Hillary Clinton’s Billion Dollar Idea: New College Compact

Larissa J. Adamiec, Deborah Cernuaskas 
(Benedictine University, USA)

Abstract: Undergraduate student loan debt has reached a level of $1.48 trillion dollars (student loan hero), or roughly 6% of the national debt. Of the $1.48 trillion dollars of debt, $1 trillion of the debt is in the form of federal loans, or loans as provided from the United States government (US Department of Education). The average graduate walks away with $37,172 in debt. The average interest rate on these loans is 3.8%, causing the graduate to pay $351 a month or $42,120 for the life of the loan. The burden of debt has resulted in graduates delaying life milestones such as homeownership, marriage and children, which has resulted in a drain on the gross domestic product (GDP).

The new College Compact plan as proposed by Hillary Clinton is designed to alleviate the challenges for debt repayment by allowing graduates to refinance their student loans. With private car loans at 0% (Toyota) and public student loans at 3.8%, students should be able to refinance their loans to a lower interest rate. However, interest payments are now included in the government budget. To balance the reduction in income, the government will be required to raise taxes to compensate for the loss according to the plan. The offsetting cost of raised taxes to the reduced student loan repayment will further drain the gross domestic product.

To evaluate the College Compact plan, we developed a time series of cohorts in Illinois evaluating their disposable income. Higher disposable income allows for the individuals in the cohort to participate in the life milestones of homeownership, marriage and children. Using data from IPEDS, we found 8 distinguishable major classifications. Using these classifications, we were able to create an average starting salary given the cohort’s graduation year. Taking the wage growth from the Atlanta Federal Reserve, were able to establish average salaries for each cohort for the entire time period from their graduation through 2014. Using the expenditures by age, we were able to calculate the average living expense for each of the cohorts for the time period. Finally, applying the average debt repayment coupled with the tax impact, we were able to find the average disposable income on a yearly basis for each of the cohorts.

Applying the College Compact plan, we can simulate the effect of the existing cohorts’ disposable income for the next 10 years. Keeping the current economic trends, the same, meaning no surprise market crashes or intense booms, we find the cohorts’ disposable income declines which will result in further erosion of the GDP. Individuals without public student debt will have an increase in payments, resulting in a lower disposable income. These individuals will pay a higher tax rate without the benefit of the reduced student loan payment.

Key words: new college compact; student debt; federal loan debt refinance; Monte Carlo

JEL codes: E240, E370, D610, H270, H240, H630