Michael Simkovic
University of Southern California, Gould School of Law, Faculty Member
- Seton Hall University, Law, Faculty Memberadd
- Michael Simkovic is an Associate Professor of Law at Seton Hall Law School, where his research focuses on taxation, c... moreMichael Simkovic is an Associate Professor of Law at Seton Hall Law School, where his research focuses on taxation, commercial law, and corporate and consumer finance. He was one of the 2015 Young Scholars Award recipients.
Professor Simkovic’s research has been cited in the U.S. Congress’ Joint Economic Committee report recommending sweeping reforms of the credit card industry, which were enacted in 2009. His research has also been cited by researchers at the Federal Reserve Bank of New York and the Government Accountability Office, and in popular publications such as the New York Times, Washington Post, Los Angeles Times, Bloomberg, the Atlantic, and USA Today. He was the recipient of the American College of Consumer Financial Services Lawyers Writing Award in 2012.
Professor Simkovic has served as a visiting professor at the University of North Carolina, Chapel Hill and at Fordham University. Before joining the Seton Hall faculty, Professor Simkovic was an attorney at Davis Polk & Wardwell in New York; a strategy consultant at McKinsey & Company, specializing in legal, regulatory and business issues affecting financial services companies; and an Olin Fellow in Law and Economics at Harvard Law School.edit
Research Interests:
We estimate the increase in earnings from a law degree relative to a bachelor's degree for graduates of different race/ethnic groups. Law earnings premiums are higher for whites than for minorities (excluding individuals raised outside... more
We estimate the increase in earnings from a law degree relative to a bachelor's degree for graduates of different race/ethnic groups. Law earnings premiums are higher for whites than for minorities (excluding individuals raised outside the U.S.). The median annual law earnings premium is approximately $41,000 for whites, $34,000 for Asians, $33,000 for blacks, and $28,000 for Hispanics. Law earnings premiums for whites, blacks and Hispanics have trended upward and appear to be gradually converging. Approximately 90% of law graduates are white compared to approximately 82% of bachelor's degree holders.
We investigate whether economic conditions at labor market entry predict long-term differences in law graduate earnings. We find that unemployment levels at graduation continue to predict law earnings premiums within four years after... more
We investigate whether economic conditions at labor market entry predict long-term differences in law graduate earnings. We find that unemployment levels at graduation continue to predict law earnings premiums within four years after graduation for earners at the high end and middle of the distribution. However, the relation fades as law graduates gain experience and the difference in lifetime earnings is moderate. Outcomes data available prior to matriculation do not predict unemployment or starting salaries at graduation. Earnings premiums are not predicted by BLS projected job openings. Although changes in cohort size predict changes in the percent of law graduates practicing law, we find little evidence that changes in cohort size predict changes in earnings. This suggests that law graduates who switch to other occupations when law cohort sizes increase are not hurt financially by larger cohorts. For medium-to high-earning graduates, successfully timing law school predicts a higher value of a law degree ex-post, but simulations show that no strategy for ex-ante timing is readily available.
Financial analyses such as valuation, solvency and capital adequacy play a crucial role in bankruptcy. Over the course of the 20th century, methods of financial analysis in bankruptcy have shifted from earnings multiples to dis- counted... more
Financial analyses such as valuation, solvency and capital adequacy play a crucial role in bankruptcy. Over the course of the 20th century, methods of financial analysis in bankruptcy have shifted from earnings multiples to dis- counted cashflow (DCF) and recently to market-based approaches such as auctions, market pricing of equity and unsecured debt, and credit spreads. Each shift in bankruptcy court practice followed shifts in financial services industry practice and developments in academic finance. Bankruptcy courts shifted gradually, often several decades after the financial community. Newer methods en- countered resistance and skepticism, and older methods continued to be used by courts in conjunction with newer methods for many years. Approaches to corporate solvency analysis used in bankruptcy courts and Delaware state courts appear to have mutually influenced each other. The overall pattern reflects a movement toward greater financial and quantitative sophistication by bankruptcy courts and practitioners and, especially in recent years, seems to be driven by a desire for greater accuracy and objectivity.
Higher education should not be evaluated based on good or bad outcomes, but rather based on value-added. Education can add substantial value even while producing unappealing out- comes, because those outcomes may still be better than... more
Higher education should not be evaluated based on good or bad outcomes, but rather based on value-added. Education can add substantial value even while producing unappealing out- comes, because those outcomes may still be better than realistic alternatives after considering heterogeneity in student popula- tions. Conversely, education can fail even while producing attrac- tive outcomes if a realistic alternative could have added more val- ue.
We estimate the increase in earnings from a law degree relative to a bachelor's degree for graduates who majored in different fields in college. Students with humanities and social sciences majors comprise approximately 47 percent of law... more
We estimate the increase in earnings from a law degree relative to a bachelor's degree for graduates who majored in different fields in college. Students with humanities and social sciences majors comprise approximately 47 percent of law degree holders compared to 23 percent of terminal bachelor's. Law degree earnings premiums are highest for humanities and social sciences majors and lowest for STEM majors. On the other hand, among those with law degrees, overall earnings are highest for STEM and Business Majors. This effect is fairly small at the low end of the earnings distribution, but quite large at the top end. The median annual law degree earnings premium ranges from approximately $29,000 for STEM majors to $45,000 for humanities majors.
Limited liability is a double-edged sword. On the one hand, limited liability may help overcome investors' risk aversion and facilitate capital formation and economic growth. On the other hand, limited liability is widely believed to... more
Limited liability is a double-edged sword. On the one hand, limited liability may help overcome investors' risk aversion and facilitate capital formation and economic growth. On the other hand, limited liability is widely believed to contribute to excessive risk-taking and exter-nalization of losses to the public. The externalization problem can be mitigated imperfectly through existing mechanisms such as regulation, mandatory insurance, and minimum capital requirements. These mechanisms would be more effective if information asymmetries between industry and policymakers were reduced. Private businesses typically have better information about industry-specific risks than policy-makers. A charge for limited liability entities-resembling a corporate income tax but calibrated to risk levels-could have two salutary effects. First, a well-calibrated limited liability tax could help compensate the public fisc for risks and reduce externalization. Second, a limited liability tax could force private industry actors to reveal information to policymakers and regulators, thereby dynamically improving the public response to externalization risk. Charging firms for limited liability at initially similar rates will lead relatively low-risk firms to forgo limited liability, while relatively high-risk firms will pay for limited liability. Policymakers will then be able to focus on the industries whose firms have self-identified as high risk, and thus develop more finely tailored regulatory responses. Because the benefits of making the proper election are fully internalized by individual firms, whereas the costs of future regulation or limited liability
Government subsidies to higher education have recently become a hot button political issue. But what if the federal government doesn’t actually subsidize higher education, but rather, taxes it? This article gauges efficient investment... more
Government subsidies to higher education have recently become a hot button political issue. But what if the federal government doesn’t actually subsidize higher education, but rather, taxes it?
This article gauges efficient investment levels based on marginal rates of return relative to other investments. Labor economists struggle to explain why the rates of return to higher education have remained much higher than the rates of return to other investments. This article proposes a novel explanation: distortionary taxation.
Economic theory suggests that when investments that are substitutes for one another are taxed inconsistently, investors are less likely to choose the investment option that is taxed more heavily. Unfavorable tax treatment of higher education relative to other forms of investment could create an undersupply of educated labor. This distortion would increase pretax returns to education and reduce economic growth and social welfare.
Part I of this article reviews empirical evidence linking higher education to increased earnings and economic growth, and considers student responsiveness to financial incentives. Part II explains why the unusually high rates of return to higher education may indicate underinvestment. Part III presents a mathematical model illustrating the link between tax rates and rates of return. Part IV reviews optimal tax theory and the distortion problem. Part V contrasts taxation of favored investments with taxation of higher education. Part VI considers policy implications.
This article gauges efficient investment levels based on marginal rates of return relative to other investments. Labor economists struggle to explain why the rates of return to higher education have remained much higher than the rates of return to other investments. This article proposes a novel explanation: distortionary taxation.
Economic theory suggests that when investments that are substitutes for one another are taxed inconsistently, investors are less likely to choose the investment option that is taxed more heavily. Unfavorable tax treatment of higher education relative to other forms of investment could create an undersupply of educated labor. This distortion would increase pretax returns to education and reduce economic growth and social welfare.
Part I of this article reviews empirical evidence linking higher education to increased earnings and economic growth, and considers student responsiveness to financial incentives. Part II explains why the unusually high rates of return to higher education may indicate underinvestment. Part III presents a mathematical model illustrating the link between tax rates and rates of return. Part IV reviews optimal tax theory and the distortion problem. Part V contrasts taxation of favored investments with taxation of higher education. Part VI considers policy implications.
Legal academics and journalists have marshaled statistics purporting to show that enrolling in law school is irrational. We investigate the economic value of a law degree and find the opposite: given current tuition levels, the median and... more
Legal academics and journalists have marshaled statistics purporting to show that enrolling in law school is irrational. We investigate the economic value of a law degree and find the opposite: given current tuition levels, the median and even 25th percentile annual earnings premiums justify enrollment. For most law school graduates, the net present value of a law degree typically exceeds its cost by hundreds of thousands of dollars.
We improve upon previous studies by tracking lifetime earnings of a large sample of law degree holders. Previous studies focused on starting salaries, generic professional degree holders, or the subset of law degree holders who practice law. We also include unemployment and disability risk rather than assume continuous full time employment.
After controlling for observable ability sorting, we find that a law degree is associated with a 60 percent median increase in monthly earnings and 50 percent increase in median hourly wages. The mean annual earnings premium of a law degree is approximately $53,300 in 2012 dollars. The law degree earnings premium is cyclical and recent years are within historical norms.
We estimate the mean pre-tax lifetime value of a law degree as approximately $1,000,000.
We improve upon previous studies by tracking lifetime earnings of a large sample of law degree holders. Previous studies focused on starting salaries, generic professional degree holders, or the subset of law degree holders who practice law. We also include unemployment and disability risk rather than assume continuous full time employment.
After controlling for observable ability sorting, we find that a law degree is associated with a 60 percent median increase in monthly earnings and 50 percent increase in median hourly wages. The mean annual earnings premium of a law degree is approximately $53,300 in 2012 dollars. The law degree earnings premium is cyclical and recent years are within historical norms.
We estimate the mean pre-tax lifetime value of a law degree as approximately $1,000,000.
The review focuses on problems with empirical claims in "Failing Law Schools" regarding outcomes for law graduates and also regarding law faculty compensation. The review also discusses Professor Tamanaha's proposals for reform of legal... more
The review focuses on problems with empirical claims in "Failing Law Schools" regarding outcomes for law graduates and also regarding law faculty compensation. The review also discusses Professor Tamanaha's proposals for reform of legal education in light of economic theory and the empirical economics literature, and finds reasons to doubt that Tamanaha's proposed reforms will have the effects he predicts.
U.S. policymakers often treat market competition as a panacea. However, in the case of mortgage securitization, policymakers’ faith in competition is misplaced. Competitive mortgage securitization has been tried three times in U.S.... more
U.S. policymakers often treat market competition as a panacea. However, in the case of mortgage securitization, policymakers’ faith in competition is misplaced. Competitive mortgage securitization has been tried three times in U.S. history - during the 1880s, the 1920s, and the 2000s - and every time it has failed. Most recently, competition between mortgage securitizers led to a race to the bottom on mortgage underwriting standards that ended in the late 2000s financial crisis. This article provides original evidence that when competition was less intense and securitizers had more market power, securitizers acted to monitor mortgage originators and to maintain prudent underwriting. However, securitizers’ ability to monitor originators and maintain high standards was undermined as competition shifted market power away from securitizers and toward originators. Although standards declined across the market, the largest and most powerful of the mortgage securitizers, the Government Sponsored Enterprises (“GSEs”), remained more successful than other mortgage securitizers at maintaining prudent underwriting. This article proposes reforms based on lessons from the recent financial crisis: merge the GSEs with various government agencies’ mortgage operations to create a single dedicated mortgage securitization agency that would seek to maintain market stability, improve underwriting, and provide a long term investment return for the benefit of taxpayers.
Consumer advocates won a victory with the passage of the Credit Card Accountability Responsibility and Disclosure Act of 2009. (Credit Card Act). The Credit Card Act bans certain pricing practices that were confusing to credit card users.... more
Consumer advocates won a victory with the passage of the Credit Card Accountability Responsibility and Disclosure Act of 2009. (Credit Card Act). The Credit Card Act bans certain pricing practices that were confusing to credit card users. Ironically, the seeds of this legislative victory may have been sown through an earlier legislative defeat - the Bankruptcy Abuse Prevention And Consumer Protection Act of 2005 (BAPCPA). In passing the Credit Card Act, the U.S. Congress Joint Economic Committee cited a study of the effects of BAPCPA on credit card industry profits and prices. The study revealed that the credit card industry may have misled Congress about the probable effects of BAPCPA. The complete and final version of this study was recently published in the American Bankruptcy Law Journal. What follows is a summary.
Publicly traded companies distribute cash to shareholders primarily in two ways - either through dividends or through anonymous repurchases of the companies' own stock on the open market. Companies must announce a repurchase... more
Publicly traded companies distribute cash to shareholders primarily in two ways - either through dividends or through anonymous repurchases of the companies' own stock on the open market. Companies must announce a repurchase authorization, but do not actually have to repurchase any stock, and until recently did not have to disclose whether or not they were in fact repurchasing any stock. Scholars and regulators noticed that companies frequently announced repurchases but then appeared not to complete them. Scholars and regulators became concerned that such announcements might be used by insiders to exploit public investors. To increase transparency and reduce opportunities for exploitive behavior, the SEC required that companies disclose their repurchase activity for the past quarter in their 10-Q and 10-K filings beginning in January 2004. This paper tracks the 365 repurchase programs announced in 2004 and finds that since the SEC disclosure requirement went into effect, companies are more likely to complete their announced repurchases and do so within a shorter time period after the repurchase announcement.
This article explains the roots of financial crises in one of the oldest and most fundamental problems of commercial law: hidden leverage. Common law courts wrestled with this problem for centuries and developed a time - tested solution:... more
This article explains the roots of financial crises in one of the oldest and most fundamental problems of commercial law: hidden leverage. Common law courts wrestled with this problem for centuries and developed a time - tested solution: the doctrine of secret liens. If the debtor becomes insolvent, the doctrine of secret liens punishes secret lien holders by subordinating their claims to those of other creditors. In other words, by overriding privately negotiated payment priorities, the doctrine of secret liens creates incentives for transparency. This article argues that legal changes over the last 80 years eroded the doctrine of secret liens, and thereby led to the financial crisis. Due to these legal changes, complex and opaque financial products received the highest priority in bankruptcy, and creditors' incentives were therefore to structure transactions using these favored financial products. The opaque credit environment that resulted permitted debtors - particularly investment banks - to hide the extent of their leverage, to the detriment of all creditors. This article argues that Congress can prevent future financial crises by restoring the doctrine of secret liens, or by adopting a modernized regulatory regime built on the doctrine of secret liens' fundamental insight - that creditors should be compelled to disclose their claims in exchange for payment priority.
The U.S. Bankruptcy code changed dramatically with the passage of The Bankruptcy Abuse Prevention and Consumer Protection Act Of 2005. This act increased the costs and decreased the benefits of bankruptcy to consumers. Supporters of the... more
The U.S. Bankruptcy code changed dramatically with the passage of The Bankruptcy Abuse Prevention and Consumer Protection Act Of 2005. This act increased the costs and decreased the benefits of bankruptcy to consumers. Supporters of the law claimed that it would benefit consumers as well as creditors, because reducing the losses faced by creditors would lower the cost of credit to consumers. Critics of the law depicted it as special interest legislation designed to profit credit card companies at the expense of consumers. This study tests whether the 2005 Bankruptcy Reform: (1) reduced the number of bankruptcies; (2) reduced credit card company losses; (3) lowered the cost to consumers of credit card debt; and (4) increased credit card company profits. The data suggests that although bankruptcies and credit card company losses decreased, and credit card companies achieved record profits, the cost to consumers of credit card debt actually increased. In other words the 2005 bankruptcy reforms profited credit card companies at consumers' expense.
The United States is at the start of a surge in fraudulent transfer litigation. During the credit boom that started in 2003 and peaked in 2007, a remarkable volume of bank loans and bonds were issued, and a remarkable volume of highly... more
The United States is at the start of a surge in fraudulent transfer litigation. During the credit boom that started in 2003 and peaked in 2007, a remarkable volume of bank loans and bonds were issued, and a remarkable volume of highly leveraged transactions were financed. As these debts become due and financially strapped businesses struggle to refinance, the outcome will almost certainly be a wave of defaults, bankruptcies, and intercreditor disputes including fraudulent transfer litigation.
The decisions that bankruptcy courts make in adjudicating these disputes will cause tens if not hundreds of billions of dollars to change hands over the next few years. If bankruptcy courts make prudent decisions, courts could help shape credit policy at U.S. banks for a generation. Unfortunately, the methods that bankruptcy courts have traditionally used to adjudicate fraudulent transfer claims have at times led to inconsistent, unpredictable, and inadvertently biased outcomes. The problem is two-fold: First, courts’ reliance on experts introduces tremendous subjectivity and complexity into the process. Second, well-established features of human psychology - which cannot be overcome through bankruptcy judges’ good intention - taint the decision making process with legally impermissible hindsight bias.
This article discusses recent legal and financial innovations that may aid bankruptcy courts in assessing fraudulent transfer claims in large business bankruptcies. These innovations have the potential to diminish the importance of experts, increase consistency and predictability of the law, de-bias and simplify judicial decision-making, and ultimately help stabilize the economy by deterring imprudent business decisions. Part I of this article discusses the dramatic increase in financial leverage throughout the economy during the last decade of prosperity, the recession that began in 2008, and why fraudulent transfer law may determine who will bear billions in losses. Part II of this article describes the historic and intellectual development of fraudulent transfer law, the expert-centered paradigm that prevailed during the last twenty years, experimental and real-world evidence of the problem of hindsight bias, and two recent decisions that suggest the emergence of a new market-centered paradigm. Part III of this article explains how this new market-centered paradigm - coupled with recent innovations in the financial markets and finance theory - can enable fraudulent transfer law to more effectively achieve its historic policy objectives. Part IV of this article includes original empirical analysis of the relationship between equity and credit default swap prices as debtors approach bankruptcy. Part V explains how judicial adoption of the methods we suggest would improve credit decisions at banks and prevent destabilizing transactions.
The decisions that bankruptcy courts make in adjudicating these disputes will cause tens if not hundreds of billions of dollars to change hands over the next few years. If bankruptcy courts make prudent decisions, courts could help shape credit policy at U.S. banks for a generation. Unfortunately, the methods that bankruptcy courts have traditionally used to adjudicate fraudulent transfer claims have at times led to inconsistent, unpredictable, and inadvertently biased outcomes. The problem is two-fold: First, courts’ reliance on experts introduces tremendous subjectivity and complexity into the process. Second, well-established features of human psychology - which cannot be overcome through bankruptcy judges’ good intention - taint the decision making process with legally impermissible hindsight bias.
This article discusses recent legal and financial innovations that may aid bankruptcy courts in assessing fraudulent transfer claims in large business bankruptcies. These innovations have the potential to diminish the importance of experts, increase consistency and predictability of the law, de-bias and simplify judicial decision-making, and ultimately help stabilize the economy by deterring imprudent business decisions. Part I of this article discusses the dramatic increase in financial leverage throughout the economy during the last decade of prosperity, the recession that began in 2008, and why fraudulent transfer law may determine who will bear billions in losses. Part II of this article describes the historic and intellectual development of fraudulent transfer law, the expert-centered paradigm that prevailed during the last twenty years, experimental and real-world evidence of the problem of hindsight bias, and two recent decisions that suggest the emergence of a new market-centered paradigm. Part III of this article explains how this new market-centered paradigm - coupled with recent innovations in the financial markets and finance theory - can enable fraudulent transfer law to more effectively achieve its historic policy objectives. Part IV of this article includes original empirical analysis of the relationship between equity and credit default swap prices as debtors approach bankruptcy. Part V explains how judicial adoption of the methods we suggest would improve credit decisions at banks and prevent destabilizing transactions.
Credit markets serve a vital function in capitalist economies: evaluating the riskiness of a range of possible investments and channeling resources toward those investments that investors believe are most likely to prove successful. This... more
Credit markets serve a vital function in capitalist economies: evaluating the riskiness of a range of possible investments and channeling resources toward those investments that investors believe are most likely to prove successful. This process is known as the “risk-based pricing” of credit. Ideally, risk-based pricing should lead to lower cost of capital for lower risk investment choices with larger rewards, and therefore more investment in such promising activities. Conversely, risk-based pricing should lead to higher costs of capital, and therefore less investment, in high-risk activities with relatively low rewards. If creditors are well informed and analytic, and borrowers respond to financial incentives, then risk-based pricing — compared to uniform credit pricing — leads to a more efficient allocation of society’s limited resources.
Although risk-based pricing is standard in business loan markets, and may be increasingly common in consumer credit markets such as mortgages and credit cards, risk-based pricing is seldom used in the market for student loans. Most student loans are extended under Federal Student Loan programs administered by the Department of Education. These federal programs have historically offered loans at rates lower than those offered by most private lenders, on terms that are more attractive to student borrowers, and without adjusting the pricing on loans according to the risks inherent in different courses of study or lending to different types of borrowers.
The Federal Student Loan programs — first established in the mid twentieth century to increase the supply of skilled labor, promote economic and technological development, and provide upward socio-economic mobility — are broadly successful: they have provided low cost credit to millions of students; helped increase educational attainment; held administrative costs to below those of the private sector; and generated a profit for the federal government.
However, Federal Student Loan programs have not incorporated many recent insights from financial, developmental, and labor economics that distinguish between different types of education. Because of this, Federal Student Loan programs, and more broadly, U.S. labor markets, are not performing at their full potential. There is a large mismatch between the skills workers have and employers’ needs, and this mismatch contributes to structural unemployment, reduced output, and higher student loan defaults.
This article argues that introducing risk-based pricing in federal student loans would advance the interests and values that Congress articulated when it first established Federal support for Higher Education. Risk-based pricing of student loans would signal the long-term financial risks inherent in different courses of study. This price signal would likely improve students’ ability to make informed decisions about the course of study that would best balance their innate abilities and individual preferences with postgraduate economic opportunities. Similarly, price signals would enhance post-secondary educational institutions’ ability to adjust their programs to improve their students’ postgraduate prospects.
Allocating educational resources more efficiently would not only benefit individual students and their families — it would enhance the productivity and competitiveness of the U.S. labor force, with beneficial consequences for both the private sector and public finances. Over the long term, such efficiencies could increase the resources available for further investment in education and research.
Transparent, risk-based student loan pricing could greatly benefit students and educational institutions, particularly if it were data-driven and sensitive to the values of equal opportunity and independent research that are central to the academic enterprise. This article discusses legal and policy reforms that could facilitate risk-based student loan pricing, potential hazards from a shift toward risk-based pricing, and safeguards that could help protect students and educators from abuse.
This article focuses primarily on the economic consequences of education rather than on moral or philosophical views about the ideal purpose of education or its proper role in society. The economic focus of this article is not intended to deny the intellectual merit of philosophical views about education, but rather to reflect the fact that government support for Higher Education in the United States has primarily been driven by economic considerations, particularly during the mid-twentieth century when Federal Student Loan programs were established.
Part I of this article discusses rationales for government support for higher education, with an emphasis on human capital theory. Part II discusses the U.S. federal student loan system. Part III discusses coordination, information, and incentive problems in the higher education and skilled labor markets. Part IV explains the theory of risk-based credit pricing and how risk-based pricing of federal student loans could ameliorate some of the coordination problems discussed in Part III. Part V discusses predictors of income, employment, and student loan default, and also considers ethical and moral considerations that might limit or preclude the use of certain predictors to risk-adjust student loan pricing.
Although risk-based pricing is standard in business loan markets, and may be increasingly common in consumer credit markets such as mortgages and credit cards, risk-based pricing is seldom used in the market for student loans. Most student loans are extended under Federal Student Loan programs administered by the Department of Education. These federal programs have historically offered loans at rates lower than those offered by most private lenders, on terms that are more attractive to student borrowers, and without adjusting the pricing on loans according to the risks inherent in different courses of study or lending to different types of borrowers.
The Federal Student Loan programs — first established in the mid twentieth century to increase the supply of skilled labor, promote economic and technological development, and provide upward socio-economic mobility — are broadly successful: they have provided low cost credit to millions of students; helped increase educational attainment; held administrative costs to below those of the private sector; and generated a profit for the federal government.
However, Federal Student Loan programs have not incorporated many recent insights from financial, developmental, and labor economics that distinguish between different types of education. Because of this, Federal Student Loan programs, and more broadly, U.S. labor markets, are not performing at their full potential. There is a large mismatch between the skills workers have and employers’ needs, and this mismatch contributes to structural unemployment, reduced output, and higher student loan defaults.
This article argues that introducing risk-based pricing in federal student loans would advance the interests and values that Congress articulated when it first established Federal support for Higher Education. Risk-based pricing of student loans would signal the long-term financial risks inherent in different courses of study. This price signal would likely improve students’ ability to make informed decisions about the course of study that would best balance their innate abilities and individual preferences with postgraduate economic opportunities. Similarly, price signals would enhance post-secondary educational institutions’ ability to adjust their programs to improve their students’ postgraduate prospects.
Allocating educational resources more efficiently would not only benefit individual students and their families — it would enhance the productivity and competitiveness of the U.S. labor force, with beneficial consequences for both the private sector and public finances. Over the long term, such efficiencies could increase the resources available for further investment in education and research.
Transparent, risk-based student loan pricing could greatly benefit students and educational institutions, particularly if it were data-driven and sensitive to the values of equal opportunity and independent research that are central to the academic enterprise. This article discusses legal and policy reforms that could facilitate risk-based student loan pricing, potential hazards from a shift toward risk-based pricing, and safeguards that could help protect students and educators from abuse.
This article focuses primarily on the economic consequences of education rather than on moral or philosophical views about the ideal purpose of education or its proper role in society. The economic focus of this article is not intended to deny the intellectual merit of philosophical views about education, but rather to reflect the fact that government support for Higher Education in the United States has primarily been driven by economic considerations, particularly during the mid-twentieth century when Federal Student Loan programs were established.
Part I of this article discusses rationales for government support for higher education, with an emphasis on human capital theory. Part II discusses the U.S. federal student loan system. Part III discusses coordination, information, and incentive problems in the higher education and skilled labor markets. Part IV explains the theory of risk-based credit pricing and how risk-based pricing of federal student loans could ameliorate some of the coordination problems discussed in Part III. Part V discusses predictors of income, employment, and student loan default, and also considers ethical and moral considerations that might limit or preclude the use of certain predictors to risk-adjust student loan pricing.