Rohit Chopra and Susan Dynarski: Is there a student debt crisis?

>> Good afternoon, everybody and welcome. I'm Susan Collins, the Joan and Sanford Weill Dean here at the Gerald R. Ford School of Public Policy, and I'm delighted to see all of you with us here today. Before I begin, I'd like to thank the Education Policy Initiative and its co-directors, my colleagues Brian Jacob and Susan Dynarski, for planning our event today which I know you, like me, have been looking forward to. I'd also like to acknowledge the Center for the Study of Higher and Post Secondary Education, whose director, Michael Bastedo is here today, as well. And the Charles H. and Susan -- and Charles H. and Susan Gessner for their generous support of today's program. We're grateful for all of those engagements. Well, today we will address a very important question -- is there a student debt crisis? Many of us are well-aware of the ever-expanding student loan market. And the latest estimates are that nearly 40 million Americans are laden with perhaps $1.3 trillion of student debt. And one in four of the borrowers is either in delinquency or in default. Last year's graduating class had an average of $35,000 in student debt. Those are striking numbers. The Obama Administration recently announced two substantive policy changes, and presidential candidates have focused on a variety of alternatives of ways to lower the debt burdens. Well, today's speakers are two of the leading voices on student debt reform, Rohit Chopra and Susan Dynarski. Rohit Chopra was recently named Special Advisor to the U.S. Department of Education. He previously served as Assistant Director of the Consumer Financial Protection Bureau, where he led that agency's work on behalf of students and young consumers. The Secretary of Treasury named him as the agency's first student loan ombudsman, a new role that was established by the Dodd Frank Wall Street Reform and Consumer Protection Act. Chopra has frequently testified before Congress on alleviating student debt burdens and private student loan reforms. Susan Dynarski is a member of the Ford School faculty and a colleague. She's a Professor of Education, Public Policy and Economics here at the University of Michigan and also Co-Director of the Ford School's Education Policy Initiative. Susan is one of the country's top advocates for accessible higher education. She has testified before Congress on education and tax policy and is widely consulted on student aid reform, including at the Federal Reserve, the White House, the Departments of Education and Treasury and with the Council of Economic Advisors. She also writes for the New York Times, and if you're on Twitter, I encourage you to follow @dynarski for a really informative and witty commentary. First, just a word about today's format. First each of our panelists beginning with Susan will kick things off with brief opening remarks. I'll then have the pleasure of moderating a conversation with our two experts. I'll start with a few questions of my own before opening things up to the audience. Please write your questions on the notecards that you should have received as you came into the room, and we will have volunteers circulating to collect them from you during the program. And if you're watching online, please send us your questions via Twitter, using the hashtag epistudentdebt. So let's get started. Susan, the floor is yours.

>> Thank you. So I'm going to start with data. So I want to start out by talking about if there is indeed a crisis in student debt, where is it? So I -- we're at a university, in a school of public policy, so we should be addressing this question with data, as opposed to, say, introspecting and thinking about our own experiences or those of our friends or our colleagues. And also instead of maybe just reading the latest dramatic piece in the news about a distressed borrower. But rather by analyzing the data. Now data had been a problem in this context, which means that in part, anecdotes have filled the void. So if there are not good data on a problem, well then ,theorizing and anecdote are going to fill the void. The Department of Education, which is responsible for the loans, federal loans in this country, has not been terribly forthcoming in compiling and releasing to the public information like who borrows, who defaults, their experiences. That's changing a bit. And as of this past fall, we actually have some excellent data on debt, default, loans, for people who borrowed basically since the last '90s or so and right up to the present. So what I'm going to say here is based on the analysis of those data. So what do those data say? Well, first of all, they say that you should erase from your mind if you're thinking of who the face of the student debt crisis is, you should erase from your mind the image of a Yale graduate or a NYU graduate or a Columbia graduate or even a UM graduate. In fact, anyone who graduates with a BA is relatively unlikely to default. So folks who graduate have quite low default rates. The default rate also drops for school selectivity. So the more selective the school is, the lower the rate of default. For schools like UM and Harvard and Columbia, about 5% is what the default rate is. Okay? So that's what it was before the recession. That's what it was during the recession. Folks who graduate from elite schools are pretty well buffered from economic distress. Not everybody -- right? But this is -- we're talking about averages and tendencies. So who should you -- you also should not think of folks who are going to graduate school. So people who graduate -- so yourselves, right? So people who graduate -- I know we don't like debt, but the question is whether it's the face of the crisis in our country. So nobody likes debt. Everybody -- here's an economist speaking -- everyone would rather have stuff free than pay for it. Okay? That's an economic principle. You've got your certificate now in economics. So grad students borrow the most, but they're also the least likely to default, because they make good money, compared to other folks, right? So graduates have a very -- people who borrow for graduate school are unlikely to default. Graduates of select schools like UM might borrow around $30,000 total, is the typical debt for people graduating. But they tend to make good money. And so they can support a debt of $30,000 and pay it off. Okay. So if it's -- that's who it's not. And one thing to note, you know, that -- I just listed the profiles of the people who focused on the media. So when the media focus is on student debt crises, the people they profile are folks at Columbia and NYU and people with graduate degrees. So in this week in Slate, a graduate of Connecticut College who also has a graduate degree from Penn talked about their experience with $200,000 in debt. So that's a vanishingly unlikely amount of debt. It's -- very few people have that much debt. And people who graduate with graduate degrees tend not to default. There is also a lovely article in the New York Times that enraged me into writing several upshot posts, from a guy who graduated with not one, not two, but three degrees from Columbia University and subsequently defaulted on all of them and was urging others to follow his example and setting him up as sort of a leader of the student loan revolt. These are not the victims of the student loan crisis. So who is? Who is? Okay. So the face of student loan distress is a dropout from a non-selective college. So a person who spent a year or two at a for-profit college, proprietary school -- like Corinthian, University of Phoenix or a community college or a non-selective four-year college. This is all based on that data. If you look at who is defaulting, that's who it is. They're first-generation college students. They grew up poor. They entered college late -- in their 20s and 30s, to improve their job market skills. Many of them were running away from the weak job market of the recession, and they went to one of these schools to try to tool up so they could get a better job. They borrowed relatively little because they spent relatively little time in school. Right? They dropped out after a year or even six months. So borrowed maybe $5,000 to $10,000 a year -- no, sorry, total -- in total they borrowed $5,000 to $10,000. They enter with low earnings -- $18,000 a year. They exited with low earnings -- $20,000 a year. Right? So they entered poor; they left poor. And this typical loan in default is less than $10,000 -- more around $5,000 is the typical loan in default right now. Forty-four percent of the dollars in default are coming from for-profit institutions, people who borrowed at for-profit colleges. Nearly a third of students who entered college during the recession and who borrowed to attend a community college or a for-profit college defaulted within five years. As I said, for the people attending a selective BA institution, it's 5%. Okay? So the problems are at the community colleges and at the for-profit institutions. So, you know, this is who I have firmly in mind, when I think about victims of a student debt crisis -- low income, first generation students attending a community college or a for-profit college, students of Corinthian College who were defrauded into borrowing for what was ultimately a non-existent education, a person laid off from their job who tried to pick up some skills at the local community college and borrowed to do so and is exiting with very low earnings. And in my opinion, if there is a crisis of any sort, it's a crisis in low earnings in our country that we have -- we lack a safety net. We have a very large number of people who are earning very low earnings and who cannot handle even $5,000 in debt, as a result.

>> Great. So first thanks, Sue, for having me and thanks to all of you for being here. As the dean mentioned, I've recently joined the Department of Education and am just a few days into the job. So we'll caveat that my comments today represent my own opinions. Now, the way -- I often got a question, [inaudible] why do we have student loans? And actually I always answer it's important to remember we have student loans for a very good reason, and that is to ensure that people who might not be able to afford to go to college can make that investment into themselves, which can pay off very, very big when done right. But, you know, things have changed so much in the past 10 years that it's helpful to think through that. Now, many people who are concerned about student debt -- many of you probably in this room might come from the education world. I probably come from the other stepchild of this world, which is thinking about it from a consumer financial markets perspective. And those of us in -- from our lens were really colored and shaped by the foreclosure crisis that we saw in the past several years. And for those of you who are from Michigan, you probably know very well that problems in the mortgage market absolutely devastated parts of Michigan. And this was not unlike other parts of the country. Now, today we have a mortgage market that is very, very different but I think less discussed was some events that really changed the student loan market too. And I think it's worth mentioning some of them. So one, again, to the financial crisis, there is no question that the financial crisis had two real big effects. One effect is that it really eroded family wealth. Actually, trillions of dollars of household wealth evaporated in the form of home equity, in the form of retirement savings. So many families felt more stressed about being able to contribute towards their dependent child's education. And at the same time, the financial crisis hit state budgets very hard. And there was some very substantial cuts to public higher education. I want to echo something Sue said. When you think about who goes to college, you really want to remember that the biggest group is actually those who attend public colleges. So the mix of families feeling more financially stressed and higher tuition -- which by the way is not just a, something that's recent. I understand that 40 years ago, undergraduate tuition at the University of Michigan was $800. Now, inflation adjusted, that's probably about four or five times higher, but the tuition for undergraduates is well more than four or five times higher than $800. And so, but I think it really pronounced -- the crisis really pronounced that effect. And I think we've seen substantial in reliance on student loans. You know, the Secretary of Education has noted that student loans became kind of the norm, at a certain point. So what else happened, I think is important context. And I think that we forget -- there was a lot of talk about the rescue of the financial system due to gambling on Wall Street. But there was also a huge change in our federal student loan system, which was a law that essentially led to the government purchasing a huge amount of federal student loans. Most federal student loans before 2010 were originated by financial institutions, stamped with a government guarantee, and now those loans -- much of them are owned by the government. And in 2010, the president got a law passed to essentially end this bank subsidy program, and now when you borrow student loans, it's all directly through the Department of Education. So all of this put together of more borrowers, more students relying on student -- on Pell Grants, on student loans combined with the government taking these unprecedented actions really has in some ways created a lot of opportunities that the policymakers and the research community are thinking about all the different tools that can really be used to make improvements to the system. And I think that we're at a place that we need to keep helping people go to college, but we need to remember that the macro environment, as well as some poor performing programs are leading to people -- many people being in very high levels of distress. And I can't tell you enough that it's -- what I would push you to remember is when somebody is delinquent on their student loan, it is often just one sign of a broader array of shocks that are happening in their life: fighting to keep paying rent, struggling to make payments on their car loan. And thinking through that as a whole consumer, about the trauma that they're managing is something that we always have to keep top of mind. Now, that being said, there's a lot of policies that are being pursued to not only address the borrowers who are struggling but also to inoculate the broader structural issues of college being hard to afford. And just a few of them I'll mention. You know, there is now new repayment plans, pay as you earn. This is a broad expansion of affordable loan modifications and repayment plans that allow borrowers to pay a reasonable amount of income to mange those times of distress. My understanding is that there's about 5,000 people enrolling in that a day, per day on average, and we have to figure out how we can keep them in there to manage through that. There are also new ways for borrowers to get out of default on their federal loans. New rules that have been put in place allow borrowers to get back on their feet through loan rehabilitation, and we need to make sure that borrowers are not hiding and that they know there are options for them. And then of course, there has been a lot of interest and activity on enhancements to student loan servicing. Now, student loan servicers are the companies that help collect payments and manage your loans and, you know, there's a lot of work to do to make that process work better. There's been -- the president enacted a Student Aid Bill of Rights that called for a number of potential improvements to student loan servicing. And that might be an important way -- and there's good work being done to help borrowers kind of, to navigate through that process. And then going forward, we have to think about how to inoculate future generations to be able to afford college and not be deterred by loans and the high sticker prices. And just a few of them -- you know, ending some of those bank subsidies for the old federal loan program created money to invest in the Pell Grant program. There are -- a lot of people are taking a look at the role of the creditors and state oversight agencies. As Sue mentioned, the collapse of Corinthian Colleges has raised a lot of questions about the role of how we do oversight. And many of you might have heard of the Administrations Gainful Employment Initiatives, which essentially is a regulatory framework to prevent schools from graduating or even not graduating students with unaffordable levels of debt. There's broader conversations all over society, inside and outside Washington, about making community college free or more affordable. And I think -- I would encourage all of you, as you think about this issue that there's not one initiative that's going to be a cure-all. It is a series of tools to fight a discrete set of problems. Focusing on just college affordability won't really fix issues for people struggling today. And the reverse I acknowledge is true, as well. So lots of hard problems to tackle but big solutions are needed.

>> Great. Thank you very much for helping to frame this very complex and nuanced set of issues. They are of vital importance, and I say that both from my perspective as a dean of a policy school and also from my perspective as a parent of two college students. And so there are many, many issues on the table. I, as I mentioned before, will ask a couple of questions first to start things off, but I encourage you to use the notecards for us to open things up to the audience participation. Perhaps the place to start is to ask -- to get more of a sense of just how worried should we be about this crisis anyway? Rohit, you talked about the mortgage loan crisis, at the beginning of your remarks, and certainly some have suggested that what's happening with student loans is a bubble that could be as concerning as the mortgage crisis was, as we all well know. How worried should we be about what's happening in student loans and with student debt?

>> Well, again, coming from the view of someone who's more of a financial services practitioner, I would -- I have a very maybe stringent definition in my mind of what a debt crisis is. A debt crisis like we saw on the mortgage market or as we see in parts of continental Europe or in Puerto Rico, is a very different animal. It is one where there is an immediate precipice upon where there will be some systemic change that will cause mass devastation very, very quickly. And the term "bubble," you know, also connotes an economic term that something will pop and will be very quick and dramatic. I do not think what we are seeing in student loans is one that's going to create rapid systemic risk, because there's really not close interconnectedness with big financial institutions that could reverberate through the economy. Now, that being said, those are technical terms, but there are many people in our country that it is a personal crisis for them that they cannot manage this debt. I will say I totally respect what Sue has shared with the data, but I wonder, are some of the borrowers who don't borrow very much but are in default, are they actually in debt on a lot of other instruments? Did they finance their education in other ways that may be not show up in the student loan data? So how I would answer that is maybe it's not a doomsday that we thought with the collapse of some of the large financial institutions with the subprime mortgages. But on a personal level, I think we have to ask ourselves, how can somebody who defaults on a student loan really recover and become someone who can participate in the economy and not be discouraged, and frankly, not to feel like a failure? Now, we've got to do a lot -- I don't want to debate over the word, what the status is, but I think we can all agree there's so much we can improve for individual borrowers and we need to know more about what the potential impacts are on the rest of the economy, but there may not be something immediate, but there's more to learn there.

>> [Inaudible] So I think I agree with everything Rohit just said. You know, a bubble emerges when an asset, for example, can get flipped over and over again and its price gets inflated. So think tulips in Holland. The Tulip crisis. Think of a house that continually gets flipped, and its price, you know, inflates, because people had expectations about -- you can't flip human capital. You can't sell your human capital. Right? You can't get the same sort of crazy and functionary effect. What we do have is a lot of suffering. And so I just wanted to make some concrete observations about what it means -- when we've got seven million people, eight million people, in default, what does that actually mean for individual lives? So somebody who's in default has an enormous blot on their credit record. What does that mean? Many landlords now do credit checks before somebody can rent. So they're shut out of parts of the housing market. If they want to buy a car to get to work because, you know, they're living in a neighborhood that's not where the jobs are. They need to drive to work. They're shut out of getting a reasonably priced loan for their car. And they have to go get a 18, 20, 25% interest rate loan, which further presses on their finances. Right? Many employers now check credit records, so they're going to miss out on job opportunities. And then of course, add to that the psychological stress of somebody calling your cell phone or calling your home phone or they're calling your relatives on a daily basis to harass you about your debt. So there's a lot of suffering, and that's bad. So I think of -- that is what the crisis is. We have people who went to school to improve themselves at our encouragement, especially during the recession. We provided a lot of subsidies, told people the right thing to do, job market's weak, go and improve yourself in school. And as a result, they're suffering. And it is a manmade crisis. And that's what I think of as the student debt crisis.

>> So, I mean, in terms of the magnitude, the mortgage crisis -- at the peak, the lending was -- the magnitude of the debt was close to 2/3 of the US GDP -- this magnitude is not at that level. Is that correct?

>> There's approximately -- I apologize if I'm not exactly right, but about 14, you know, in the low teens of trillions of outstanding mortgage debt. And what I always share is that in the subprime mortgage lending context, there was a set of risky features as part of those loans that lead to some potential cataclysmic events. And a lot of -- and finance kind of counterparty transactions, derivatives and other sorts of instruments tied to that. Now, there was in fact a subprime private student loan market that really blossomed in the years, just when -- subprime mortgage lending. Generally speaking now, most of the lending that is occurring is in the federal loan market where, fortunately, people have access to these income-driven repayment plans, so I think that understanding how the mortgage market unraveled is important, but there are also important differences. And I think one of the important lessons is looking at servicing. You know, how -- in my old role at the CFPB, we really, we regulated both mortgage servicers and student loan servicers, and I was quite struck, particularly with the private student loan servicers at the same types of deficiencies. Servicing is a tough business, but when it grows wrong for a borrower, it can really be quite devastating. And as Sue said, it can lead to some suffering. So I really encourage that there's a lot of interest in doing more to improve that piece of the puzzle.

>> That piece of that -- so it's sounds like both of you actually agree that this is not in the realm of the mortgage crisis in that sense. However, perhaps, in addition to concerns about the impact on individuals, there are broader economic impacts, in terms of economic growth. Certainly some of the things that you are suggesting -- each of you -- pointed to at least the possibility that there might be more aggregate consequences that we should be concerned about. I wondered if you would each comment on that before we shift gears to a different dimension.

>> So on that front, there's one fact that I didn't explicitly put out there, which is that the people who have the largest loans are the least likely to default on their loans. So it's a straight line relationship where the smallest loans are the ones most likely to default. So we here this -- the narrative tends to be loan debt is going up. It's 1 trillion, 1.2 trillion, 1.3 trillion. Defaults are going up. It must be that one leads to the other. So it must be that people are borrowing more, and because they're borrowing more, they're more likely to default. And back to this fact that the debts that are most likely to default are about $5,000. Okay? So these are not the numbers that we think of when we say, okay, people now can't married or they can't buy homes because of this debt. You know, it's not -- the people who have the most debt are the people who are currently the winners in our society. People who graduate with a BA, people who graduate with master's degrees, they're the people -- the only people whose earnings have been growing pretty steadily for the past decades; earnings of other folks have been dropping or flat. So there is a set of people -- these low-skilled, low-income folks with fairly small debts who were suffering, but as you alluded to, they have other debts as well. So we have a set -- we have a very large group of people who have terrible employment prospects. We don't have a sufficient safety net. They are a problem. Their problems are the important ones. The student debt may have been the needle that broke the camel's back I think is the better way to put it. It's not the burden that is causing the main problems.

>> Though I think Professor Dynarski's analysis is right on who's actually hitting the default, but I think there are reasonable people who have asked questions, the extent to which people are graduating with higher levels of debt, even if they're not defaulting. Many of those graduates may actually be located in metro areas where cost of living rents have gone up quite a bit. So I think query as to whether -- are they paying higher student loan payments, higher in rent, maybe not experiencing a huge amount of wage growth, and does that interaction, which we don't know too much about, does that have a impact on their ability to hit some of the other milestones? Some of the survey data of public opinion suggests that having a lot of student debt might change the way people think about saving for a down payment, buying a home. We don't really know the specifics of it. And I think as you have mentioned so many times, having better data about real -- about student debtors I think will help us really understand the problems. But I agree, think mostly about the people who have defaulted. Kind of like I think about the people not too far from here, where there was very high levels of foreclosures. People need to recognize that, yes, crisis from an economic term, maybe it's not there. But what's happening to, what happened to people in their foreclosed -- when they lost their homes and what happens to people when they default is, you know, is a personal tragedy. And dealing with that is something we have to tackle.

>> I want to follow up a little bit on that. Every dollar that someone's putting into a student loan is a dollar they can't put into something else. Right? So they can't use it to save or they can't use it -- so in that sense, it all has to add up in some way. The New York Fed, among others, had been sort of developing, putting on a narrative that really sort of pushed the idea I thought that loans were reducing the home ownership rates, for example. And from this newer data that we've got, it really looks like what's been going on is that more and more poor people are taking out loans. And therefore you see among those people who have loans, the home ownership rate is going down. This is a compositional effect. It's that people who never could afford homes are now appearing in the ranks of student loan borrowers. The people who always used to borrow, who go the elite schools, they're home borrowing rates have not changed. It's a shift in the composition of the borrowers that now includes a lot of poor people, as opposed to a casual impact of the student loans on people's home owning. So again, this data nerd in me, but you know these data have given us a much clearer picture about what's going on and -- okay, I'm going to throw out a question to you. I want to -- we've got a good snapshot now of what happened from like late 1990 to the present. How are we going to make sure that we keep seeing this information, as time goes on and that this isn't -- this door is not going to close again? How are we going to know whether we're in this crisis in five years, if we don't have new data on this?

>> And part of the things that many of my colleagues and I are thinking about is how actually can we be more transparent and routinize the release of data and information? And I think --

>> Which we do with mortgages very well.

>> Which we do with mortgages, and frankly, the college scorecard which you referred to, which includes -- I actually encourage anybody who's interested in education and student loan policy to look at the college scorecard because it actually gives you a much more detailed view, not only about debt, but also about earnings. And that's really the two sides of the equation that can really help us think about what's the next level of analysis beyond not only, do I go to college, but where do I go and where will that pay off? I think you're right, though, that there is an increasing need to make data available, so -- and that scorecard was a big piece of that, and I think we're going to do more.

>> So I am always happy to contribute to a plug for the importance of data, but in addition, as you were both alluding to, the importance of helping people understand what the data are telling them and so that they can, you know, can influence their own decisions in those ways. So a number of your comments have really highlighted the interactions among dimensions of people's lives and the interactions among the different groups who are participating in the loan markets is part of that complexity. So in addition to student borrowers and to various lenders -- of course, we also have the colleges and the universities. Some have said -- and I believe there it is actually research, including by the fed, that finds that as availability of student aid and student loans went up, that colleges simply raised their prices. And so that may be a kind of challenging dimension, and I would like to hear from each of you your views about whether that simply is how things would unfold, the support for the student aid went up and the universities and colleges simply raised their prices. And so that doesn't really help us address the challenge.

>> So I'm not ultra familiar with the literature on it, but my understanding is that there is some disagreement and a mixed view about whether the impact of the additional aid and loans on the price of college. I will say though that it's important to remember that the published tuition and fees that is out there is not actually what a substantial portion of lower-income people pay. And I think with more aid, the net price for many -- for several years now has actually stabilized against many sectors of higher education. So I don't know the answer to it, but it's obviously one that you know you'd want to know that effect. But I want to make sure it's clear that we -- what's the answer? What's really the answer? We have to tailor the programs so that they meet the policy goals, and the policy goal is for people to be able to go to college and advance ahead. But I think it goes into the question of the importance of research and analysis is just increasing every single day. Because frankly, sometimes when you release more information, new questions arise.

>> So my read of the evidence on this -- the best evidence at this point -- is that for-profit colleges indeed raise their prices when grant aid and loans go up. So their sticker price -- they don't give their own aid to people, right? Their sticker price is their net price. They're not giving scholarships to people. And their prices do go up when aid gets more generous. That the -- 80% of the students attend public institutions. At those institutions, what guides price? How much money the states are giving to them. Right? So if you look at how much public institutions are spending per student, it's been pretty flat. But what's changed is most of the money is now coming from the states and more money is coming from the students. So it looks like costs are going up, but really it's that --

>> They share.

>> Who pays for it? It's now the students rather than the state taxpayers. There is some evidence that schools that provide their own scholarships when the Pell Grant goes up will scale back on their scholarships and shift them to other people who aren't eligible for those scholarships. But the main action appears to be in the for-profits.

>> Thank you. Let me shift gears just a little bit. I think each of you in your remarks has talked about some of the either proposals or policy options that have been implemented, to try to address some aspects of the student loan crisis. And in particular, you've mentioned the income-driven repayment plans, and those of course allow borrowers to repay in installments and often over longer time periods. There have been proposals, and I think Sue, Susan, that you have been one to propose this, of a managed repayment plan through payroll withholding, and I'd like to ask each of you: how much of the problem do those kinds of policies really fix?

>> Well, I personally think that in a world where borrowers can pay as a percentage of their income, it's not a cure-all to college affordability and student debt. But it's an important weapon that a borrower can use to fight delinquency and default and avoid it by getting an affordable payment. And I actually think that's a pretty good weapon, and I want to make sure that, you know, for anybody who you think is struggling about it, they should know about that and I -- it's important that they're able to easily enroll and re-enroll each and every year. They've been some -- the president has directed the agencies to look into multiyear certification of income-driven repayment plans, but I would say for the purpose of tackling delinquency, it is pretty powerful. And, you know, I urge people to figure out, are they learning about it? And give ideas about how to improve it. Are their servicers telling them about it? And if they're not, like we need to hear about that so we can fix that.

>> I would say the very fact that we have seven million people in default, and the ranks continue to grow, indicates that the system of income-contingent loan repayment programs that we have is not working -- like basically none of those people should be defaulting. If they're very low income, you know, $18,000 a year, for example, if they were in pay as you earn, they basically wouldn't be paying at all. Right? So a lot of this comes back to like where the rubber hits the road. How do we actually implement these programs? And servicing sounds like such a boring topic -- like loan servicing -- boring. Right? But the fact is like how do you actually interact with the borrowers? How do you contact them? How do you work with them to get them into a program that works for them? Very same issue came up with the mortgages, right? So there's a big push from the feds for mortgage companies to restructure loans, to restructure the mortgages so that people would have more reasonable payment plans. And where it fell apart was like the implementation of it, getting the servicers to actually do it. And that's happening right now as well. I think, you know, frankly I think the big problem is that the Department of Education owns this enormous portfolio of loans. It's essentially one of the biggest banks in the country. But it's a service organization. It's not a financial organization. It's very good at giving money to students and getting people to college, and that's what it should be doing. It should not really be in the business of servicing a trillion dollar portfolio of loans. That -- who in the government collects money from taxpayers? Treasury does. It knows how to do that. I don't think ED knows how to do that. And I don't know that I would want to see ED turn into an organization whose focus is collecting money from people. So I kind of think that this business should be moving out of the Department of Education in somewhere else in the federal government. Rohit, what do you think of that?

[ Laughter ]

>> Well --

>> I love nothing in government [inaudible].

>> I will say though that, you know, the issues of engaging borrowers and getting the incentives right, it's hard, especially when using private firms, you know, there's going to be their own economic incentives. And also I would add that borrowers -- the process to walk through that -- many borrowers need that individualized counseling that I think sometimes is just hard to deliver for -- many companies may not be set up to do that, per se. So I don't really know what the right answer is. There have been --

>> Also they're not paid to do it. You know, they've got a contract with the Department of Education, and if the Department of Education is not paying them enough for the time that it takes to walk somebody through an enrollment in an income-based program, that's a contracting failure.

>> Well, the -- what we saw in the mortgage market was that many of those servicers were working for other financial institutions or for trusts and it just, it was, it did not work so well. So figuring out how that's worked, related to your point about payroll deduction, maybe there are ways to streamline the repayment issues, and in some ways -- I know you've done some work on automating how that might work. I think that's -- those are all concepts that we have to really think about. But what I want to make sure though is very clear is when a borrower is having a tough time on their student loans, there may actually be bigger issues that they're dealing with, financially speaking, that might have more immediate consequences. For example, getting their car repossessed or making rent. And I think we always have to remember that once people are in trouble, it is like a treadmill that sometimes gets faster and faster and faster. And so figuring out how to deal with all of these many explosions in your life is really hard, and that's why getting that -- getting those repayment plans clear and that people know about it and can easily enroll in it is just critical.

>> And even if we had my dream of a universal income-based payroll withholding, structured progressive system, it would not deal with fraud. So if there are institutions out there that are selling a product, charging people tuition, getting them to take out loans but not actually educating them, that's not going to get fixed by this. Right? So the regulation of the for-profit colleges in particular is not going to get fixed by there being an income-based program. Right? All it fixes is the back end. But how do we make sure that people are getting the educations that they're paying for? That is a separate issue that cannot be dealt with by income-based repayments.

>> That's right. Yeah, figuring out how to monitor them, so that they're not engaged in wrongful conduct. Just today, the FTC and the Department of Education took action, enforcement action related to DeVry. So of course there are issues of -- you're right. Those repayment plans won't solve it. I guess the other thing that I think is important to remember, there is a sense that everyone with student loans is having a tough time. And I actually think that's just not true. But there is a -- and for many people who graduate, make good money, sign up for auto-debit on their loans, they don't have any -- they have a good experience with repaying, but there are --

>> It makes me very happy to pay that loan every month. It's a good experience.

>> Well, in the sense that they feel like they know -- they feel like they know what to do, whereas I think when people are really struggling, that's really where it gets tough.

>> Okay. We're now ready to go to the audience. The first question is actually from Twitter. And we've actually had a nice segue to it. We've been talking a lot about the repayment approaches and mentioned that that's not going to fix everything. So this question is, is it possible to produce guidelines, such as borrow no more than x dollars if you're getting a degree in a particular field or if you're getting an associate's degree? What are your views about that?

>> I went first last time.

>> We essentially do have some of that, in that we have annual limits for undergraduates. Right? So we have some caps on it. We don't have caps on other loans, such as the Parent PLUS Loans, so pretty much parents can borrow the entire contribution that they're supposed to be -- that the formula says they're supposed to be making. And that's been causing lots of problems. Ditto with Grad PLUS loans. You know, if that were going to be -- so there's like, should we do that, and would government do it? I think it would be great if students had better information about what the payoff is to say a degree in Education or a degree in Social Work or a degree in Fine Arts that would guide them in how much they would borrow for that degree. You know on average, it's worth it to borrow to go to Medical School and not so much for some other degrees. Is the government going to do that? I think that's kind of what the College Scorecard is intended to do. Is the government ever going to have sort of hard caps that, oh, you know, you're getting a degree in animation -- not going to lend to you? I don't see it happening. You know, we just don't have that degree of regulation in our country. So I could see, you know, sort of an informal advising system, trying to promulgate that kind of information. Do I think practically we could have major by major, school by school loan limits? I don't see it happening.

>> So the -- a lot of people answer this through rules of thumb about, oh, you should roughly not borrow more than this. I think the challenge about doing that when it comes to degree type -- bachelor's versus associate's -- there are significant variations in earnings within those degree types. So I think when it comes -- this is just my own quick thinking, is by -- when it comes to vocational training, certificates, where there's pretty clear understanding on what the type of job you might earn afterward -- I'm sorry -- the salary you might earn based on that occupation, it may be simpler to come up with that's that right amount to borrow, so that it's comfortable to afford. I think actually when it comes to the number of undergraduates, particular four-year bachelor's degree, we all have to acknowledge that so many people don't really know what kind of profession they're going to pursue several years later. And that just makes huge complications in either developing rules of thumb or even, frankly, regulating on it.

>> Okay. The second question -- and this is a question related to data. And that is, what does the data tell us? What do we know about differences by race? And what, as well, is the kind of impact related to the HBCUs?

>> So I don't have that off the top of my head, but my understanding is that some of the survey data suggests that minorities, particularly African-Americans, borrow at higher rates and more. So the percentage of people borrowing and the average level of borrowing is higher. Now, that being said, my understanding is that there is not a similar framework like there is for mortgages, where we have much more granular information on how much people are borrowing and loan level data by race, ethnicity and some other -- now, that's, as I understand, so that's not in the facts though?

>> It is not. So the -- yeah, so there's a long history of racial redlining and so forth, and because of that, there are requirements that race is included on -- in mortgage applications. The data that I was describing to you, that gave all the insights that we now have, come from the administrative data that the Department of Education has on student loans, including the FAFSA, which you all know and love. And if you remember filling that out, there's nowhere on there for race. So those data do not -- nor for that matter the IRS data that it's matched to, again nothing in there about race. Right? So what you can say is you can try to piece it together -- I mean, the facts are that if you look at who attends for-profit institutions, nonselective institutions, community college -- disproportionately -- first-generation students disproportionately are going to be nonwhite -- going to be Hispanic, going to be African-American. Those populations also have much lower wealth levels. For a given level of income, if you compare an African-American family and a white family, the African-American family would have lower wealth, because wealth is something that builds over multiple generations. Right? So you need to have -- not only your parent, but your parent's parent and your parent's parent to have had good incomes for many years for you to end up with wealth. And also not have had it seized and appropriated in the institutionalized ways that it has been in the U.S. for African-Americans in particular.

>> Not just wealth, but income. I mean, we know that there's disparities according to some of the government data on what college graduates who are minorities are earning per hour after college versus their white counterparts. So I think there's a lot of mixture there, that raises some very serious questions about, how do we look at this in a nuanced way if we believe that education is a vehicle to social mobility?

>> So clearly more work to be done to understand those gaps. With the failure of Corinthian, what is the role of the government shutting down institutions versus letting the market take care of poor performing schools?

>> Yeah, so I think the -- when I was at the CFPB, I was heavily involved in a lawsuit against Corinthian which alleged a number of types of misconduct related to their private loans. And obviously, they have shut down. And I think it has raised some questions about, how does oversight in higher education work? And this is actually -- the history of oversight in higher education is referred to as the triad, where the federal government, accreditors and states all play a role in doing so. And I think there have been some legitimate questions asked about Corinthian being accredited to the very end, and what is the appropriate role of each? And part of what I'm working on is thinking about what is the appropriate role of the states in protecting consumers from those closures? Now, I think you actually were asking me a different question about the market closing it. You know, there are schools that do fail because of their own whatever it may be -- financial mismanagement or not being able to provide good programs. But I do worry that there are some programs that -- particularly where there might not be the level of transparency we would like and honesty in how they represent their programs to their students, that some of them may be able to longer than maybe the market would typically allow if students really knew the full truth about what that program was going to deliver.

>> I think it's also a big -- if you have an image in your mind of the for-profit college industry as being this competitive, private market, you're wrong. Right? Because they get 90% of their income from student aid programs, right, through loans from the government and from grants from the government. And then -- so there's a -- there's something called the 90/10 rule, which means that institutions can't get more than 90 percent of their income from the student aid programs. The for-profits tend to be right at that margin. And then they can get more money, though, from people who are getting veterans benefits. That doesn't count in the 90/10 rule. And this 90/10 rule is sort of one of the few ways we sort of like regulate the for-profits. But the idea that somehow that market forces are going to compete them out of existence, I don't think is accurate. The 90/10 rule, we sort of use as a way to make sure that no institution is completely living off of student aid, but it's a fairly weak regulatory tool. I don't know what you think of it, its future as a tool in regulating this [inaudible].

>> Well, I mean, one of the things that I've been closely following for years is we can't deny the fact that there are a number of people post-9/11 who have returned from service and have a generous -- an appropriately deserved GI Bill, and I think because what you've said about the 90/10 rule -- the 90 is only related to student aid programs that are part of Title IV of the Higher Education Act, but monies from the GI Bill and other, especially military related programs, they do not count. And the Obama Administration has actually supported closing that loophole, because it is, I think, leading to targeting of those individuals. And I just think the last thing we want to do is have someone use their benefits on a program that is not going to help them get ahead. After World War II, we -- the GI Bill was actually a key instrument of transitioning those from service into productive civilian life, and I -- many people believe it was part of the engine of growing the economy, of getting people in jobs that pay. And I think it's -- we have to fix that.

>> Okay. It's virtually impossible to discharge student to loan debt through bankruptcy. Doesn't that make that situation worse than the mortgage crisis, in some ways? What are your thoughts about that set of challenges?

>> Yeah, so the main area I've worked on in the student loan context as it relates to bankruptcy is the 2005 change, which treated private student loans like federal student loans. And it's worth noting that federal student loans do have income-driven repayment, which is a -- and I'm not a lawyer, but it's kind of like a Chapter 13 style repayment plan. But private loans don't have that. And a study published by the Department of Education, the CFPB, a few years ago showed that the change in the bankruptcy code did not lead to lower prices, nor did it lead to expanded access to loans. So because of that, it probably did not meet its intended goals. And it's something that, you know, needs to really be looked at again, as to whether it was an appropriate change. I will say, though, that I think bankruptcy is very well-known that's it not dischargeable. But I'm not sure if in any way -- what I talked about before about single issue cure-alls, I don't think it's in any way a panacea for what's going on, because many particularly young people, even if they could file would not, because of some of the other effects it might have on their credit. So when it comes to rather the federal student loans, I would like to see that people really are able to get into those programs that help them avoid delinquency and default.

>> And you can't get into an income-driven program for your mortgage. Right? If you lose your job and your earnings drop as a result, your mortgage company is not going to say, "Okay. Well, you know, because you're not earning much, low payments. Just stay where you are." And then that's -- but then you can do that with the student loans by getting into one of the income-driven programs. So indeed they're not just -- I mean, their reason, rationale behind them not being dischargeable in bankruptcy is that, you know, say you've got a bad year in terms of your earnings. It may well be that another five or 10 years, you've got a good year. You still have that education, and at some point, you could be doing fine. And as a society, we want to make sure that people who are doing fine are contributing so that they could be helping other people get access to college. Right? The idea is we've got a pool of money that comes from people who win and it works out. Let them contribute their money in the form of both taxes and their loan payments. And that get's recycled -- pay it forward to the next generation, to education them. So I would not want to see, you know, people doing these sort of strategic bankruptcies. How many times have Donald Trump been in bankruptcy, right? Where it's just a mechanism for the next deal. You want to make sure that people are paying their fair share towards, you know, the commonwealth.

>> So this question also from the audience kind of follows up, Susan, on the comments that you were just making about how you want to encourage people to move forward into higher education in ways that really improves their opportunities for the future. So the question here is, how do we prevent students from over-borrowing without discouraging students from enrolling in college in ways that improve their economic future? I mean, that's a delicate balancing act, and what are your thoughts about ways to try to get it right?

>> Well, I would say that for the, you know, the students, the borrowers that I've expressed the most concern about, the traditional access point, or first-generation students, low income students has been community colleges and has been public institutions. And keeping those -- and the way that we sort of protected students against very high risk in making the bet on college is by making those very cheap. You know, we keep public colleges very cheap, so that people don't have to borrow, go into debt, and they can therefore experiment. And if it doesn't work out, they're not left with a big hangover in terms of debt that they can't afford later on. With the states pulling back on their funding for public institutions, you know, even public colleges become a more risky place to go to college, because you have to end up having to borrow some. So, you know, sort of returning to community colleges as being essentially -- an essentially free access point for education I think is an important way to make sure that low income, first-generation folks can experiment with college. It's not going to fix everything. There are still going to be people who go to private institutions and who go to for-profit institutions who are going to borrow. So we still have to be thinking about, how do we deal with repayment? How do we make a well-functioning loan system? But I think having a vibrant, cheap, well-functioning community college system is one way that we keep that promise.

>> And to be clear, the consequence of not completing or, you know, going into community college and it not working out, is not as grave as if you borrowed a lot for a different type of school. So in some ways, it provides a lower risk gateway for people to not borrow much, but also frankly get that credential and maybe if they don't pursue further study that they're still able to get that wage increase.

>> And the other -- so one dynamic we saw during the recession was, you know, people are pouring back into school. They want to go to the community colleges. They're being underfunded, and they're oversubscribed. People can't get into classes they want to take. They can't get into the nursing program that they want to. And the for-profits took advantage of that. So we've got strong evidence that when community colleges are underfunded, for-profits grow. So in part that in itself is a manmade problem. Right? And it could be undone. But the next time we've got a recession or some other event that pushes more people into school, if we have an expanded capacity at the community colleges, the same thing's going to happen all over again.

>> So the U.S. university system is often compared to systems in our counterparts in other industrial countries. And, you know, and frankly the U.S. is a wealthier country than some of those countries which have not faced the types of repayment challenges, crises that the U.S. is grappling with. So what are the lessons? Are there lessons that we should be drawing from those experiences in terms of how to finance postsecondary education?

>> I mean, I have not studied the international comparisons, but my perhaps ill-informed view is that I think maybe most of those -- the differences in borrowing and financing is simply because college as a percentage of family income is dramatically lower in other countries. From my understanding, there's also many industrialized countries, particularly in Continental Europe have universities, that are essentially federally funded in ways that keep tuitions very, very affordable. Though I do know in some Anglo countries, that that shift has changed quite a bit. But I don't know the exact answer. But it's possible the simple answer might be explained for much of this.

>> There's another piece as well, which is that we -- I mean, the U.S. postsecondary system is just the land of second chances and third chances. Right? So if you didn't do well in high school, you can still go to a community college. And maybe eventually you'll be able to go to a university. In Germany, France, there's restricted access to the universities. So basically based on how you're performing in middle school, you're going to go to a high school that prepares you or does not prepare you for university. And the share of people who are going on to university is much, much lower. And as a -- just about everybody -- so I was meeting along with other people from the higher ed group over at the ed school, we went to England and were talking to our counterparts there. Their graduation rates in the universities are astoundingly high, because they restrict the share of people who can go to the universities. The best students can go, and they go on and they graduate. So it's a less risky proposition for the government to invest in them. But it also means that we're not taking a risk on the same number of people. So that's the other structural difference. So we give people the opportunity to take a risk, but then we place all the risk on them. And if it goes badly, what we're hearing is it goes very badly. And if we want to let people experiment, then I think we need to provide more in the way of essentially insurance against things going badly. One way to ensure it is to make it free. Another is to, you know, if you don't end up with a strong salary, you just don't pay. And that's what, you know, a well-structured, well-functioning income-based repayment plan would do.

>> So the next question is, how much of the problem here is just that the interest rates that are charged on the student loans are just too high? Elizabeth Warren has proposed making student loans at much lower percentage interest rates. What do you think?

>> The -- so I understand that from before 2012 or something, the rates were fixed at I believe generally -- 6.8% was a very common interest rate. Today, new federal student loans are tied to market conditions. So rates today for loans that you're taking out are much lower. Now, look, that's -- the interest rates, they're set by Congress. If Congress wants to lower the rates or increase the rates, you know, that's their prerogative. For many people, interest accrual is a substantial part of what they repay. But, you know, for those who are struggling badly and in default, in many ways they're not even close to not just paying the interest portion but ever getting near the principal portion. So I don't know -- it's one of the many issues about loan repayment, but as it relates to the default issue, I'm not sure that it's directly related. But I think many people have made the argument, and the interest rates during the Obama Administration did not go down, with Congress passing a law that many people did feel that that was a more fair outcome, to be tied to the broader interest rate environment.

>> I would say that, you know, lowering interest rates cuts costs for borrowers. That is undeniable. Does it deal with defaults in a targeted way? No. Because basically you're taking a subsidy -- so somebody's in distress right now, and you're saying, "Okay. Over the next 10 years, I'm going to reduce your payments by $20 a month." That is not the most targeted way to help somebody who's struggling right now with their repayments. Right? It really literally if somebody's got a debt of say $20,000 and you charge them 6.5% versus 4%, it will make a difference of maybe $20 or $25 a month in their repayment, in what their payment is [inaudible]. So it's not a -- and it's going to benefit everybody, including the people who have $100,000 in debt and are MBAs and are earning very good money. So they're going to get the benefit of that interest rate cut as well. So it's not targeted in the sense that it doesn't get money to people right when they're struggling nor does it get the money to those people who need it the most. A lot of the money ends up going to people who are doing just fine. So that's my main concern about using that as a tool to reduce distress and default is that it's not targeted.

>> But again it reduces the total amount you pay over the life of the loan which, you know, people want.

>> It makes people happy to pay less for things. Again, it supports that controversial economic principle.

>> So unfortunately this will be our last question, and it is a different type of option to really address this broader challenge. If we're worried about access to college and see student loans as an obstacle, why not just make college free? Yes, taxes will increase but wouldn't we be better off as a society?

>> Well, I think that's partially why there is an effort to essentially make community college available and free or near free, to be that gateway, given that if we believe as a society that getting that credential is critical for that person's future, then I think that's part of it. Now, I think you always have to think about the distributional effects of how you make it free and who you make it free for but, you know, there's no question that the increase in college tuitions has been something that feels like a real impediment to so many people, to get ahead. And they feel like they're putting a lot on the line and risking it. And there's really no other option for them, because going to college is the way to ensure -- in some ways, against poverty for many people in the labor force. So it's a tough -- dealing with college costs I think is also very personal to people, because they felt like they were able to go to school at -- you know, you always hear people saying, "Oh, 40 years ago, it was only $800 here." And when you go to school, it feels like such a gateway to your life, of how you chart out your career. Not only does it give you more earnings, but maybe even gives you more ability to -- in what you choose to pursue. So I think it's so important, which I -- being an economist sometime for doing and over-commoditizing higher education, that it's not just about a ticket to higher wages. It actually shapes a lot of us how we are as citizens --

>> I just wanted to say this is a Wharton MBA saying this stuff.

[ Laughter ]

Okay. Go on.

>> But I do -- I do feel that though. I feel that it's more than just purchasing some -- it's not like buying a factory that produces a certain amount of widgets. It's about, you know, who we are as people and citizens, too.

>> So I certainly want Susan to weigh in on this. But I'm going to push you just a little bit. So if I pull out one of the things that you said at the beginning of your response, I think it was, no, that you would answer no, we shouldn't just make college free, because of the distributional aspects.

>> Well, I don't know about that. I think that for people who can't really -- who are lower income, that the cost should not necessarily be an impediment. I guess I would ask, would making college free -- and again, I'm more on the financial services side than the education side, but would making college free come at the expense of limiting the ability for people to go? Would it lead to lower Pell Grants? Like what's the tradeoffs? Because in actual policymaking, those are things you have to weigh, is that what are you losing by doing that? And that's why -- I hate to pivot back to this, but the data-driven approach to figuring out what's the right interventions to meet all sorts of goals, I think that's -- I think the world we live in not just philosophical. It's also about implementing and figuring out costs and benefits.

>> I mean, historically in the U.S., community college was free. Right? So community colleges really grew and expanded during the '60s, the '70s, and tuition was nominal. You know, very small amounts. So we departed from that history during the -- we have been departing from that history as the states have disinvested. So free community college can be a return to where we were. Should we also make all the four-year institutions free? That would be tremendously expensive, and again, it would be poorly targeted. Right? So community colleges are where low income, nonwhite, first-generation students go as their first entry point. So that would be a way to sort of target resources on the people who most need education as a form of economic mobility.

>> Unfortunately, we are out of time. I am sorry we didn't get to all of the questions. But I do want to thank all of you for coming and for participating by offering such a wide, varied range of questions to our panelists. I'd like to thank our panelists for a very informative and wide-ranging set of perspectives. And please join me in thanking both of them for their comments and remarks.

[ Applause ]