Opportunity Minnesota

Opportunity MinnesotaAN Economic Analysis CREDITSEconomic analysis conducted by Elton Mykerezi PhD, Applied Economics at the University of Minnesota Twin Cities. Supporting analysis and content was provided by Terry Chaney, MPP. Joshua Winters provided additional higher education debt overview information and policy recommendations. Special thanks to Brian Dailey-Arndt, Ryan Kennedy and Charlie Bevis for their efforts in advancing this report.Executive SummaryThis report presents the findings of a cost-benefit analysis of a higher education debt relief policy known as Opportunity Minnesota. Opportunity Minnesota provides higher education debt relief and reduces the barriers to a college education. The policy creates a tax credit for higher education debt payments made the prior year for students who graduate from a Minnesota higher education institution and stay in the state. This reimbursement induces low-income or marginal students to pursue a higher education, and those benefits are quantified.

The key findings of this economic analysis are:1. The total fiscal benefit to Minnesota from this policy for every one degree induced is $123,865 and the total social benefits are $847,133, for a total of $970,998 of economic benefit.2. The program pays for itself if it is able to generate a 12% increase in the share of each cohort of graduates that obtains a BS degree, or induces 2% more high school students to pursue and attain a college degree.3. The level of inducement (12% increase in cohort of graduates) required for Opportunity Minnesota to offset the fiscal costs for the state is feasible according to existing studies and economic literature on higher education debt reduction programs[endnoteRef:1]. [1: Sensitivity analysis of debt relief programs such as the one in DC provides evidence that this is feasible. For reference see,Abraham, K., Clark, M., Financial Aid and Students College Decisions: Evidence from the District of Columbia Tuition Assistance Grant Program, National Bureau of Economic Research (NBER) Working Paper no. 10112, November 2003.]

The policy recommendations from this economic analysis are:1. Create a fully refundable tax credit that goes beyond just reducing tax liability2. Create a ratcheted income cutoff that decreases the credit as income increases and cap the total amount eligible annually for debt payments on qualified education loans3. Allow for payments on all federal Stafford unsubsidized and subsidized loans, Perkins loans, and SELF loans.4. CONTENTSIntroduction.5The Student Debt Crisis6A Cost Benefit Analysis of Opportunity Minnesota.10Social Cost-Benefit Ratio..14Policy Recommendations..15Works Cited and End Notes.....16The credit will only be eligible to those students who stay in Minnesota post-graduation5. Allow for employer to take the deduction if they offer tuition payments as a benefit of employment

An IntroductionThe rising costs of attaining a higher education degree are more burdensome now than ever for prospective students, and further bar low-income youth from entering the middle class. [endnoteRef:2]. But this trend is not unique to the U of M it is true across the board in both public and private institutions. As a result, Minnesota now has the dubious distinction of having the 3rd highest average higher education debt in the country at a whopping $29,058, according to an annual report by the Project on Student Debt[endnoteRef:3]. [2: http://www.oir.umn.edu/static/tuition/TuitionUMNTC.pdf] [3: http://ticas.org/posd/map-state-data-2015#overlay=posd/state_data/2015/mn]

It is estimated that cost factors prevent 48% of college-qualified high school graduates from attending a four-year institution, according to a 2002 report entitled Empty Promises: The Myth of College Access in America[endnoteRef:4]. The price of a higher education has become a major factor. So much so, that according to a 2012 survey by the National Association of College Admission Counseling (NACAC), college enrollment has begun to slow down, particularly at private colleges across the country[endnoteRef:5]. The NACAC cited increasing costs as reaching a tipping point and was a key driver behind sluggish enrollment. If this trend continues, low-income individuals will have fewer and fewer paths to rise up out of poverty and into the middle class to build a vibrant economy in which all Minnesotans can succeed and prosper. [4: http://files.eric.ed.gov/fulltext/ED466814.pdf] [5: http://www.nacacnet.org/research/research-data/documents/2011soca.pdf]

Greater state investments are needed in higher education to offer real debt relief. These are investments in a future that promotes economic vitality for all, regardless of socioeconomic background or social status. Decreasing student debt relieves an unnecessary burden on Minnesotas youth and their families, and creates greater economic mobility by eliminating a major financial constraint on college graduates. Opportunity Minnesota is a concrete policy solution that can lower the debt burden for graduates, divert economic activity from debt payments to local economies, and promote a strong and educated workforce. What is Opportunity Minnesota?Opportunity Minnesota is a piece of legislation based off of a bill that passed Maines legislature overwhelmingly in 2007. It relieves student loan debts for Minnesota residents that have graduated from a Minnesota higher education institution and continue to work in the state following graduation. It is designed to both relieve student debt and remove the cost barrier that prevents many Minnesotans from attending college. At the same time, it incentivizes more students to go to college and complete their degree, and incentivizes our highly-skilled workforce to stay in Minnesota, increasing entrepreneurship, business investment, lifetime earnings, and the tax base.At its heart, Opportunity Minnesota is a merit based tax cut provided to the newest members of the middle class as they if they achieve a higher education. This report first explores the current status of student loan debt federally and in the state. That overview is followed by an economic analysis of the costs and benefits of the policy, the conditions necessary for the policy to pay for itself, key assumptions used in conducting this analysis, and recommendations for how this policy should be crafted in Minnesota.

The STUDENT DEBT CRISISStudent borrowing for higher education in the U.S. has reached a crisis level. Recently it was reported that debt incurred to finance a college education is now measured in the trillions of dollars, surpassing even credit card debt. The long term economic impact of this debt burden on students and their families is still uncertain. But there is already evidence emerging that an entire generation could be so saddled with student loan payments that it will likely supplant home mortgages and car loans. Most economists acknowledge that borrowing for a college education pays for itself over time, since on average college grads do earn more. However, college tuition rates have been increasing much faster than inflation, leaving college graduates with crushing levels of debt that will likely become an obstacle to future prosperity.

Table 1. National trends on new student loans and total debt outstandingFinancing a college education is especially burdensome for Minnesota students, who are graduating with debt levels that are higher than the national average. The Project on Student Debt ranks Minnesota 3rd highest in average debt for a four year degree ($29,058) and the 5th highest percentage (71%) of students that graduate with debt.[endnoteRef:6] Students and their families have had to borrow more to compensate for large decreases in the states contribution to higher education. According to the Minnesota Office of Higher Education (MOHE), compared to the previous year, in 2011 the states contribution for higher education decreased by 14% and tuition at state colleges increased by 12.8%. Between 2006-2011 state appropriations for public higher education per full-time student in Minnesota decreased by 21% while spending per full-time student increased by 5 and 6%. [endnoteRef:7] At the same time, businesses expect potential employees to arrive on the job with a higher degree of training and expertise. The message to young people today is that obtaining some kind of post-secondary education is required in order to compete in a global economy. [6: http://projectonstudentdebt.org/state_by_state-sum2011.php] [7: http://www.ohe.state.mn.us/mPg.cfm?pageID=1988&1534 D83A_1933715A=fc6e4fe085ee75ba33c6aadbf2b60f4f27d09ab3]

Table 2. Inflation adjusted college tuition and fees

At one time it was possible for college students to earn a four year degree and graduate relatively debt-free. Today however, the typical college student must mortgage his or her future to secure a job from an employer that expects, at the very least, a four year degree. Since 1985, the inflation rate for college tuition has increased by more than three times the rate of inflation. In 2011 alone, college tuition and fees increased at a rate of 8.3%.[endnoteRef:8] For the 2011-12 academic year the average tuition bill at the University of Minnesota was $13,062, and as high as $31,862 at the states private liberal arts colleges.[endnoteRef:9] Thus, the combination of tuition inflation and a reduced contribution by the state, has forced Minnesota families to borrow more. [8: http://www.bloomberg.com/news/2011-10-26/tuition-jumps-8-3-doubling-inflation-as-obama-plans-debt-relief.html] [9: http://www.ohe.state.mn.us/mPg.cfm?pageID=949#1&1534-D83A_1933715A=e3a5b3ac6d1e8a797854b7ffae8ff06def06e269]

Table 3. Tuition and debt from public and private schools in Minnesota[endnoteRef:10] [10: http://www.ohe.state.mn.us Office of Higher Education on Tuition, Project on Student Debt]

As Table 3 shows, tuition at public college and universities has climbed dramatically over the last decade. During that same time period, student debt from both public and private institutions has also risen dramatically growing more than 52% over the last decade[endnoteRef:11]. Though the cost of attaining a higher education from a private institution has risen consistently over the last 40 years, the debt from private schools is very close to that from a public institution. In 2010-2011, the average student debt from a private school was $31,459 and the average debt from a public school was $28,907, for a difference of only $2,552. The close proximity of these two numbers is due in large part by the financial aid offered by private institutions which limits the indebtedness of their graduates. One unique aspect of the Opportunity Minnesota policy is that it addresses both public and private debt. [11: Currently, existing data on debt from the Project on Student Debt only goes back to the 2003 2004 academic year. This report will be updated if and when additional data becomes available. ]

Student debt from both public and private institutions has risen dramatically growing more than 52% over the last decade.Table 4. National ratio of student loan debt to household incomeIt is generally acknowledged that having an educated populace is necessary to maintaining a competitive business environment; and Minnesota has been a good place to do business for decades due in large part to its educated workforce. State economist Tom Stinson has argued that education has been the key to Minnesotas productivity and prosperity. Moreover, Stinson believes that the states ability to remain productive and innovative in the future will depend on the investments in education that are made today. In the next ten years it is projected that more than half of all job openings will require some college or higher.[endnoteRef:12] Therefore, to remain competitive the state needs to think strategically about the link between higher education costs and long term economic growth. [12: http://www.ohe.state.mn.us/mPg.cfm?pageID=945]

This study will examine a proposal that would provide debt relief in the form of a tax credit to Minnesota students that complete a degree at a state college and continue to work (and pay taxes) in the state after graduation. A similar bill passed in Maine with bipartisan support and was implemented in 2008. It is known that a percentage of non-marginal students will enter college regardless of any incentives. However, if the promise of debt relief can induce additional (marginal) students to enroll in college and earn degrees the benefits of such a program would be increased. [endnoteRef:13] [13: http://inflationdata.com/Inflation/Inflation_Articles/Education_Inflation.asp]

A COST/BENEFIT ANALYSIS OF OPPORTUNITY MINNESOTA

Because much of the benefit of an educated population accrues to society at large, rather than the recipient alone, government agencies at all levels of responsibility invest in making higher education accessible.This study provides an economic analysis of a proposed tax credit designed to offset part of any student college debt accumulated through federal student loans for Minnesota residents who obtain a bachelors degree from one of the states institutions of higher learning, and who are gainfully employed in the state after graduation[endnoteRef:14]. The tax credit would be equal to the smallest of the graduates annual payment on their federal loans (provided the loan is extended over no fewer than 10 years) and their total income tax liability to the state. Higher education brings significant benefits to the recipients themselves and to society at large. Because much of the benefit of an educated population accrues to society at large, rather than the recipient alone, government agencies at all levels of responsibility invest in making higher education accessible. Opportunity Minnesota presents an innovative mechanism for delivering such an investment in ways that make higher education more accessible, while rewarding accomplishment and, likely, with minimal or no distortions to incentives for leaving productive lives. As proposed, the program will reimburse college graduates for part, or all of their annual dues on their federal student debt. Undoubtedly, the majority of the recipients will have decided to attend college regardless of the existence of such a program, and will receive benefits without changing their educational/career choices. This presents a fiscal cost to the state, but it does not necessarily impose a cost on society; in fact, it could generate social benefits (to be discussed in greater detail to follow). We will label recipients who will benefit without a change in their plan as the incumbents through the rest of this paper. The prospect of such reimbursement, however, will likely make college accessible for some students, who in the absence of the program, would have deemed the amount of debt required to pursue a degree too high. We will use the label marginal students and induced degrees interchangeably to describe the latter; students who would complete a degree if the program were in place but who would not have done so otherwise. [14: The economic analysis section of this report was conducted and authored by Elton Mykerezi, PhD, Assistant Professor, Applied Economics at the University of Minnesota - Twin Cities. Supporting analysis and content was provided by Terry Chaney, MPP. ]

This study will answer the following questions about the proposed program: 1-What is the social value of a college degree? 2-What is the fiscal benefit to the state from a college degree (in terms of taxes and savings from reduced use of social programs/institutions). 3-For a representative cohort of Minnesota high school graduates, what is the minimum number of induced degrees (relative to incumbents) that the program would have to produce to fully cover the fiscal costs of the program. 4-We will provide a discussion of the potential social costs and benefits of such a program, relative to other mechanisms for investing in higher education and tax law, with a focus on precedent for education-related tax credits. Private Benefits from a College DegreeThe most salient benefit of a college degree accrues to the degree recipient in the form of higher wages in the labor market as well as higher probability of being employed in any given point in time. Recent computations from the Bureau of Census indicate that the present value of the lifetime earnings during a typical working life of a high school graduate amount to a present value of $1,371,000 (in 2011 U.S. dollars). A study by Paul Glewwe and Amy Damon found that in the U.S., on average, income earnings are increased by 7-9% for each additional year of education.[endnoteRef:15] This study assumes a return of 40% for a bachelor degree, a figure that enjoys widespread consensus among economists.[endnoteRef:16] Educated adults are also less likely to be unemployed at any point in time. For each additional year of schooling, an individuals chance of being unemployed is reduced by 0.5-0.8 percentage points.[endnoteRef:17] This study assumes a difference of 2.8 percentage points in the probability of annual unemployment between a high school graduate and a BS holder. [15: Damon, A., Glewwe, P., Valuing the Benefits of the Education Provided By Public Institutions: A Study of the University of Minnesota and the Minnesota State Colleges and University System, Department of Applied Economics, University of MN, January 2008, p.14. ] [16: Individuals with a BS degree earn $2,422,000 in their lifetimes, for a difference of over $1M over high school graduates. However, not all of this difference can be presumed to have been caused by the college degree. Individuals who chose to go to college may differ from those who dont in a number of personal characteristics (e.g. intellect, persistence, ambition, family resources and social capital, etc.), thus part of the differences may be a consequence of those same individual differences that caused one person to go to college and another not to, rather than the degree itself. Extensive economic research into the causal effect of a college degree has held constant personal characteristics and has generated quasi-experimental evidence on the true return to education.] [17: Damon, Glewwe, p.17.]

Public Benefits from a College Degree

A study by Paul Glewwe and Amy Damon found that in the U.S., on average, income earnings are increased by 7-9% for each additional year of education.In addition to these private benefits, there are others that are often not factored by the recipient themselves while they make college attendance decisions, but that accrue to society at large. Economists call these positive externalities. Educated adults are less likely to commit crimes, use social assistance programs, more likely to donate to charities, are more active and better informed participants in political processes, among other things.[endnoteRef:18] All of these translate into quantifiable benefits to the state. For instance, average annual costs of incarceration are around $20,000 per year, social assistance programs impose administrative costs, as well as a burden associated with raising the public revenue needed to operate these programs (also known as Dead Weight Loss of taxation). We assign conservative dollar values to some of these external benefits based on widely accepted standards in the academic literature in economics. [18: Externalities can be best described as desirable by-products of an individual decision. When one contemplates on whether to go to college or not, they compare expected benefits from perceived future earnings, prospects for job stability and personal satisfaction from education with the financial costs and trouble of going to college. It is unlikely that one decides to go to college because such an experience will reduce the likelihood that they commit a crime, their willingness and ability to vote, desire to volunteer/donate, etc. All of the latter are a desirable by-product of an individuals quest for better labor market outcomes and/or personal satisfaction from schooling. ]

Wage Spillovers One of the most important external benefits to an educated population is that educated adults have a positive impact on the productivity of people around them. This causes others to be more productive and is reflected onto the wages of people other than the recipient of the college degree themselves. Two of the most common channels for such spillovers are through cross-firm productivity spillovers and via social interactions among citizens.[endnoteRef:19] Morettis analysis estimated that a one percent increase in the number of college graduates increased wages of other college graduates by 1.2%, while the spillover effects on those without a college education are even higher.[endnoteRef:20] For purposes of this study, we use a conservative estimate of spillover effects equal to half of the private effect on wages.[endnoteRef:21] [19: Suppose someone in firm A is responsible for ordering supplies from firm B. If the person in firm B is more educated, they likely make fewer mistakes, could share useful insight with their collaborator from firm A, etc. This results in someone at firm A enjoying higher productivity because firm B hired a more educated worker. Also, people rely on social interactions for learning, business ideas, resolving personal problems, handling issues at work, etc. Any one person would benefit more from such interaction if it were with a more educated person. ] [20: Damon and Glewwes analysis is much more conservative, estimating a spillover effect of 0.5% on degree holders and 0.75% on non-degree holders.] [21: A recent study (Moretti, 2004) showed that, after holding individual characteristics constant, people who were surrounded by more educated people had higher wages. A one percentage point increase in the incidence of college degrees in ones city was estimated to increases the wages of high-school dropouts by 1.2 percent, the wages of high-school graduates and those with some college by 1.4 percent, and the wages of college graduates and of those with graduate degrees (master, professional and doctoral degrees) by 1.2 percent. Some believe that these estimates may be too high, since they imply that the public benefit can be higher than the private. Glewwe and Damon (2011) use conservative estimates (of approximately 2/3s of the effect estimated in Moretti (2004)) in their study of the impact of public education subsidies in Minnesota. Our numbers are more conservative than either of those studies. ]

Fiscal Costs and Benefits

Some of those social benefits translate into fiscal benefits to the state in the form of higher revenues from taxes as well as savings in the costs of running social programs and various state institutions.The total social benefit is computed as the sum of all of the above benefits from a college degree. Some of those social benefits translate into fiscal benefits to the state in the form of higher revenues from taxes as well as savings in the costs of running social programs and various state institutions.[endnoteRef:22] We use median earnings data by level of education, income and sales tax rates for the state, as well as published costs of social programs and institutions to quantify these fiscal benefits for each degree. Table 1 shows the social and fiscal benefits of inducing a single college degree in Minnesota. [22: Damon and Glewwe estimated that this would amount to a benefit of 8.8%.]

We then use data from the MN Office of Higher Education on enrollment of the states high school graduates across colleges, their graduation rates, and annual federal debt incurred to compute the debt liability that the 2011 cohort of graduates would incur. We then compute the number of inducted degrees required for the fiscal benefits of the program to match the costs. The results of these computations are found in Table 6.

Table 5. Value of a college degreeSocial Benefits

Lifetime Salary of High school graduate $ 1,371,000

Salary benefits of inducing 1 degrees: $ 548,400

Lifetime earnings of BS holder $ 1,919,400

Unemployment $ 14,533

Wage Spillover effect $ 274,200

Reduced Incarceration $ 10,000

Total Social Benefit (public + private) $ 847,133

Fiscal Benefits

Income tax--own earnings $ 39,476.07

Income tax--Spillover $ 19,331.10

Sales tax $ 44,677.46

UI benefits $ 10,380.43

Incarcerations $ 10,000.00

Total Fiscal Benefit $ 123,865.06

Table 6. Fiscal costs associated with the 2011 high school graduating class, and minimal program induction rates needed to offset fiscal costs. State University University of Minnesota Private College & University Total BS program

Attendees81235703621720043

Graduates38993707447612082

Number with loans2724212330947942

Average per person $ 5,573 $ 5,590 $ 5,988

Total debt per year $ 15,183,987 $ 11,867,915 $ 18,530,615 $ 45,582,517

Total debt per cohort $ 60,735,949 $ 47,471,659 $ 74,122,459 $ 182,330,068

Social Value of degree $ 849,990

Fiscal benefit of degree $ 123,865

Induced degrees required1,472

Percent of College Cohort12%

Percent of HS graduates2%

Social Cost-Benefit RatioFirst, we note that the benefits computed here are very conservative. We have used conservative numbers on returns to degrees, wage spillovers and almost all other figures. In addition, there are many benefits that are left out. For instance, only the cost of incarceration is factored in relation to the reduction in crime. Crime, however, imposes other fiscal costs associated with policing as well as private costs to the victims of thefts, assaults and murders. These can be very large, and are not computed here. Additionally, all costs associated with use of welfare programs, benefits associated with increased civic engagement and participation in political processes are not factored in.

If the program is able to generate a 12% increase in the share of each cohort of graduates that obtains a BS degree, or induces 2% more high school students to pursue and attain a college degree, the fiscal benefits would cover costs and paying for initial costs by incurring debt would be justified.The social costs of such a program are much more difficult to estimate as the answer would depend on assumptions about the marginal cost of public funds and on the marginal value of public services. Specifically, each dollar used by the public sector has, in effect, cost the taxpayer more than one dollar. This is because there is administrative cost associated with collecting and managing the revenue, as well as distortions in incentives due to taxes that produce a loss in efficiency. The latter is known as a dead weight loss (DWL) in the literature. [endnoteRef:23] This credit is, in fact, a tax cut, so there will be a proportional reduction in DWL and implementing the policy will generate a social benefit equal to the additional marginal cost of the public funds that are not collected. Of course, there is no free money, so the cost of such a move would depend on what compensates it. If the state raises funds from other sources then there would be a marginal cost of collecting the replacement funds (which may be higher or lower than the one associated with income taxes among recent college graduates). If the state cuts spending, what is lost is the marginal value of the services that will be cut to the public. There is one additional potential cost. If students are not borrowing the maximum possible from the federal government, they might be more inclined to do so with the program in place. However, most students already borrow the amount allowed through federal programs and also resort to private sources. [23: To understand the notion of the DWL of taxation, consider the following example. A college professor is presented with an opportunity to do one more consulting project during the summer, for the amount of $5000. With that being the last $5000 the worker will make during that tax year, the marginal tax rate that applies to this project will be one of the higher rates (depending on how much has been earned already), so the net profit from the project would be only a fraction of the gross revenue (lets assume $4000 for purposes of exhibition). It may easily be the case that this is the kind of project that the worker would do for $5000, but would chose not to do for $4000. So in the absence of a tax the person would be working and producing a social value of $5000, while in the presence the person is producing $0. The same applies to decisions of marginal workers across the state, on whether to take the overtime hours if they have a chance, on whether one takes a second part-time job, or starts a side business, and even on whether the marginal family member should work at all or be a home-maker. ]

While it is not possible to estimate the possible tradeoffs ex-ante, two statements can be made on this program. The first is that if the program is able to generate a 12% increase in the share of each cohort of graduates that obtains a BS degree or induces 2% more high school students to pursue and attain a college degree, the fiscal benefits would cover costs and paying for initial costs by incurring debt would be justified. The second is that if one is of the opinion that a tax cut for the middle class is already sound fiscal policy, the program likely has no costs. It turns a tax cut for the newest members of the middle class into a merit based tax cut that encourages higher education.

Policy REcommendationsThe benefits discussed in the costs/benefits section hinge greatly upon how the policy is crafted. The goals of this policy should be to maximize the incentive to attain a college degree it is precisely this inducement that drives the benefits to Minnesota. The following policy considerations are recommended to achieve that objective:1. Create a fully refundable tax credit that goes beyond just reducing tax liability2. Create a ratcheted income cutoff that decreases the credit as income increases and cap the total amount eligible annually for debt payments on qualified education loans3. Allow for payments on all federal Stafford unsubsidized and subsidized loans, Perkins loans, and SELF loans.4. The credit will only be eligible to those students who stay in Minnesota post-graduation5. Allow for employer to take the deduction if they offer tuition payments as a benefit of employment

Works Cited and Endnotes

1