Episode 12: Could the U.S. Make College Free?

d e x dot com, futures, options and spots. Trading involves risk and may not be appropriate for all investors. Hi, and welcome back to Bloomberg Benchmark, a podcast about the global economy. It is Thursday, November nineteen. I'm Tori Stillwell and economics reporter with Bloomberg News in d C. And I'm joined this week by my co host, Dan Moss, our executive editor for International Economics Coverage, who is a very early to join us from Sydney this week, and Ako,

our editor for Benchmark in San Francisco. Hey everyone, it's great to be here. Dan. When are you going to move me to the Sydney bureau. I've been asking for this for years. You know, those requests might just have escaped my attention, Tori. It's all about hard work down here. The stuff you've heard about Sydney being a lifestyle bureau, don't believe it for a second. Okay, that's great to know, Tori.

I have a two announcements before we start the show today. One, there have been a lot of really cool people tweeting with at us with feedback about our show. Special shout out here to Mike Lamp from South Carolina and Dan Levine and San Francisco, So please keep writing to us. We love to hear from you. And second of all, we are throwing a swanky cocktail party on December one in d C, U celebrating both this podcast and also the print section of Schmark, which you can find on

Bloomberg dot com. And it's going to be a bunch of economists and policy experts, DC journalists. And we're also holding a couple of free tickets to our loyal listeners. So if you live in d C and you'd like to come, send us a tweet with what you think of the show and we'll hold a ticket for you. We'll be announcing our Twitter handles at the end of

the show. So first off, we want to offer our sympathy to the people of Paris and Beiru and other cities that have seen terrorists attacks in the past week. What took place there was both horrendous and tragic, and often when events like this unfold, concern starts to percolate

that an economy will also be harmed up. Colleague Simon Kennedy wrote about this this week, and the people he spoke to concluded that in a large, diversified economy like France, it's very, very tough to find any kind of significant medium to long term economic consequence from these events. It doesn't mean they're not tragic, it doesn't mean there are

long term policy consequences. There may well be, But for those of us who are concerned that on top of the human tragedy there will be economic damage, at least you won't have to worry about the latter. Gosh, seems to be almost crassed to be talking about the monetary impact of what's such a human tragedy here, But you know, at the same time, if an economy worsens because of these attacks, it's definitely a double punch to a country

that's already reeling from these human losses. So I'm really glad to hear that even these attacks in Paris are unlikely to harm the French economy as a whole. That's right, Terrorists who want to disrupt modern economies often have a pretty difficult task ahead of them. So, transitioning back to the US, we want to take a look at an issue that's been grabbing an increasing share of headlines lately, and that is student debt. Presidential candidates are promising free

public college. Last week, you guys may have heard about it. There is this event called the Million Student March, and people are demanding tuition free public college, a cancelation of all student debt, and also a fifteen dollar minimum wage for all campus workers on top of that. So on today's show, we want to talk about a couple of things.

We want to talk about just how big the student debt burden is, and then we want to walk through this idea of free college, whether it's actually possible here in America now or in the near future, and could we actually have a US without student debt at all? And if not, what can we do to reduce the

student det burden. So let's start with the lay of the land on US student debt, that we can understand just what we're dealing with here and why this issue has become such a hated one, with some even calling it a cross tory. You have a couple of numbers for us here, right, For those of us who don't know student that really well, can you give us a

brief overview of how they work? Yes, so there are private sector loans that you can use, of course, but also most student loans in the US are federally guaranteed or are direct loans made by the Department of Education. You know, some are based on financial needs, with some interests or cruise while you're in school, with others it doesn't. Some are available to the parents of students, so there's

sort of a variety of loans to choose from. With most loans, repayment begins after about a six month grace period, and people generally have like a ten year window to pay them back, but that can be pushed out, especially when when the debt that you have is especially large.

So let's zoom out a little far. There is one point two trillion dollars abo outstanding student loaned it that's as of June, and so there's more student loaned it than any other type of household debt except mortgages, and the level of student loaned it has more than tripled over the past decade. Has a quality of education multiplied by the same factor over the same period, um, I would say that's a that's a lot harder to quantify,

but certainly tuition has been going up. A lot of that is because on a per student basis, states have been cutting back their funding of higher education for quite a while. You know, they don't have a lot of extra money floating around, So a lot of public schools especially have been using increased tuition revenues to replace declining

state funding. But with private schools, a lot of them lost a ton of money in the crash, and they're also spending more on things they didn't used to, more programs, facilities, research, all types of stuff, and they're also giving a lot more financial aid. This issue of student debt, it does seem in its scale to be somewhat unique to the US. In Australia, for example, for a couple of decades we had free f R double a tertiary education. Students now pay some of the cost of that, but it's nothing

like the figures bandied around for the US. How did it get to be this way? We do know a couple of things. We can tell you a little bit more about who's borrowing, who's doing the borrowing. We know that low income households often are the ones that have to borrow the most um. But when we look at the real increase over the last couple of years, that's

been driven by higher income families borrowing a lot as well. UM. We know that the bulk of increased borrowing in the past few years has been driven by students who went to for profit or two year colleges like community schools UM. And I think we should also put some parameters around this.

I feel like, and a lot of the conversations I hear about student debt, it just feels like everybody has student debt and everyone's rocking like two hundred thousand dollars worth of student debt um and that's just not the case. We know that when we look at young households, households under the age of forty or so, about of those households have education debt that's as of according to the

Federal Reserve. And among those young households. The median debt was about seventeen thousand dollars, so that's much lower than I think what a lot of people think about. Now, does that depend on the type of tertiary institution people have been to? I mean, would your average Harvard, Yale, m I T, Stanford, Cornell grad be carrying that kind of number or is it exponentially high? Is that just

an average? Well, definitely depends on what school you go to and also what level of education in that you're at. Grad students are going to be borrowing a lot more money than um someone getting an undergraduate degree. So to help us with our second goal of this show, which is to determine the feasibility of free public college, could we actually have a US without student debt? We're going to bring on one of our colleagues who's been covering

higher education at Bloomberg since two thousand and eight. But first, a word from our sponsor. What do traders want to limit risk? Access every opportunity and trade on a level playing field. Nate x binary options let you set your maximum profit and loss before the trade, so your risk is always limited. Find opportunities in multiple markets, stock indussees commodities for US, even economic numbers and bitcoin, all from

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may not be appropriate for all investors. We have Janet Lauren with us, a colleague in New York who covers higher education, and Janet actually won a George Polk Award for her reporting on student loans a couple of years back, so super excited to have her with us. Hey, Janet, Hi, thank you very much for having me. So, Janet, let's

run through some of these ideas that people are tossing around. Um, the amount of student debt out there is more than a trillion dollars higher than ever and that's sparking a lot of these conversations right now. Can you talk about some of the other countries that have actually been able to make college free. Well, we heard from Dan in Australia about his experience there where it had been free.

And Australia has also done something that the US has been trying to do in its repayment plan called income based repayment and student repay their loans based on their income. And more students have been taking the government's offer up here to do that because they've been struggling. But there's one very important distinction between programs in Australia and New Zealand, and that is there are price controls on the front end. In the US. We don't have that, and uh, the

cost to attend college has really skyrocketed. It's increased faster than inflation for decades. The problem starts with the price. And to give you a little bit of perspective to add what Torre had mentioned before, each year the Education Department disperses about one hundred billion dollars in education loans, mostly to students but also to parents. So you're talking about a lot of money that people borrow to go

to school. So this idea of free college, um, the question is, well, if the students aren't taking it out in loans, where does it come from. And we've heard two plans this year from the Democrats Bernie Sanders, the Vermont Senator, has talked about eliminating undergraduate tuition and fees and all public colleges and universities, with the government putting in about two thirds of the funding and one third

coming from the state. And Hillary Clinton, who has her own proposal, has criticized that, saying that even someone like Donald Trump's kids would pay nothing for college, and he could certainly afford to pay something. And Hillary Clinton has offered her own proposal, and that would cost about three hundred billion dollars over a decade, and it would encourage students to spend their own money on public higher education, and the government would help with some grants. So it's

basic level. Though, are we gonna have to for free tuition to public colleges and universities to actually happen? That seems like it would require massive tax increases. Well, we're not really sure where the money would come from. You know, that's the beauty of proposing grand ideas. And certainly the states were able and willing to put more money um towards higher education, sure it would would likely have to

come from another place. Both candidates have proposed that the federal government could spend more right, Right, So, if we as a society are deciding that we just want to publicly fund higher education, that's going to have to come at the expense of some other things though that would

be funded by the federal government. Well, the federal government already, you know, funds a lot of money in terms of higher education in terms of grants, and also the loans haveing uh cost money to the government as well in terms of there are subsidies you've mentioned the government picks up the interest for some student loans during school Janet, people all around the world, despite everything that you've just said, lining up and killing themselves to get into US colleges.

And global rankings that have done at least once a year show that the top universities in the world still buy and large mainly US schools. Shouldn't we pay for the best? Well, those schools are mostly in the private sector, which is not the sector we're talking about a few minutes ago, and the cost of some of those top schools for an undergraduate is in you know, the sixty dollar range. Now, the wealthiest schools like Harvard and Yale and Princeton and m I T have a very large endowment.

So they're able to subsidize lower income students. So if you fall within a threshold, say sixty dollars or lower a place like Harvard, the school pace for everything. And isn't that the case with community colleges to and and really low income students around the board, if you're really needy it is. Isn't it pretty cheap for you to

go to college in many cases to a community college? Yes, um, there there's the Pell grant which funds about per year and that generally will cover your tuition at a community college. And those community colleges are two years. And in fact, we heard a proposal from President Obama earlier this year to make community college free and one criticism has been,

well already is free for lower income students. And the challenge with community colleges is getting those students to complete because often if you're attending a community college, you're older, you may have children, and you need the support to

help you get through college. It's not just the tuition um that that is a difficulty, and especially if you're able to get a Pell grant, it's the support to make sure you get the classes you need to graduate on time and to finish your program and to get help when you know you can't get that class or you have this struggle, and there's there's somebody who can

support you to make sure you're finishing. And we know if you don't complete college, that's when debt becomes a huge, huge problem because you you not only don't have this degree, so you're not going to get be able to get a job that would enable you to earn more, but now you also have the debt, and then the absence of that extra credential could sort of like reduce your

motivation even to pay back these loans. So Dan and Torry, let's put our economists caps on, and let's say this actually happened, that public college actually became free in America. From an economic angle, could we say that that would be a great thing that all the student debt money could be applied to other things. What people were paying maybe four hundred dollars per month, Let's say they could instead spend on mortgages, or on fancy new bikes, or

even retirement. If you're not putting that four hundred dollars to your student loan payment, you're not able to take advantage of putting money away towards retirement. Pew came out with a store study about a year ago that looked at the growing divergence between those who have student loans and those who don't. And if you're making that four payment every month towards your payments, you're not able to save for retirement. And you know how much that can

grow over over time when you're ready to retire. So that's something else. In addition to mortgages, you may be seeing a big difference between those who have debt and those who don't. But it's not really fair to look at that just in a vacuum. Right If we if we do think that free college is possible in the US, and we and we use that hypothetical that money has got to come from somewhere, and it does come from

tax increases. That is going to be money that's that's out of your pocket that wasn't before, unless you're taxing someone else and not yourself. Let's answer the question, though, could this actually happen here in the US? Is are we just talking pure hypothetical here? Is this something that could happen? Well? Bernie Sanders proposal, I believe is setting a fifty cent tax on every of stock trades on stock sales and lesser amounts. So that's one way to

do it. Um. I'll give you another example. Elizabeth Warren proposed twice to allow students to refinance their student loans to a lower rate, and that was turned down twice by Congress. So I don't know that you're going to have that kind of support. Um. And you get into the argument that Hillary Clinton has has pushed that if there's free public school tuition for everybody, why should you

be subsidizing the wealthiest of students? Right, do we really want to forgive the one thousand dead of a bunch of lawyers who already have nice condas and cars. Probably not, um, So, I mean, it doesn't sound like this is It sounds like we could do it, certainly, but it doesn't really sound like it's very practical. Well, and that's you know, looking at the undergraduate degrees, and certainly we know that, um, if you have a undergraduate degree, your earning power is increasing.

And that was sort of the whole idea of the federal student loans when when the program was started fifty years ago to give young people a little bit of liquidity to pay for college because they would be repaying that with the lifetime of higher earnings. Now, we haven't really talked about graduate school too much. College can be subsidized with with aid, you know, grants from colleges, but you don't see that kind of financial aid with graduate schools.

And they are much costlier and students are often expected to bear the entire cost. And if you're going to say law school, it could be eight dollars total, and because of the laws that are in place, you can borrow up to the cost of attendance, and that includes living expenses. So when you see that um some students have a lot of student debt, it's likely not just for college, it's likely graduate school as well. Right right, Well,

I want to leave our listeners with some suggestions. You know, if we're not going to have free public college, what can we actually do to reduce the student that burned? Now? One of them is just to make sure that more people know about income based or payment that we've been talking about. It's been far under utilized historically, although that is starting to change. Also, no federal loans for you if you go to a school where it's shown that

your outcomes aren't going to be that great. You know, a lot of for profit institutions have high rates of non repayment student debt. If that's the case, maybe we should stop paying for people to go to those schools. It's it's just something to think about. And also, like we mentioned, really really focusing on this completion of college, making sure that if people are taking out debt to go to college, they need to be getting that degree. And with that we are going to wrap up. Thank

you so much Janet for joining us. It's great to be able to have such an expert on this stuff with us, and thanks to you all for listening to Bloomberg Benchmark. We'll be back next week and until then, you can find us on the Bloomberg terminal and Bloomberg dot com, as well as on iTunes, Pocketcast, Stitcher, Google playing all the platforms that my producers tell me to say, and while you're there, you can take a minute to

rate and review the shows and more. Listeners can find us and let us know what you've out of the show. You can talk to us and follow us on Twitter at Akta seven, at Daniel mass d c at Tori Stillwell and for our guest Janet at Janet Lauren Um, you cannot let us, So let us know what topics you'd like to hear more about. And if you are free in December one, and if you are in d C, let us know and we'll hold a ticket for our

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