Our analyses look at the economic philosophy why interest rate is necessary from the Classical Economic theory.  We also presented the rival’s of this theory from the monetarist point of views.  This analysis is an effort to understand, why the lawmakers is charging, in some loans, higher interest rate, than what the commercial banks do.  Only the lawmakers can answer this question for sure.  It seems that the public is the interest-rate takers–that means students have rarely ask, and they may not know about this whole thing until after receiving the first repayment bill from the loan servicing entities.

A necessary and sufficient conditions for any loan borrower to survive in its business plan iff (if and only if) the return on investment (ROI) is higher than the interest charges.  Otherwise, it surely will go bankrupt with the probability of one.  A quick question that student loan borrowers and their family should ask before pursuing any college major is to ask if she or he will get paid high enough that can cover the loan payment amount–if not, be realistic and scrap your plan.  These are the weaknesses that the Association has learned across the board, that the dreamers think they can get by.  May be they can in the past 30 to 40 years ago, but not in 2018.

The Financial Aids Office, the Student Advisors, the Student Success Office along with the loan providers have failed to convey this simple question or may be, they just do not  care.  The same situation with car salesmen–whose sole interest is to sell as many cars as possible–because that is their job. However a student financial aids advisor is not a car salesman.  They are in a better position, and are equipped with a better understanding and resources to better advise the loan borrowers than the car salesmen.

By charging the same interest rate among the student borrowers regardless of their majors is an evidence of over simplifying the student loans issue which has been happening for along time, without anyone critically thinks about it.  As results, the loan problems are getting worse every day as shown in Figure 3).  Increasing students’ default rate is a real example which shows that the ROI from investing in a college degree, for most part, definitely is lower than the interest charges (5-7.78% APR, depending on the type of loans).  So, America may witness another potential big event happens in the history of the country.

After the Association shared the ideas of Institutional Research Intelligence or Education Analytics about six years ago, the concept has been embraced by many–from higher learning institutions to the software companies who write and sell the canned analytics programs based on our manuscript presented at North Carolina Community College System Office Annual meetings in 2012 in Raleigh.  This pioneer work has changed the landscape of institutional research old profession to a deferent level, from reporting to applying data-driven strategic information to support Colleges’ administrators in the decision making process.  In the past, the top person for the job has the PR ability.  However, It is not enough now.  She or he needs to have the understanding and broad knowledge about all that requires to generate strategic information.

Six years later, where are we?  Well the IRI concept has developed even further.  The regulator’s public policy in the US has changed (either ways, good or bad) so much compared with they were 6 years ago.  This day, the higher ed industry, if you may wish to call it, is more volatile.  It is more uncertain, more competitive, and therefore these institutions are facing greater risks associated with student enrollment, state and federal financial aids and even donors’ support money.  Consequently, doing the business as usual is no longer relevant.  That said, applying the IRI version one (IRI V.1) will no longer provide the optimal solutions.  AAEA offers and shares to the public on the IRI Version 2, where stochastic simulation is the foundation for it.  Why simulation?  Simply because IRI V.2 provides the decision makers more flexible answers, based on different scenarios and possibilities which can be used in formulating strategic planning.  Think about the FED’s decision on the prime rate.  Before making it public, the FED has simulated what the impacts of such a change on the US macro economy such as aggregate demand and supply.

The applications of IRI V.2 at the college level are ample.  Think what will potentially happen if the state budget is reduced by 2% next year.  This is especially important where the State allocates education money based on individual college performance.  For example, the State of Florida or Tennessee and others have applied such a formula funding.  Think what will happen if graduation rate, which usually one of the components in the formula funding can be improved by 1%.  How much more money an institution will potentially receive from the State.  Other examples can go on and on.  The bottom line is this–if a higher ed institution has not applied or do not have the professional to apply IRI V.1., what and how that will impact their future financial stability and operational continuity?  What the positive impacts will it bring, if an institution is able to apply both IRI V.1 and IRI V.2?

We have heard so many of unfortunate US citizens got impacted from this program, which supposed to help them rather than to add more miseries in their life.  When the US Congress started this program about 60 years ago, never had their thoughts such negative effects prevail.  The next questions that one might have are what the policy makers need to do now?  One for all solutions to the country student loans challenges?

So far these are the partial solutions that both the American public and the current US lawmakers are trying to do, but they are partial, and will not solve the root of the problems.

1. Hundreds US companies have tried to ease some of their employees’ student loans program by giving some assistances.
2. US Congress are working or have passed the following Act.

Let us diagnose where the problems are, by critically ask the following questions: Why after 60 years these problems occurred.  What such changes have occurred during that same period of time.  What the potential sources that might have caused such problems to occur?

These are the first starting points that may get trigger the researchers’ interests to delve and roll their sleeves, and make their hand dirty to find the answers of $1.41 trillion challenges.  So, far we heard more from reporters than researchers.  Reporters’ roles are to report, to make the public aware, and may not necessarily directed to solve the public issues. In this gigantic challenge, lawmakers need to team up with researchers to find the optimal solutions, based on logical reasoning, scientific approaches and back up by historical data to find possible causes, but not just the symptoms.

So far, there is no evidence that the industry is moving toward Pareto efficient, not even close to Pareto Improvement.  Increasing student loans with all the other related problems, such as default rate, loan servicing collection agencies’ practices, and other related issues are getting worse everyday.  These string issues dragged the country further away from the possibility to solve it.  They even accelerate the process toward massive financial crises.

When the US unemployment rate is the lowest in decades (DOL reported at 3.9% in August, 2018), while the DOW reaches the historic high (26,616.71 on January 26, 2018), one might think that they may negatively correlate with student loans debts and default rate.  But that is not the case in realty.  Its seems that everything related to students loans are going against the logic.  That makes the life of a researcher more interesting–that makes solving this problem brings excitement–that will increase the rush of adrenaline in the bloodstream, and last but not the least important, it may open an opportunity to be the next Nobel Laureate down the road.  Having said that, the Association invites both the Saltwater and Freshwater School of economics thought to make national contributions to answer these challenges. Let the discussions begin.

To understand deeply the US student loans issue, one needs to comeback to NDEA–to understand reasons why did Uncle Sam start the student loans program.  Over the time, the soul of NDEA has changed to what the American public is seeing currently.

Three critical questions may be asked by a US citizen in that (1). why they, the taxpayers, need to pay interest on the money that comes from their tax i.e., the federal income tax that they have paid? for (2) and (3), please see below.

When Johnny went to college, his parents, which are great citizens have to take Parent-Plus Loans.  They always pay their federal income tax on-time, never late, and always paid-in-full.  After their son graduated from his postsecondary education, they have to pay the taken additional loans to support their son through the college education.  Critically analyzing their loans situation, the parents, as ordinary US citizens ask three important questions as mentioned above and repeated here:

1. Why they should pay to borrow their own tax money?
2. Why in addition to 4.25% fees, the 7.6% Fed Loan interest rate for Parent Plus is higher than that of the commercial bank (about 50% lower) ?
3. Why monthly payment is paid first toward the interest charges, and the remaining applied to the principal?

Well, some will argue that money (seen as capital, here), like any other resources are limited in supply, so that there is a price and “time value of money” for it.  This is basically the rationale of Classical Economics theorists’ hypothesis.  Even though there are many other monetarists, such as I. Fisher’s thesis on interests rate developed later, the main idea is that interest is the price for money.  The whole idea is about opportunity cost.  Investing the same amount of money, investors may generate at least or higher rate of return.  However, there is a fundamental difference on the assumption behind either the Classical or Keynesian theory of interest in that its application is more appropriate toward for-profit private sectors or businesses and both theories do not differentiate investments in public sectors, such as a nation’s human capital investment.  The investor’s objective function between the private sector and the government’s is not symmetrical, where it’s objective has been clearly defined in the NDEA.

If, the proposition of opportunity forgone hypothesis is true for both private and public institutions, then one may need to ask further “what kind of investment opportunities” that the lawmakers are referring to that yield 8% annual return?  When the commercial financial institutions are able to offer about a half of 8%, that truly reflects the expected normal return from their commercial borrowers.  In this case, the law is passed with an explicit assumption that investment in college education will generate higher ROI than that of in other non-academic industries.  Are there any other data and research which can back this maintained hypothesis up?  Please read horror stories that the student loans have caused on some borrowers.

May be the best Wall Street investment companies are able to make that happens.  But investment in a nation’s human capital is not exactly the same with that of in Wall Street’s.  The objective function will not ever be the same.  Read again the NDEA for clarity.

When the student loans default is creeping higher daily and more private sector/companies are participating to ease their employees’ student loan burden, that are the real proofs that a human capital investment will not bring 8% rate of return, universally.  The US lawmakers have to think over on this issue.  Y’ll may be able to do something better for Uncle Sam, and its citizens are looking forward to seeing it happens, especially before and during the election time.

Information taken from Q & A USDOE website as of September 14, 2018.

What is the current interest rate?

For Direct PLUS Loans first disbursed on or after July 1, 2018, and before July 1, 2019, the interest rate is 7.6%.  These are fixed interest rates for the life of the loan.

Well, it is about companies’ assistance in reducing employees” student loan burden.  Is this a good thing? Definitely yes.  Why?  One reason is to minimize employees turn-over. Two, It reduces their corporate taxes. Recently Congress is working on a bill which allows employers to treat the assistance as companies’ expenses. In addition, the recipient employees will not be taxed from receiving the assistance up to $5,250.00 annually. Three, to generate positive multiplier effects which may, in turn, to increase the society’s purchasing power or aggregate demand, including but not limited to the firm’s own products.  Fourth, to foster the country’s economics growth.

There is no negative effect financially to the companies if they help paying for their employees’ student loans. This small amount of money will not have significant impacts on their bottom-line, but it surely will on the employees’ wealth-being, at least financially.  This idea seems pretty unusual, yet some companies have helped their employees to pay their loans.  It may be one of the viable solutions which may help reducing skyrocketed student loans growth in the US.  So far, the public does not see that the lawmakers will be successful or have a serious interest to solve the root of the problems.  It is too messy, time consuming, too many lobbyists, tiring efforts, and too many conflicting interests.  Therefore, invisible hand of Adam Smith’s is still needed for it works free from self-interests.