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Context for Demography AICAD Retreat October 20, 2007
Cumulative Change in CPI Adjusted Median Family Income (Household Head Age 45-54), National Baccalaureate Attainment Rates and Personal Savings as a Percent of Disposable Income Median Family Income Percent with a College Degree Personal Savings as a Percent of Disposable Income Source: Census Current Population Survey, Bureau of Economic Analysis - NIPA
Household Head Age 35-44 Household Head Age 45-54 Median Net Worth in 2004 Dollars Percent of Families that Save Source: Federal Reserve Board – Survey of Consumer Finances
Source: Federal Reserve Board – Survey of Consumer Finances Age 35-44 Age 45-54 Median Debt Service Payments as a Percent of Gross Income Prime Rate Families with Debt Service Payments in Excess of 40 Percent as a Percent of Gross Income Families with Debt Payments Past Due Sixty Days or More
Unpaid credit cards bedevil Americans AP Impact: Americans' see their debt woes expand as unpaid credit card bills are on rise By RACHEL KONRAD and BOB PORTERFIELD Associated Press Writers | AP DEC 24, 2007 SAN FRANCISCO - Americans are falling behind on their credit card payments at an alarming rate, sending delinquencies and defaults surging by double-digit percentages in the last year and prompting warnings of worse to come. The value of credit card accounts at least 30 days late jumped 26 percent to $17.3 billion in October from a year earlier at 17 large credit card trusts examined by the AP. That represented more than 4 percent of the total outstanding principal balances owed to the trusts on credit cards that were issued by banks such as Bank of America and Capital One and for retailers like Home Depot and Wal-Mart. At the same time, defaults — when lenders essentially give up hope of ever being repaid and write off the debt — rose 18 percent to almost $961 million in October, according to filings made by the trusts with the Securities and Exchange Commission. Serious delinquencies also are up sharply: Some of the nation’s biggest lenders — including Advanta, GE Money Bank and HSBC — reported increases of 50 percent or more in the value of accounts that were at least 90 days delinquent when compared with the same period a year ago. The AP analyzed data representing about 325 million individual accounts held in trusts that were created by credit card issuers in order to sell the debt to investors — similar to how many banks packaged and sold subprime mortgage loans. Together, they represent about 45 percent of the $920 billion the Federal Reserve counts as credit card debt owed by Americans. Even after the recent spike in bad loans, the credit card business is still quite lucrative, thanks to interest rates that can run as high as 36 percent, plus late fees and other penalties. But what is coming into sharper focus from the detailed monthly SEC filings from the trusts is a snapshot of the worrisome state of Americans’ ability to juggle growing and expensive credit card debt.
Cumulative Percent Change in the Price of Selected Consumer Goods and Services: Calendar 2001 to 2006 Source: Bureau of Labor Statistics, Annual Average Report, Table 3A. Consumer Price Index for all Urban Consumers (CPI-U): U.S. city average, detailed expenditure categories
Cumulative Change in Inflation Adjusted College Cost of Attendance, Family Income, and Financial Need Remaining Cost After Grant, Work and EFC Financial Need Tuition and Fees Cost of Attendance Family Income Source: Census Current Population Survey, College Board, Common Data Set – HCRC Custom Tabulation
Cumulative Growth in National Higher Education Loan Volume in CPI Adjusted Dollars: Actual - Fiscal 1997 to 2007, 3-Year Moving Average Projection for FY 2008 UnSub Sub Private PLUS State Perkins Source: Census Current Population Survey, College Board, Common Data Set – HCRC Custom Tabulation, Department of Education
Cumulative Growth in National Higher Education Loan Volume in CPI Adjusted Dollars Actual - Fiscal 1997 to 2007, 3-Year Moving Average Projection for FY 2008 Private Perkins State PLUS Sub UnSub Source: Census Current Population Survey, College Board, Common Data Set – HCRC Custom Tabulation, Department of Education
New York Times ARTICLES ABOUT STUDENT LOANS Private Loans Deepen a Crisis in Student Debt By DIANA JEAN SCHEMO As tuition has soared past the limits on federal aid, more students are relying on barely regulated private loans. June 10, 2007EDUCATIONNEWS Demands for Loan Information By DIANA JEAN SCHEMO The Senate Banking Committee and Attorney General Andrew M. Cuomo of New York sent joint letters to the nation’s 20 largest student lenders, demanding information on how they set rates and fees on student loans, as part of a growing investigation into possible discrimination in student lending. The letter gives lenders until the end of next week to say which criteria they use, including “college, college location, graduation rate, historic default rate, gender, age, parental income, ... June 8, 2007EDUCATIONNEWS Cuomo Plans to Broaden Student-Lending Inquiry By DIANA JEAN SCHEMO Attorney General Andrew M. Cuomo of New York said that he was broadening his investigation to examine whether the criteria lenders use when making loans violate civil rights statutes. June 7, 2007U.S.NEWS U.S. PUTS LIMITS ON LENDERS' TIES TO UNIVERSITIES By JONATHAN D. GLATER New Education Department rules would set new standards for universities and ban practices that have resulted in loan company payoffs to college officials. June 2, 2007FRONT PAGENEWS National Briefing | Education: Agreeing To Code Of Conduct On Student Loans By JONATHAN D. GLATER Wells Fargo agrees to follow code of conduct developed by New York Atty Gen Andrew M Cuomo governing relationships between lenders and universities; code prohibits practices including giving university money or other incentives in exchange for steering students to particular lender; agreement means that five largest student loan companies in country agree to follow code May 30, 2007EDUCATIONNEWS Documents From Sallie Mae Add to Questions About Timing of $18 Million Stock Sale By JONATHAN D. GLATER The investigation centers on whether Albert L. Lord had inside information about budget cuts for companies participating in the federally guaranteed student loan program. May 25, 2007EDUCATIONNEWS Fixing the Student Loan Mess Congress is fashioning bills that would explicitly outlaw collusion between lenders and schools while closing loopholes that the two have routinely used to enrich themselves at the expense of students. May 17, 2007OPINIONEDITORIAL Educating the Education Secretary Department of Education officials seem more interested in kowtowing to lenders than anything else. May 14, 2007OPINIONEDITORIAL Chefs Topped With Debt Educators, lenders and the government regulators have to stop thinking of students as revenue streams and start thinking of them as students again. May 10, 2007OPINIONEDITORIAL
12/29/07 INTERVIEW WITH PAUL B. SHELDON, PRESIDENT, STUDENT LOAN CAPITAL STRATEGIES, LLC. By Maria KoklanarisNews sources are widely reporting that the credit crunch that hit the mortgage industry is expanding to student loans. What is happening? The answer is to whether the credit crunch is affecting student loans is, very definitely yes. The capital markets are basically closed to most asset-backed securities issuers at the moment. This is somewhat normal as we get toward the end of December, these markets do tend to get fairly difficult to access. But basically markets are completely closed to student loan entities, have been for a week or two. There’s nobody attempting to access the markets right now. Substantially every student loan issuer is affected here. And not only are the markets closed, but there’s significant trading in auction rate securities, where these securities basically re-price every 28 days, and that market is in terrible shape, producing extremely high interest rates for student loan issuers. …this is mostly a mortgage matter, a subprime mortgage matter, and not a student loan thing, but there is a bleeding over to all asset-backed securities. So the thing that I would underscore is, that while there are pockets of thought that all student loans are being targeted, in general, that is not the case. The markets are tied up in the subprime credit crunch, and the market will differentiate student lending from subprime mortgage very quickly. The markets will return to normal early in 2008.
PAUL B. SHELDON, Continued On the credit side, on the cost of financing, the markets will return to normal but they’ll be re-priced. When I say “return to normal,” there will be buyers and sellers, there will be an efficient market, where issuers can bring deals to market, and investors will buy them, and issuers will be able to finance their programs. However, they will be re-priced, such that it will cause an increase of at least 10 basis points for issuers.Now, the following is very important: we have had three or four years of extremely low cost of funds, and basically my opinion is that we are going to return to the pricing that existed prior to that. The market got too rich. Some of that was caused by the SIVs – “special investment vehicles” – that many banks set up. These SIVs bought asset-backed securities and they financed those by selling commercial paper. In other words, you sell 90-day paper in order to finance nine-year paper. That works fine as long as you can continue to sell 90-day paper. But these SIVs have been locked out of selling 90-day paper. These SIVs drove the interest rates on asset-backed securities down, and they are a lot of the reason why we had such rich pricing for the last few years. They are now gone, and so markets are going to return to the pricing that existed in the late 90s, around the turn of the millennium.This is going to, to some extent, cause permanent changes. A lot of the newer, smaller lenders that were able to exist and make money in part because of these rich financing conditions, these lesser players in the market, will be squeezed out. You will see a consolidated market. This is good news for the survivors. It’s a much more stable environment.The other thing is that is going to happen is there is going to be considerable noise from the education community to Congress, as there are going to be certain access problems. Part of it might be kids not being able to find a consolidation lender, part of it might be community colleges in rural areas not being able to find a lender. There’s going to be a hue and cry starting in March and April that is likely, in my opinion, to cause a need to put a little more economics back into the student loan program.
12.02.07 A More Meaningful Default Rate An amendment attached to House of Representatives legislation to renew the Higher Education Act this month is designed to make the cohort default rate a more realistic assessment of how individual institutions (and lenders) are faring in keeping student borrowers on track to repayment, extending to three years from two the period over which borrowers’ defaults are measured. The change, if it becomes law, is likely to significantly raise most colleges’ default rates, which could cause problems for institutions that have historically had higher rates of student loan default — most notably for-profit career colleges, but also some two-year and historically black colleges. “Extending it by a year should give us a more accurate assessment of what’s going on,” Rep. Timothy Bishop (D-N.Y.), who co-sponsored the amendment with Rep. Raul Grijalva (D-Ariz.), said in an interview this week. “If because of it there are more schools that now fall into an area where there’s a red flag, that are encroaching on a problem, that’s a good thing.” …in the 1998 Higher Ed Act bill, Congress altered the cohort default rate calculation by extending, to 270 days from 180 days, the amount of time before the federal government deems a delinquent borrower to be in default. That change delayed the point at which the government must take responsibility for a bad loan and repay the bank that made the loan, saving the U.S. Treasury money. But it also had the effect of making it easier to postpone a student’s potential default, raising questions about whether colleges might be encouraging borrowers to seek deferments or forbearance from lenders, since students in those situations are not in danger of defaulting.
TG Life of Cohort Cumulative Default Rates – All Sectors Source: Texas Guaranteed Life of Cohort Loan Default Rates
TG Life of Cohort Cumulative Default Rates – Four-Year Public Colleges and Universities Source: Texas Guaranteed Life of Cohort Loan Default Rates
TG Life of Cohort Cumulative Default Rates – Four-Year Private Colleges and Universities Source: Texas Guaranteed Life of Cohort Loan Default Rates
Tuesday, October 30, 2007 The Truth About Student Loan Default Rates By Richard VedderA recent analysis by Erin Dillon of the Education Sector explodes the myth that loans are not a big deal --a myth strengthened by Department of Education data, which reports the overall student loan default rate is under 5 percent. That number is simply baloney --worse than worthless. The Education Department looks at two year default rates --and most persons default after the second year. Ms. Dillon looks at extended longitudinal data reaching back into the 1990s and finds much higher default rates -- rates that vary enormously depending on race/ethnicity, size of loan obligations, and post-college earnings. For example, the long term black (non-Hispanic) default rate appears to be around 39 percent, roughly ten times as great as that for Asians (4 percent) --the white non-Hispanic rate is about 7 percent. Similarly, those with $15,000 or more in loans had well over double the default rate (19 vs. 7 percent) of those with $5,000 or less in loans.Moreover, with rising loan obligations, the default problem is almost certainly going to rise. This is aggravated by another trend that college presidents should be frightened about -- the college-high school earnings differential is NOT growing for women (for a decade), and may be slowing for men. The ability to pay off loans is directly related to post-college earnings, as the Education Sector study makes amply clear.Here is my read on things. The unsustainable tuition fee explosion has been sustained for longer than expected by the introduction of student loans of ever greater magnitude. The notion, previously novel and suspect, is now conventional wisdom: college is a financial investment, and borrowing to pay for that investment is acceptable and prudent. However, as loan obligations rise relative to post-college incomes, the whole go-go financing becomes more suspect and potentially destabilizing, not only to individual borrowers, but to the American economy at large.
Census Bureau Estimate and Projection of Total Number of 18 Year Olds: 2000 - 2024 Source: Census Bureau, April 2004
National College Going Rates for 18 to 24 Year Olds by Gender and High School Graduation Status Female High School Graduate Rates Male Female High School Graduates Enrolled or Completed College Male Female High School Graduates Enrolled in College Male Female All 18-24 Year Olds Enrolled in College Male Source: Census Current Population Survey, October Education Supplement
Selected Academic Prep Measures for Children Age 12 to 17 by Parent Education Attainment Source: Census Bureau, SIPP
Parent Aspirations and Expectations for their Children to Earn at Least a Baccalaureate Parent Attainment Source: Census Bureau, SIPP
Census Bureau Projected Cumulative Percent Change in Number of 19 Year Olds by Race Hispanic Asian Black White Source: Census Bureau, April 2004
Census Bureau Projected Number of 19 Year Olds by Race White Hispanic Black Asian Source: Census Bureau, April 2004
Census Bureau Projected Cumulative Net Change in Number of 19 Year Olds by Race Hispanic Asian Black White Source: Census Bureau, April 2004
Composition of Children Ages 5 to 16 by Race/Ethnicity and Level of Parent Education Attainment Two Advanced One Bachelor’s One Advanced Two Bachelor’s One Bachelor’s Degree Some College / Associates No College White Black American Indian Asian Hispanic Source: Census Bureau, American Community Survey – PUMS, 05/06 Merge Files – HCRC Custom Tabulation
Projected Number of 18 Year Olds by Level of Parent Education Attainment No College Some College - Associates One Bachelor’s Two Bachelor’s One Bachelor’s, One Advanced Two Advanced Source: Census Bureau, American Community Survey – PUMS, 05/06 Merge Files – HCRC Custom Tabulation
Cumulative Projected Percent Change in 18 Year Olds from 2007 by Level of Parent Education Attainment One Bachelor’s, One Advanced Two Bachelor’s Two Advanced Some College - Associates One Bachelor’s No College Source: Census Bureau, American Community Survey – PUMS, 05/06 Merge Files – HCRC Custom Tabulation
Projected Entering Enrollment at Private Colleges and Universities by Level of Parent Education Attainment Two Advanced One Bachelor’s, One Advanced Two Bachelor’s One Bachelor’s Some College - Associates No College Source: Census Bureau, American Community Survey – PUMS, 05/06 Merge Files – HCRC Custom Tabulation
Estimated National Enrollment Funnel for 2007 for White Females 1200 or 30 and above 1100 or 24 and above $75,000 $125,000 $75,000 $125,000 Source: Census, College Board, CDS, IPEDS, HCRC Custom Tabulation
Estimated National Enrollment Funnel for 2007 for White Males 1200 or 30 and above 1100 or 24 and above $75,000 $125,000 $75,000 $125,000 Source: Census, College Board, CDS, IPEDS, HCRC Custom Tabulation
Estimated National Enrollment Funnel for 2007 for Black Females 1200 or 30 and above 1100 or 24 and above $75,000 $125,000 $75,000 $125,000 Source: Census, College Board, CDS, IPEDS, HCRC Custom Tabulation
Estimated National Enrollment Funnel for 2007 for Black Males 1200 or 30 and above 1100 or 24 and above $75,000 $125,000 $75,000 $125,000 Source: Census, College Board, CDS, IPEDS, HCRC Custom Tabulation
Estimated National Enrollment Funnel for 2007 for Hispanic Females 1200 or 30 and above 1100 or 24 and above $75,000 $125,000 $75,000 $125,000 Source: Census, College Board, CDS, IPEDS, HCRC Custom Tabulation
Estimated National Enrollment Funnel for 2007 for Hispanic Males 1200 or 30 and above 1100 or 24 and above $75,000 $125,000 $75,000 $125,000 Source: Census, College Board, CDS, IPEDS, HCRC Custom Tabulation
Ratio of Degrees per FTE Student – AICAD and Private and Public Sector AICAD Competitors: Fiscal 1997 to 2005 Private Competitors Public Competitors AICAD Source: NCES IPEDS – JFF Merge File, HCRC Custom Tabulation
Published Tuition and Fees – AICAD and Private and Public Sector AICAD Competitors: Fiscal 1997 to 2005 – in CPI Adjusted Dollars AICAD Private Competitors Public Competitors – Out of State Public Competitors – In State Source: NCES IPEDS – JFF Merge File, HCRC Custom Tabulation
Tuition Reliance – AICAD and Private and Public Sector AICAD Competitors: Fiscal 1997 to 2005 – in CPI Adjusted Dollars AICAD Private Competitors Public Competitors Source: NCES IPEDS – JFF Merge File, HCRC Custom Tabulation
Fully Loaded Cost* per FTE Student – AICAD and Private and Public Sector AICAD Competitors: Fiscal 1997 to 2005 – in CPI Adjusted Dollars Private Competitors AICAD Public Competitors * Fully Loaded Cost per FTE = Current Fund Expenditure for (Instruction, Student Services, and a pro-rated share of Academic and Institutional Support and O&M based on instructional share of instruction, research and public services) / FTE Enrollment Source: NCES IPEDS – JFF Merge File, HCRC Custom Tabulation
Fully Loaded Cost per Degree* – AICAD and Private and Public Sector AICAD Competitors: Fiscal 1997 to 2005 – in CPI Adjusted Dollars AICAD Private Competitors Public Competitors * Fully Loaded Cost per Degree = Current Fund Expenditure for (Instruction, Student Services, and a pro-rated share of Academic and Institutional Support and O&M based on instructional share of instruction, research and public services) / Total Degrees Awarded Source: NCES IPEDS – JFF Merge File, HCRC Custom Tabulation
Average Instructional Subsidy* per FTE – AICAD and Private and Public Sector AICAD Competitors: Fiscal 1997 to 2005 – in CPI Adjusted Dollars Public Competitors AICAD Private Competitors * Instructional Subsidy is the Net Difference between Fully Loaded Cost per FTE and Average Net Tuition per FTE Student Source: NCES IPEDS – JFF Merge File, HCRC Custom Tabulation
Common Theories Underlying Cost Escalation Demand Pull The absence of a widely accessible alternative to a college degree (such as the apprentice system in Europe) coupled with societal revere for attainment and the almost universal aspiration among high school students to attend college, and a large and still rising opportunity cost of not attending all help account for rising college going rates and sustained enrollment demand. Revenue Push Ready access to (low cost) capital – both through the federal guaranteed loan program and more recently through private student loans, as well as historically low mortgage rates, coupled with third party subsidization (government grants, appropriations, gifts and investment return) all serve to buffer institutions from the rigors of the marketplace and undermined cost discipline. Price Shifting Over the course of the past two decades, there has been a well pronounced pattern of price shifting in which tuition increases in lieu of other revenue sources. This behavior is most common among public colleges and universities during periods of economic recession when state appropriates are reduced. In the independent sector, price shifting is observed during periods of slow growth or declining investment return – resulting in greater reliance on tuition. Internalizing the Externalities The scholarly literature of the 1990s sought to differentiate among costs that are externally imposed (and thus deemed unavoidable or justifiable) from costs that are discretionary, avoidable, and unrelated to the enhancement of the core “product” of higher education. A simple example relates to changes in the federal needs analysis that might reduce expected family contributions, thereby raising the level of financial need and the demand on institutional aid. Another example might be at less selective institutions that enroll students with weak academic preparation, who in turn require additional services. Source: HCRC Custom Tabulation
Common Theories Underlying Cost Escalation Oligopoly While higher education institutions compete with one another to lure desirable students to campus, colleges enjoy considerable product differentiation based on their geography, history, and unique programmatic attributes. By implication, no two colleges can offer the exact same college experience, creating in many markets an environment of oligopolistic or monopolistic competition. Consequently, colleges lack the same incentives to reduce costs that are found in more competitive industries in which product substitutes are easy to identify. Lattice and the Rachete The latter costs have been described as “internally pathological” (Leslie and Rhodes, 1995), and the byproduct of “administrative lattice” and the “accretion of unnecessary tasks” in which valuable employees work hard to find problems that justify their positions despite no clear link to organizational output or product (Massy, 1996). Gumport and Pusser (1995) refer to a similar phenomenon—the “additive explanation”—to account for a growing number of positions within academia that serve to maintain and resolve conflicts within the organization rather than making direct contributions to the organizational product. Intangibility Considering the historically paternalistic and civic-minded missions of our higher education institutions (Rudolph, 1990), it is not surprising that economic efficiencies traditionally have not been the focal point of delivering a college education in the United States (e.g., Adams & Shannon, 2006). Because education, not unlike health care, is insatiable in what potentially can be rendered – “we can always do more to enhance the college experience” –the best of intentions may bring with them a natural tendency to overshadow the reality of production costs and economic inefficiencies. Data Rich – Information Poor “If you can’t measure it, you can’t improve it.” With an absence of systems that link organizational inputs to student outcomes, measuring productivity or the comparative return on one class of academic investment over another remains elusive. Ultimately, to have at the measurement of learner productivity would require a marriage of the chart of accounts against the student system. While this has become the subject of much attention within the accreditation process, the vehicles to do so are far and few between – ultimately causing institutions to be blind operating. Source: HCRC Custom Tabulation
Common Theories Underlying Cost Escalation Cost Disease “Consider the classical string quartet playing to a live audience. A thirty-minute piece requires two labor hours, the same as it did centuries ago. Improving “productivity” by playing faster or dropping the second violin (which some might consider redundant) would diminish quality—which is what many believe happens when college class sizes balloon. Yet the musicians’ real wages will escalate due to productivity growth elsewhere in the economy. If musicians did not share in the fruits of such growth (to which they arguably have contributed by improving the quality of life), the supply of new entrants to the field could not be sustained. So the classical string quartet, like traditional education, is what Baumol and his colleagues call a “stagnant industry”: doomed to become ever more expensive in real terms, all the more so as the economy advances.” Massey (1997) Structural Higher education’s production inputs are unique from other economic sectors and require a mix of goods and services that in and of themselves are rising in price at rates significantly faster than inflation. Evidence of the structural drivers is most common in the HEPI ( Higher Education Price Index) which calculates the weighted average price of a fixed market basket of goods and services commonly purchased by colleges and universities for operational purposes. It is related to, but distinct from CPI, it is a tool that enables schools to determine increases in funding necessary to maintain real purchasing power and investment. For example, from 1980-2000, the price of goods and services purchased by colleges increased by 154 percent, while inflation measured by CPI increased by 118 percent. Arms Race “In an arms race, there is a lot of action, a lot of spending, a lot of worry, but if it’s a successful arms race, nothing much changes. The essence of an arms race is position—how a country or university stands relative to others. No single institution alone can safely quit the race, even though all institutions, together, would be better off if everyone did. Unilateral disarmament will swiftly be punished by loss of position and increased vulnerability.” Engaged in the Arms Race institutions experience a spiraling of expenditures for amenities intended to help sustain or enhance a their competitive position and campus quality of life, but often with limited impact on student’s cognitive gains or other substantive measures of learner outcomes. Source: HCRC Custom Tabulation
Proportion of SAT Test-Takers with Background and Academic Interests Related to Art and Design 4+ years of related course work Studio Art and Design Art History or Art Appreciation Photography or Film AP and Honors Courses Intended Major Art or Music Plans for Advanced Standing Source: College Board – College Bound Seniors Annual Reports 2001 - 2006