Hello and welcome to MarketWatch’s Extra Credit section, a weekly overview of the news through the lens of debt.
This week we look at the challenges of disabling the student loan system during the pandemic and a proposal for a different kind of unemployment benefits. But first, how the debt enters the elementary and secondary school classrooms.
Different student debt
We are all familiar with the loans students take to pay for their education, but a recent New York Times editorial highlighted a way students pay off debt years before they enter higher education.
Public school systems across the country are using debt to fund their operations, and the cost of servicing that debt can have implications for students, families, and educators. School systems devote much-needed resources to servicing debt. For example, in Philadelphia this year, the school district paid $ 311.5 million to service its debt and $ 162 million went to creditors in the form of interest, according to the opinion papers.
I wanted to learn more about debt-funded public schools and their implications, so I called Eleni Schirmer, author of the editorial and associate researcher in the Future of Finance Initiative at UCLA’s Luskin Institute on inequalities and democracy. Using debt to fund public schools is not a new phenomenon, Schirmer said. In fact, the practice can date as far back as the 19th century.
But what she hopes to learn from further research is when exactly the use of debt to fund public schools went from a “fairly stable, low-risk, low-risk funding mechanism” to another that has become much more expensive for school systems.
Schirmer suspects that the change “is accompanied by larger changes in a financialized economy, when finance itself has started to become an industry not just a tool for doing things, but in itself an industry,” he said. she declared.
School districts of all types depend on debt financing, Schirmer said. Affluent communities can use the debt to modernize or expand their facilities. But it is the already under-resourced school districts – such as those in very poor urban and rural areas – for whom debt has the most crushing consequences, she said.
Like most loans, the terms of money borrowed by public school districts are based on a measure of creditworthiness. Neighborhoods where property values and resident incomes tend to be low are generally viewed as riskier, Schirmer noted in the editorial.
“Debt is based on a very regressive logic according to which those who have the least pay the most, that’s just the rule,” she said. “When you fund public goods with this rule, it’s always going to be upside down. ”
Schirmer and other activists fear that this form of financing could transfer power over the operations of schools from the local community to lenders because in some cases, she said, districts are forced to repay debt against to other priorities. The way to solve this problem, activists say, is to provide more public funding for public schools, so they don’t have to depend on Wall Street investors to function.
The pandemic has offered a little taste of what additional funding could look like for public institutions after the federal government sent billions of dollars to public schools and local governments. But that’s probably not enough for lasting change. Schirmer highlights Chicago officials’ decision to use some of the funding the city received as part of the US bailout to pay creditors.
“Obtaining one-off aid does not change the funding dynamic that exists, it does not eliminate these power relations,” she said.
Loans as unemployment benefit?
The federally funded emergency unemployment benefits, which end this month, have been a lifeline for many Americans during the economic upheaval caused by the pandemic. They have also been controversial in some circles, with politicians and business owners citing relief as part of the explanation for worker shortages in certain industries.
Nobel Prize-winning economist Joseph Stiglitz published an article outlining an approach to unemployment benefits that he says could alleviate some economists’ concerns about traditional unemployment benefits and boost GDP.
The idea is to create a package of unemployment benefits that combines traditional unemployment insurance with income-tested loans, wrote Stiglitz in a working paper with co-authors Haaris Mateen, a doctoral student in economics at the ‘Columbia University and Jungyoll Yun, economist at Ewha University in Seoul. The paper was released by the National Bureau of Economic Research this week.
The package economists are proposing in their model would pay the unemployed more than traditional unemployment benefits. By including the loan element, the package would be less costly to the government than an unconditional unemployment benefit of a similar size.
Income contingent loans, or the debt that a borrower repays as a percentage of their income, are widely used in education. In the United States, federal student loan borrowers have the option of repaying their debt as a share of their income through a program known as Income Based Repayment.
One of the advantages of this arrangement, as Stiglitz describes it, is that it gives students the ability to essentially sell stocks on their own, which allows for risk sharing unlike traditional debt. Someone who borrows a loan without an income option must pay the same amount whether or not the loan gives them a benefit in the form of better employment prospects.
Stiglitz said he wondered if this setup could be applied to other areas and unemployment seemed like a good solution. A period of unemployment is similar to when a student borrows in the hope of increasing their potential in the job market, Stiglitz said, “particularly if you think of spells of unemployment as times when you invest in research. “.
It is difficult to know in advance if someone is going to find a job and how much they will pay once they find it. To solve this problem, we as a society would fund the combination of traditional unemployment benefits and income-based loans – organized by the government – and share the risk with job seekers.
“Some of us will be lucky and some of us not,” Stiglitiz told MarketWatch. “And those who are lucky and find a job quickly pay back a little more and those who are unlucky and can’t find a job just because of the raffle pay less.”
So how is this an improvement over what we have now? Well, as the debate over increasing unemployment benefits during the pandemic has indicated, some fear that providing job seekers with traditional unemployment benefits will deter them from looking for work. Stiglitz notes that the evidence that this happened during the pandemic was not very strong, and indeed, it appears that the early cut in unemployment benefits has not boosted job growth in states that have chosen to do so.
By providing job seekers with more funding during periods of unemployment, they may become less risk averse and willing to hold out for a job that better matches their skills – and pays more – than if they were only receiving the traditional unemployment insurance. , according to the model that Stiglitz and his co-researchers built for their study. And if more job seekers end up finding jobs that pay them more, it could boost GDP.
“It’s a way to improve how we can provide the kind of security people need without some of the worries that at least some people have about negative incentive effects and actually encouraging the productive search for a. better job, ”he said. “Doing what we are proposing here would actually have a positive effect on our economy. ”
The challenges of closing the student loan system
Borrowers are still seeing their wages foreclosed on overdue student debt, despite the coronavirus-era payment hiatus on student loan payments, interest and collections.
That’s a takeaway from Education Department data released this week at the Student Borrower Protection Center, an advocacy group. Data, which the organization received as part of a Freedom of Information Act request, also indicates that borrowers must repay $ 37 million for wages that collectors seized during the pandemic.
The data is the latest indication of the challenges the government has faced in disabling the student loan system and in particular, it is the debt collection operation – a cumbersome program that involves multiple actors, including organizations involved in the student loan industry as well as the employers of borrowers. . Almost six months after Congress passed the CARES Act, which suspended collection of delinquent loans, thousands of borrowers were still facing wage garnishment.
Learn more about what the data suggests here.