Addressing Student Debt in Wisconsin

February 3, 2014 | Blog, News

On Wednesday morning at 10 am, a bill titled the “Higher Education, Lower Debt Act” will receive a hearing before the Wisconsin Legislature’s Senate Committee on Universities and Technical Colleges.

I have spent the last decade studying the impacts of higher education financing on current, prospective, and former students throughout Wisconsin and nationwide.  In the most relevant effort, the Wisconsin Scholars Longitudinal Study, my team and I tracked a cohort of 3,000 Pell Grant recipients through the state’s public 2-year and 4-year colleges.  We carefully surveyed and interviewed them repeatedly to understand how college costs affected decision-making, stress and health and, of course, their education.  When some left school without degrees, we continued to talk with them, learning about how debt has affected their post-college lives.  We witnessed the challenges that rising debt brings to them and their families, and are deeply empathetic to the crisis that confronts them now.

In addition, I have also been very involved with policy debates at both the state and national level about what to do to make the situation better, improving our economy and collective health and well-being.  Last spring, I testified to the United States Senate on the challenge of college affordability. These discussions are fraught with disagreements about right and wrong, and are further confused by the relative lack of empirical data indicating both the effects of debt and delineating the effective pathways forward.  People on both the Left and Right are struggling to find good ideas that are also politically feasible.  Over the last 18 months, I worked through these challenges with my friend Andrew Kelly of the American Enterprise Institute, not because he and I agree on everything (I’m on the far Left most of the time, and he’s more towards the Right), but because we share a commitment to doing something effective for students, rather than something that is merely (or solely) ideological.  In a forthcoming book from Harvard Education Press, due out next year, we describe a range of approaches to achieving greater college affordability through innovations in college financing.  We recently hosted an event in Wisconsin, which can be viewed on Wisconsin Eye.

 It is with this background and those intentions that I am sharing thoughts on the bill to be discussed Wednesday.  It is being proffered by people I respect a great deal, including Representative Cory Mason, who has been a very good colleague over the years, willing to debate any range of ideas and perspectives, and showing up at my invitation to do so publicly.  Numerous advocates with whom I share much in common, and with whom I have worked in tandem with over the years, also support the bill.

The bill includes four main components:

  • It creates the Wisconsin Student Loan Refinancing Authority, charged with developing a loan program to allow state residents to refinance their student loans.  It “must provide loans under the program at the lowest possible interest rate that is still sufficient to cover the expenses of the program. A loan issued under the program is not dischargeable in a bankruptcy proceeding.”
  • It requires the publication of information about private student loans across the states, and mandates that the UW System, Technical College System, and the private non-profit colleges give prospective students information about their likely debt accrual from attending that school.  It also requires the Higher Educational Aids Board to release an annual report on student debt.
  • It requires institutions of higher education to provide loan counseling and information on repayment options to students.
  • It alters current law on tax deductions for both tuition and fee payments and student loan payments to increase the availability of those deductions with regard to state taxes and also end the phase-out that currently reduces the amount of the allowed reduction as adjusted gross income rises.

Therefore, the intentions of this bill are apparently to (a) lower the monthly and annual payments state residents with debt face on their loans, making it easier to repay, (b) inform more people about loans and the costs of education, and (c) allow state residents with debt to keep more of their annual income.  These intentions certainly appear to align with the demands of the “753,000 graduates who come out of college with a degree and thousands of dollars in student loan debt.”

While I share a desire to reduce the burden that student loan debt places on people throughout Wisconsin and the nation, I cannot support this bill.  Below, I explain why, and offer several alternatives.

Concern #1: The distributional implications of the bill are regressive.

Therefore, providing tax deductions for college costs and student loan payments benefits people with relatively more money.  (This is similar to the mortgage interest deduction, which progressives nationwide have long recognized as regressive.) The Wisconsin residents who are unable able to contribute to our economy because of low educational level and low wages need to be the top priority, since they are being left behind and exerting a drag on our state’s well-being.  The dollars debtors save from these deductions may or may not go back into the state via increased consumer spending; the evidence on that is far from clear (this type of survey research does not establish impact). But what is clear is that the deductions will further reduce the state’s resources for supporting appropriations to keep college costs down and those that could instead be put into grant aid.   In Wisconsin, my team has demonstrated with a randomized experiment that increasing grant aid to needy students improves rates of on-time (4-year) bachelor’s degree completion.  It’s a cost effective investment with results—that’s what policymakers must be focused on.

Concern #2: The bill will not reduce student loan debt in Wisconsin and may actually increase it.

The increased student debt burden in Wisconsin is due to rising college costs in the public sector (attributable to both diminished per-student state appropriations and a failure at some institutions to control costs), the entry and success of the for-profit sector, a failure to adequately invest in the Wisconsin Higher Education Grant, declining real family income, and a poor labor market that does not provide a living wage to many workers.  This bill does not address any of these problems. 

Instead, the bill will reduce anxiety among debtors and diminish pressure among  voters for changes that could address the real causes of debt.  Furthermore, by placing new mandates only on the non-profit institutions, it puts them at further disadvantage relative to the for-profit schools.  Moreover, by likely reducing the funds available to the state with the tax deductions, it has the potential to compromise future state appropriations and investments in need-based grant aid, further driving up the need to borrow.   In this way, choosing to address today’s debtors may over the longer-term do harm to tomorrow’s students.

 Concern #3: The bill may put some current debtors at greater financial risk.

The creation of the state refinance authority sounds great on paper, but in practice it is very likely to require that students forgo the substantial protections they currently receive in the federal system. These include income-based repayment, deferment and forbearance availability, and the ability to discharge the loan in the event of disability or death.

Remarkably, the proposed authority does not address the biggest problem in the federal system: it does not enable students to discharge student loans in bankruptcy. Moreover, widespread concerns about “profit” made by the federal government on student loans will likely spread to this statewide authority, since as the Government Accountability Office recently pointed out, it is near impossible to accurate project the expenses of these programs to ensure that costs are covered and no profit is gained.

 Am I naïve to state politics to suggest that anything but this bill is possible? Absolutely not.  While the bill offers market-based solutions that ought to appeal to conservatives, those offered are not the only options.  Moreover, the fact that not a single Republican has endorsed the bill suggests that catering to the Right is not a successful political strategy.  It is far more important to provide the thought leadership required to making college affordable in Wisconsin and map the pathway forward than to look backwards and react to past mistakes.  

 That said, assuming the bill will be pursued, I offer the following amendments.

1.      Instead of deductions, use tax credits, which are notably more progressive. If this is impossible, at  minimum ensure that the deductions for debt are phased out at higher income levels.

2.      Limit the deductions to debt accrued while in undergraduate education and further limit it to students who did not complete their degrees. This will focus the effort on debtors most at risk of financial insecurity.  There is little chance that it will incentivize students to leave school without degrees; the payoffs to those degrees remain strong and surveys indicate that no one who will drop out actually plans in advance on doing so.

3.      Require an experimental pilot program to establish a basis of evidence of effective loan counseling.  The federal government already requires all Title IV institutions to provide loan counseling and yet there is no evidence as to which approaches are effective at helping students become better informed decision-makers.

4.      Give the Education Accountability Board the authority to require the for-profit colleges in the state to provide the same information currently demanded of not-for-profits.  Furthermore, mandate that the non-Title IV for-profits, which are not required to do loan counseling currently, provide it.

5.      Adjust the reporting requirements so that increases in the full costs of attendance at Wisconsin colleges and universities, appropriations, and changes in the allocation of grant aid (both need and merit), are described in the same report that describes student debt.  

There are numerous alternative approaches to addressing Wisconsin’s student debt problem.  First and foremost, there must be a strong effort to ensure that all eligible residents are aware of the existing income-based repayment plan offered by the federal government.  Take-up is low nationwide and awareness in Wisconsin is low.  A public/private campaign to increase participation would help reduce delinquency and default rates.  It would also be beneficial to instigate community investments in effective tax preparation and financial counseling to help families manage the resources they do have and ensure they are accessing all available benefits.

Most importantly, I strongly recommend that Wisconsin invest in helping students complete their degrees.  Debtors without degrees are in the greatest pain. If they complete a program of study their chances of success in the labor market increase tremendously.  Across the nation, both Republicans and Democrats are pursuing this pathway by making community and technical college education tuition-free.  Such a plan is not very costly (in Mississippi, legislators are looking at a plan that costs just $4.5 million a year) and it holds tremendous potential to improve the lives and financial well-being of former, current, and prospective students.  In contrast, the current bill appears to violate a core principle central to all good policymaking: First, do no harm.  We can, and must, do better.

 

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