On Wednesday Oct. 16, Professor Karen Dynan gave this year’s Goldman Lecture in economics on the topic of the student debt crisis, titled “What’s Wrong with Student Loans (And How to Fix It).” Dynan, who is currently a professor of economics at Harvard University, was appointed by President Barack Obama to be Assistant Secretary for Economic Policy and Chief Economist at the U.S. Department of the Treasury from 2014 to 2017. She has an extensive background in macroeconomic policy from her work as a staff member on the Federal Reserve Board, a senior economist for the White House Council of Economic Advisers from 2003 to 2004, and as vice president and co-director of the Economic Studies program at the Brookings Institution from 2009 to 2013.
Dynan began the lecture not by discussing student loans but by talking about her experience in public service. She expressed that it is “important for Wellesley grads to take on public service roles.” She continually emphasized the importance of macroeconomics, in particular, as a tool for helping people avoid financial instability. “If you care about people, you should care about understanding how the macroeconomy works and how to use macroeconomic policy effectively,” she said. She noted that it was at the Fed that she realized she “could be a policy person without being a political person” because “[their] job, as economists, was simply to get the right answer.” From there, she launched into explaining student loans, dividing her lecture into five parts.
She began by asserting that it is “desirable to have a federal student loan program.” Dynan pointed to research from her former Brookings colleagues Adam Looney and Michael Greenstone, which found that for most people attending college is worth it even considering the cost. “The average college graduate earns close to $600,000 in a lifetime more than her [high-school educated] counterpart.” She added that unemployment rates for people with college degrees tend to be lower than the unemployment rates for people without college degrees, and even in recessions, unemployment rates for people with college degrees rise slower than unemployment rates for those without. Without the federal student loan program, U.S. borrowers would have to rely entirely on private loans, meaning that low income borrowers, those with “weak or limited credit histories,” and those without “concrete collateral payments like a home or a car” would get charged high interest rates or would not receive the loans at all. The federal student loan program, on the other hand, has low interest rates and ensures that “access depends on [whether] you attend an accredited institution.”
“Too many student borrowers are struggling to pay their loans,” Dynan acknowledged in her second point. Outstanding student debt has increased considerably, especially in the last two decades. Dynan finds it concerning that older households still struggle to pay off student debt decades later and that there are striking racial disparities in the distribution of student debt, with black students being more likely to take out loans and to have more debt. She believes it will take “many years before we see the long term consequences of all this debt.” She noted emerging patterns, such as low home-ownership rates among people in their late twenties and early thirties and the increasing rate of adults in the 25-36 age-group living with their parents. Statistically, defaults on student loans have risen since the recession and have remained high, but Dynan pointed out that looking at default rates alone understates the underlying issues. According to the statistics Dynan cited, 21% of borrowers are still in school or in their grace period, during which time students do not have to repay their loans. Meanwhile, 42% of borrowers are in default. Even among those who are paying off their debt on time, some are only able to do so because of income-driven repayment plans (IDR). For people whose income is low enough, this plan reduces monthly payments for up to 25 years, with the remaining balance being forgiven, but this involves “extending the terms and paying more interest.”
Third, she noted that “the [current] student loan program has some very specific problem areas.” For-profit institutions account for a higher share of student loans than they did approximately two decades ago, and students at for-profit institutions tend to be high-balance borrowers from underserved populations. High balance borrowing has also increased, in part, due to the availability of PLUS loans. PLUS loans, which are “determined by the cost of attendance ,as determined by the school,” are available to parents of undergraduates and graduate students. Exacerbating matters is the fact that the PLUS program is most utilized by “parents that have little or no ability to repay, especially minority parents.” In the past, most high balance borrowers were funding professional degrees ,such as medical degrees and law degrees, and had low default rates. While default rates for high balance borrowers are still comparatively low, Dynan said, repayment rates are slowing for undergrads, parents, and for-profit students.
After explaining the problems with student loan policy as it stands, Dynan offered potential solutions to the current situation. “Well designed reforms within the student loan program could significantly cut costs,” she believes. She suggested the U.S. “should consider switching to a system where IDR is the default and it is done through payroll withholding,” making IDR less “administratively burdensome” and more along the lines of systems that currently exist in the United Kingdom and Australia. She also seeks reforms that “impose more accountability on higher education institutions,” suggesting a “risk sharing” proposal in which “schools for which borrowers collectively are not making good progress are subject to a continuum of penalties,” believing that such potential penalties “would incentivize schools to deliver more value.”
Finally, she stated, “There may be trade-offs between making the federal student loan program safer and improving access to higher education.” Though accountability on higher education institutions might “encourage them to change practices such that fewer students struggle to pay their student loans,” it might also give schools more incentive “to avoid admitting riskier prospects,” meaning students from poor and underserved backgrounds.
At the same time, she believes that “policy can limit these trade-offs.” Risk-sharing programs can incentivize schools to serve low-income students, for example. She also pointed to research suggesting that when predatory institutions no longer exist, students will switch to other schools. To conclude, she believes that these reforms, combined with more grant aid and more funding to community colleges can ameliorate the student debt crisis as it stands.
Audrey Ballarin ‘23 said in a statement to the Wellesley News that she “appreciated Professor Dynan’s focus on policy, especially her recommendation to increase funding for community colleges.” Ballarin also likes “that [Dynan] highlighted the strength of community colleges in providing both academic and vocational training.”
According to the Wellesley College Admissions and Financial Aid website the average student debt for all four years at Wellesley College is $16,122. The average student debt for four years at a nonprofit private college is $32,600, according to the College Board.