Sunday, July 26, 2015

Transparency, Debt, and Context

Should community college students borrow more?

It seems like a ridiculous question, given the recent focus on student loan burdens and the move towards free community college.  But there’s actually a serious argument for it.

Libby Nelson’s recent piece in Vox focuses on Indiana University’s successful effort to reduce student borrowing by actually disclosing to students how much they already owe, and what their future monthly payments will be.  The idea behind IU’s effort is that students are less likely to be cavalier about future debt if they see it in terms as concrete and clear as the disclosures on a car loan or a credit card bill.  (I give credit card bills less, well, credit, for transparency, but that’s a side issue.)  Now IU gives students a one-page statement showing total loans taken out so far, the expected payment period, the expected interest rate, and the expected monthly payment.

Apparently, since it started disclosing this information to students, students reduced their borrowing by eleven percent.  In a context of increasing costs, that’s striking.  And all else being equal, it’s probably a good thing.

In a community college context, though, I suspect the results might be more complicated.

It’s true that community college students typically borrow much less than their counterparts at four-year colleges.  That’s to be expected; tuition is far lower, and most community colleges don’t have dorms.  But their default rates tend to be higher, as I noted last week.  That’s largely because of a higher dropout rate.  Graduates do quite well with repayment, but dropouts don’t.  I’ve mentioned before some serious concerns with taking a “graduation rate” as if it were some sort of transparent indicator -- for my money, a student who transfers after the freshman year and graduates on time with a bachelor’s is a success, not a dropout -- but it’s still true that too many students either stop out and get lost or walk away altogether.

One reason that students walk away is that they work so many hours per week for pay.  Being a “full-time” student is supposed to be a full-time job.  When you add a second full-time job on top of that -- or, worse, a full-time equivalent with unstable and shifting hours -- it’s that much harder.  Add family obligations, and even the most dedicated student will face an uphill battle.  

Loans can reduce the amount of hours a student has to work.  They can open up the time and space to focus on academic success.

For people from college-educated families, that may seem like a tautology or a no-brainer.  But to someone from a background where the idea of borrowing money for school seems profoundly suspect, that may seem bizarre.  And that’s why I’d worry about applying IU’s formula too quickly in a community college context.

Transparency works really well when there’s a context for understanding what you see.  But if the context is missing, or an inappropriate one is applied, transparency can be detrimental.

In my observation, the problem isn’t that community college students are too cavalier about borrowing.  It’s that they’re too afraid of not finishing.  If finishing seems like a risky proposition, then hedging one’s bet by minimizing borrowing and maximizing work hours makes sense.  But that hedge often becomes self-fulfilling.  Work a lot of hours to avoid the debt that would be hard to repay without a degree, and you probably won’t finish the degree.  Jump in to the degree program with both feet -- which may entail borrowing enough money that you don’t have to work ungodly amounts of time -- and you’re much likelier to finish.  And the statistics show clearly that the folks who finish are far more able to repay debts than the folks that don’t.  

It’s a sort of academic Calvinism.  Act like the sort of person who graduates, and you’re much likelier to graduate.  Put differently, fake it ‘til you make it.

I’d like to see us supply the students with the payoff information IU does, but in a context of information about the effects of working too many hours a week for pay on the chances of finishing.  Show the downside risk, yes, but also the upside.  Because the student loan crisis doesn’t stem from cardiologists who have trouble paying down $100,000 from medical school.  They’re doing just fine.  It stems from students who walk away owing $2,000, but who couldn’t keep up because they were putting in too many hours at Foot Locker.  If we give that student only the information that IU gives its students, she may double down on her hedges, to no good effect.  

IU’s move is admirable, in its way, and probably appropriate to its context.  But if we were to try something similar, we’d have to build in a lot more context.  Without it, we’d be transparently showing only half of the picture, and doing real harm to our students.