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Game of Loans

By | June 23, 2014
President Obama signs executive order on June 9, 2014

President Obama signs executive order on June 9, 2014

On Monday, June 9, President Obama signed an executive order to expand the Pay As You Earn program enacted in 2010. The order extended the current system that caps monthly payments from student loan borrowers at 10 percent of their discretionary income. According to the new iteration of the program, the government will forgive the debt in 20 years for private sectors workers and in 10 years for public service workers. The executive order extended the program to those who borrowed before October 2007 and have not borrowed since October 2011. In a budget proposal, Obama estimated the expanded program will cost $7.6 billion in the first year. Obama also announced a plan to negotiate with federal student loan services to devise a strategy to aid borrowers and avoid defaults on student loans.

Senator Elizabeth Warren (D-Mass.) has also pushed for student loan debt reform in the Senate. Her Bank on Students Emergency Loan Refinancing Act, endorsed by Obama, aims to refinance outstanding student loan debt at the lower interest rates currently offered to new borrowers. Warren’s bill reached a roadblock on June 11 as Senate Republicans blocked it from moving forward, in large part because it relies on a tax increase on wealthy Americans. Shortly after the 56-38 vote, a frustrated Warren stated at a press conference, “We’re not giving up.”

Regardless of party principles, Democrats and Republicans must work together to solve the problem of rising and outstanding student loan debts. University of Michigan Professor Susan M. Dynarski’s paper showed that, in 1998, offering $1,000 in grants increased the probability of students attending college by four percentage points. Offering loans with guaranteed forgiveness mirrors the aid from a grant by greatly minimizing the risk of the loan. Prospective students will have the benefit of cheaper loans and the insurance of loan forgiveness, which will incentivize them to continue their education. The consequently better-trained labor force and increase in consumer spending after refinancing, due to more disposable income for those with refinanced loans, will push the U.S. economy forward toward full employment.

Losing Our Lead

Many Republicans contend that neither Obama’s executive action nor Warren’s bill addresses the real problem: rising college tuition rates. Instead, Senate Minority Leader Mitch McConnell (R-Ky.) claims the president and Senate Democrats “want an issue to campaign on to save their own hides this November.” However, in sticking to party principles, the Senate and the House put America at risk of falling further behind other nations economically.

In the United Kingdom, student support packages first included student loans in the 1990-91 academic year. By 1998, this evolved into a repayment system, similar to Obama’s, in which graduates paid back 9 percent of their income over £10,000, and eventually outstanding debt was forgiven. Since then, both the threshold income level and the time after which debt is forgiven have changed, but the basic plan has remained intact.

According to the Organization for Economic Cooperation and Development’s report in 2011, the United Kingdom has inched closer and closer to the United States—39.4 percent versus 42.5 percent—in terms of the percentage of the population that has completed tertiary education. In the younger age group of 24-35 year olds, the United Kingdom now has a higher percentage of college graduates than the United States. Furthermore, the OECD report revealed that between 2000 and 2011, the United Kingdom’s average annual growth was more than double that of the United States—4.0 percent versus 1.4 percent. GDP per capita in the United Kingdom also grew faster from 1997-2010 than in Italy, Japan, and the United States, none of which have a similar loan program to the United Kingdom’s.

Obviously, correlation does not ensure causation, and many factors determine a country’s economic performance. Yet it is worth noting that, in the decades following reform similar to the Pay As You Earn program, the United Kingdom underwent a spike in its economy as its labor force increased in education. Even at the peak of the recent global recession, the United Kingdom maintained an unemployment rate in the single digits, whereas the United States’ unemployment rate reached double digits.

With 37 million Americans carrying student loan debt and Americans owing more than $1 trillion in student loan debt, the United States has fallen behind in education investment. Warren calls this debt a “crisis that threatens our economy.” Although Obama’s plan risks more national debt and Warren’s bill calls for higher taxes on wealthy Americans, the benefits outweigh the costs. To remain competitive in the global economy, the United States needs a more skilled and better educated labor force.

Rewriting the Playbook

Complexity has often proven to be a flaw in government, yet it may be the way out of the partisan gridlock over student loans. Theoretically, Warren’s bill follows the basic principles of supply side economic theory by improving labor productivity. However, her plan loses any right wing support as its funding comes from tax increases. Instead of a solution as simple and alienating as raising taxes to fund refinancing student debts, Congress needs to find a trick play that will please both sides and fund a much-needed solution to the student loan crisis.

Rather than relying on tax increases, perhaps Warren’s bill can be funded by savings accumulated by retrofitting government buildings. Similar to President Bill Clinton’s Home Energy Affordability Loan and the ideas he champions in his book Back to Work: Why We Need Smart Government for a Strong Economy, the government could begin retrofitting all public buildings. The initial spike in government spending would save money in the long run by reducing energy costs—covering both the costs of retrofitting and those of refinancing student loans. Thousands of retrofitting infrastructure jobs would be created and could stimulate the economy as President Franklin D. Roosevelt’s public works programs did after the Great Depression. Additionally, resulting energy efficiency would help the environment.

In a report on retrofitted New York apartments, Deutsche Bank Americas Foundation and Living Cities found that retrofit changes led to 19 percent savings on fuel bills and 10 percent savings on the total electricity portfolio. Furthermore, the Rocky Mountain Institute found retrofitting of the Empire State Building led to a 38 percent reduction in energy use, 252 new jobs, a 105,000 metric ton cut in carbon emissions, and annual savings of $4.4 million.

Meanwhile, according to the Chicago Climate Action Plan, retrofitting 400,000 buildings in Chicago to carbon reduction goals would cost $2 billion. The federal government oversees about 500,000 buildings nationwide, and these buildings spend about $7 billion per year in energy. Using the same price estimate as the Chicago Climate Action Plan, retrofitting 500,000 buildings would cost $2.5 billion. A 15 percent saving on the $7 billion spent on energy costs would spare the government $1.05 billion a year after the 7-12 years it typically takes public buildings to obtain simple payback. The $1.05 billion in savings would pay for the $2.5 billion retrofitting itself in about three years after payback, approximately 10-15 years.

The Congressional Budget Office and the Joint Committee on Taxation concluded that Warren’s bill requires $58 billion from 2015-2024. At the projected savings rate from retrofitted buildings, it would take an additional 56 years to fund Warren’s bill. However, the government could use money from interest rates on student loans and encourage state governments to retrofit and contribute to the bill to shorten the time until payback. Seemingly an arduous and lengthy process, the retrofitting would benefit the country greatly in the long term by enabling refinancing of student loans, creating a greener infrastructure, and saving money after payback.

Unfortunately, partisan politics may still get in the way of compromise solutions like retrofitting. Democrats prefer the quick fix of funding refinancing through taxes, and the GOP may fundamentally disagree with taxing or borrowing to finance the retrofitting projects. However, the initial Keynesian-favored spending through borrowing will also push the supply side—increasing labor productivity through a more educated labor force. Ultimately, this option would solve problems near and dear to both parties, on issues ranging from job creation to environmentalism.

Retaking the Lead

Such unconventional problem solving has never been more necessary. The United States’ days of leading the Space Race seem like a far cry from its present. The U.S. has fallen from its perch as the global leader in innovation and education: the World Economic Forum places the United States 52nd  in quality of mathematics and science education, and only fifth in global competitiveness. Moreover, the 2009 OECD report ranks the United States 27th among developed nations in the proportion of undergraduate students receiving degrees in science or engineering. Without a focus on improving education, the U.S. could continue losing its lead as a global innovation leader. However, with funded student loan programs, America can equip its labor force to enter STEM fields, which present a clear path to economic growth.

STEM jobs are in global demand because of the recent and rapid innovations in technology, presenting a critical opportunity for economic growth. A U.S. Department of Commerce report projects STEM jobs will grow by 17 percent between 2008 and 2018, whereas non-STEM jobs are projected to grow by merely 9.8 percent. Furthermore, the report notes that STEM workers made 26 percent more than non-STEM workers, and that STEM workers only faced a 5.3 percent unemployment rate in America in 2010, while the national unemployment rate was nearing 10 percent. Higher education plays a key role in this distinction: more than two-thirds of STEM workers hold at least one college degree, while less than one-third of non-STEM workers do.

On the bright side, the White House appears to have recognized the need for broader and more accessible STEM programs. President Obama has challenged the country to prepare 100,000 new, effective STEM teachers as part of a coalition known as 100Kin10. Furthermore, the president is pushing federal investment in STEM fields, while also pushing underrepresented groups into STEM fields through mentoring programs and partnerships with organizations such as NASA and the Department of Energy. Undoubtedly, as more students are able to pursue higher learning due to the ability to obtain cheaper loans, many will fill the new STEM programs created by the Obama administration.

Opening the door to higher education can enable the United States to reclaim its position as the global economic leader. Both a rise in liberal arts educations and an increase in STEM studies can bolster the U.S. economy and help America regain its status as the hub of innovation and technology. Here, Obama’s loan repayment plan will be critical. Giving all Americans the financial ability to attend college may be the impetus necessary to fuel America’s competitiveness in this era of emerging markets and rapidly-changing technology.

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