Reframing the Student Loan Costing Debate

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Reframing the Student Loan Costing Debate

• The Benefits of Competition

Hoke Wilson
Fred Galloway
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Introduction and Overview

• Introduction
• Overview of presentation
• Problem Framing
• Methodological Review
• Data Sources and Variable Construction
• Modeling Results
• Other Examples of Public/Private Competition
• Wrap-up and Implications for Reauthorization

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Problem Framing

• Importance of Problem Framing
• Two Non-Student Loan Examples
• The Student Loan Costing Debate
• Office of the Inspector General (1999)
• General Accounting Office (2001)
• Center for American Progress (2004)
• Americas Student Loan Providers (2005)
• Galloway and Wilson (2005)

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Problem Framing

• What exactly is our frame of analysis?
• We feel strongly that focusing on the cost per
  loan is at best counterproductive, and at worst,
  technically incorrect. Instead, we argue that any
  benefits that have accrued to taxpayers have
  occurred as a direct result of the competition
  between the programs, and the elimination of
  either program would result in significantly
  higher overall programmatic costs.

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Problem Framing

• What research questions are driving our analysis?
• 1. To what extent has the introduction of the
  Direct Loan Program (DLP) impacted the total real
  costs of running both the FFELP and DLP?
• 2. To what extent has the introduction of the
  Direct Loan Program (DLP) impacted the total real
  costs of running just the FFELP?
• What time period did we use in our analysis?
• Obligations 1966 2003 Expenses 1966 - 2001

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Time Series Methodology Review

• What exactly is a time-series?
• A time-series is a sequence of values or
  readings ordered by a time parameter.
• EX daily stock prices
• monthly unemployment rates
• annual DL/FFEL program costs
• When is time-series analysis typically used?
• When researchers are interested in uncovering
  patterns in the series, studying the effects of a
  particular time-dependent intervention (like the
  introduction of the DL program), or predicting
  values for the time-dependent variable as a
  function of the independent variables used in the
  model.

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Time-Series Methodology Review

• How does time-series analysis work?
• As with standard regression models, researchers
  are interested in decomposing variation on the
  dependent variable in this case the variation
  might be explained by trends over time, the
  lingering effects of earlier values of the
  dependent variable (called an auto-regressive
  structure), the lingering effects of earlier
  shocks (called a moving average), other
  independent variables, and of course, random
  variation.
• What might be an example of an auto-regressive
  structure?
• For researchers studying monthly unemployment,
  if the total number of unemployed in one month is
  a fixed proportion of those unemployed in a
  previous month, plus a new group of workers
  seeking jobs, then a one-period auto-regressive
  structure is appropriate.

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Time-Series Methodology Review

• What might be an example of a moving average?
• For researchers interested in studying commodity
  prices, suppose that the commodity market
  receives a news report about the state of crops
  in producing countries. This news, whether good
  or bad, will have an immediate effect on prices
  and also a weighted, or discounted effect over
  the next few days as the market assimilates the
  importance and relevance of the news.
• Another example might be the effect that
  hurricane Katrina has had on gas prices, where as
  we all know there was an immediate effect, as
  well as a discounted effect in the days and weeks
  that followed.

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FFELP Data from Appendices to US Budgets

• FFELP Cost (Program and Self-Liquidating)
  Calculated as
• () Interest Benefits
• () Special Allowances
• () Loan Defaults
• (- ) Defaulted Loans Collected
• () Contract Collection Costs
• () Guarantee Agency Retentions
• () Death, Disability and Bankruptcy Benefits
• () Federal Administrative Costs

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Data from Appendices to US Budgets

• To the Sum for the FFELP So Far, We Add
• () Administrative Payments to Guarantors
• Account Maintenance Fees
• Loan Insurance and Processing Fees
• Supplemental Preclaims Assistance
• (-) Borrower Origination Fees
• (-) Lender Origination Fees
• (-) Sallie Mae Offset Fees
• (-) Consolidation Loan Holder Fees
• (-) Reinsurance and Insurance Fees

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DSLP Data from Appendices to US Budgets

• DSLP Cost (Self-Liquidating Does Not Apply)
  Calculated as
• () Interest Benefits
• () Loan Defaults
• (- ) Defaulted Loans Collected
• () Administrative Cost of Default Collection
• () Private Collection Agency Fees
• () Death, Disability and Bankruptcy Fees
• () Federal Administrative Costs
• (- ) Borrower Origination Fees
• () Interest Payments on Treasury Funds

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Comparisons to Other FFELP Expenditure Series
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Modeling Results The Effects of the DLP
Intervention on the Total (DLP FFELP) Cost of
Providing Student Loans
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Model Fit to Data for Total Cost of Providing
Student Loans (FFELP DLP)
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Residual Distribution for Total Cost of Providing
Student Loans (FFELP DLP)
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Residual Distribution for Total Cost of Providing
Student Loans (FFELP DLP) Deleting Outliers
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Modeling Results The Effects of DLP
Intervention on the FFELP Cost of Providing
Student Loans
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Model Fit to Data for FFELP Cost of Providing
Student Loans (FFELP Only)
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Residual Distribution for FFELP Cost of Providing
Student Loans (FFELP Only)
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Other Examples of Public vs. Private Competition

• Public vs. Private Utilities
• Primeaux studied 49 cases of competition between
  utilities (in almost all, one was private and the
  other public). He found that public utilities
  that were forced to compete had, on average, 11
  lower cost structures.
• Bellamy confirmed Primeauxs findings,
  suggesting that competing utilities had 20 lower
  prices.

Primeaux, Walter J., jr. A Reexamination of the
Monopoly Market Structure for Electric Utilities,
in Almarin Phillips, ed., Promoting Competition
in Regulated Markets (Washington, D.C. Brookings
Institution, 1975). Bellamy, Jan. Two Utilities
are Better than One (San Francisco Pacific
Research Institute for Public Policy, 1993).
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Other Examples of Public vs. Private Competition

• Canadian Pacific (CP) and Canadian National (CN)
  Railroads
• CN created after WWI to provide service to areas
  unprofitable to the CP. Industry remained
  heavily regulated until 1967.
• In 1957, CN was 13 more efficient than CP.
• By 1967, CP caught and then surpassed the CN
  until 1975, when the two railroads roughly
  converged in productivity.

Caves, Douglas W., and Laurits R. Christensen.
The Relative Efficiency of Public and Private
Firms in a Competitive Environment The Case of
Canadian Railroads (Journal of Political Economy,
vol.8, no. 5, 1980).
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How Generalizable is Inter-program Competition?

• Private markets must already exist.
• The first guaranteed student loan was made in
  1955, ten years before the HEA.
• This implies the use of fairly widely available
  technologies/ inputs.
• Thor/Atlas Tactical Missile Fiasco.
• The good in question must have significant
  positive externalities in order to justify the
  governments desire to expand the market to the
  underserved.

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How Generalizable is Inter-program Competition?

• Are there other problems confronting our nation
  that could benefit from this kind of competition?
  Health Care?
• The FFELP/DLP competition provides with a unique
  laboratory. It came to be as a random act of
  politics. Let us not purposefully destroy
  something that has generated significant cost
  savings for federal taxpayers.

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Wrap Up and Implications for Reauthorization

• Overview of Results
• 1. To what extent has the introduction of the
  Direct Loan Program (DLP) impacted the total real
  costs of running both the FFELP and DLP?
• Our modeling results suggest a real savings of
  almost 685 million per year, for an 8-year
  savings of almost 5.5 billion.

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Wrap Up and Implications for Reauthorization

• Overview of Results
• 2. To what extent has the introduction of the
  Direct Loan Program (DLP) impacted the total real
  costs of running just the FFELP?
• Our modeling results suggest a real savings of
  slightly more than 620 million per year.

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Wrap Up and Implications for Reauthorization

• Importance of problem framing and the role of
  incentives.
• Implications for other stakeholders (students,
  schools, loan industry, ED).
• Implications for reauthorization and the
  importance of a level playing field.

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Questions??

• Contact Information
• Fred Galloway, University of San Diego,
  Galloway_at_sandiego.edu
• Hoke Wilson, ORC Macro, International,
  Hoke.J.Wilson_at_orcmacro.com

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Reframing the Student Loan Costing Debate

• The Benefits of Competition

Hoke Wilson
Fred Galloway