Jeb Bush’s student loan plan should outlive his campaign

February 11, 2016

Jeb Bush’s higher education plan has attracted little notice in the heat of a campaign that has focused more on personalities than policy details, but his proposed reforms to the federal student loan program deserve serious attention regardless of the outcome of his bid for the presidency.

Existing repayment programs attempt to help students by linking repayments to income, but these programs are difficult to navigate and require participants to file onerous paperwork. As a result, hundreds of thousands of students needlessly default on their loans every year. The Bush plan addresses this—and other—problems by replacing student loans with a $50,000 line of credit that is repaid solely based on income and the amount borrowed.

Loan repayment options for current students include the standard 10-year repayment schedule, which asks students to pay a fixed amount every month, ultimately paying off the loan interest and principal over 10 years, and the existing income-driven repayment plans, which base payments on a formula that takes income but not amount borrowed into account. Under income-driven repayment plans, students pay 10 to 15 percent of their incomes (depending on the plan) until they have paid off the loan with interest, with any remaining balance forgiven after 20 to 25 years.

The Bush plan is a significant deviation from these programs, stipulating that students automatically repay (through the tax withholding system) one percent of their income for 25 years for each $10,000 that they borrow to pay for college. For example, a student who borrows $30,000 and gets a job with a starting salary of $50,000 would pay $125 per month initially (i.e., 3 percent of income). She pays more if her salary increases, but makes no payments during periods of unemployment.

Unlike the current system, the Bush plan charges no interest and caps total payments at 1.75 times the original amount borrowed. Students can borrow up to a total of $50,000 for their postsecondary educations under the Bush plan, which is enough to cover most undergraduate student borrowing, though it will require many graduate students to seek alternative financing options.

How would the Bush plan work in practice? In a recent analysis produced for the Brookings Institution’s Evidence Speaks series, I evaluated Bush’s proposal and found that, compared with the current system, it would lead to more appropriately graduated repayments and a stronger link between borrowing and repayment amounts, addressing some of the primary concerns with automatic income-driven repayment plans.

A key element of the Bush plan is that borrowers pay a constant share of their income. As a result, the total amount repaid increases much more smoothly relative to income under the Bush plan than under the Revised Pay as You Earn (REPAYE) income-driven repayment plan.

The REPAYE formula is generous to borrowers who earn very little but asks those with high incomes to pay no more than those with middle incomes. The upshot is that low- and high-income borrowers pay more under the Bush plan than under REPAYE, whereas middle-income borrowers pay less under the Bush plan than under REPAYE.

Perhaps the most important innovation of the Bush plan is that it creates a stronger link between borrowing and repayment amounts than REPAYE. This means the Bush plan addresses a leading concern with automatic income-driven repayment plans: that they will make students less sensitive to the prices charged by colleges and lead to further increases in tuition.

For example, my analysis shows that REPAYE essentially forgives all borrowing over $30,000 for a hypothetical borrower with a starting income of $30,000. The Bush plan fixes this problem by directly tying payments to amount borrowed.

The core ideas of the Bush student loan plan are worthy of serious consideration by presidential candidates and policymakers on both sides of the aisle. Tying repayment to both income and borrowing could be accomplished in tandem with candidates’ existing proposals. Income-share agreements are a private-sector analog of the Bush plan that have attracted support among Republicans. A Republican candidate might propose the public version for college and a private-sector version focused on the financing of graduate education.

Making student loan repayment income driven and universal has bipartisan support. A Democratic candidate could propose a version of the Bush plan that retains its progressivity at the middle and higher income levels, and makes it more progressive at the bottom by adding an income offset. She or he could also expand it to higher borrowing levels that would better accommodate graduates students, who would otherwise have to seek private financing.

Our student loan system is a complicated mess in many ways. Fixing it should be a priority for Congress and the next president. A student lending policy that is both income and borrowing driven is easily adaptable to the preferences of policymakers with different political philosophies but a common desire to improve our federal student loan system.

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Can economic growth really fix Social Security?

February 5, 2016

In less than 20 years, according to the latest official projections, Social Security will no longer be able to pay full benefits to retirees and people with disabilities. Yet, presidential candidates aren’t talking much about how they would fix the problem.

Democratic candidates Hillary Clinton and Bernie Sanders want high-salaried workers to pay more Social Security taxes. A few Republicans, like Jeb Bush, Chris Christie, and Marco Rubio, have proposed raising the retirement age and restricting benefits for high-income people to shore up Social Security. But 7 of the 12 Republicans who competed in the Iowa caucuses don’t offer any specific ideas on their websites about how to close the funding gap.

Republican candidate Mike Huckabee dropped out of the race after the Iowa caucuses this week. But during a debate last month, he offered a painless solution for Social Security: “Here's the fact. Four percent economic growth, we fully fund Social Security and Medicare. Our problem is not that Social Security is just too generous to seniors. It isn't. Our problem is that our politicians have not created the kind of policies that would bring economic growth.”

Some left-leaning commentators have made the same argument. Strong economic growth would raise earnings, which would boost payroll tax revenue going to Social Security, eliminating the need to cut benefits or raise taxes.

Is the solution really that easy? Unfortunately, it isn’t.

Four percent growth year after year is unrealistic. It’s been more than 40 years since we last completed even 10 years of 4 percent average annual growth (in inflation-adjusted dollars). And back in the early 1970s, the labor force was growing more than 2 percent a year as the baby boomers were coming of age and many women were entering the workplace. It’s going to be a lot harder to achieve that growth over the coming decades when the labor force is projected to increase only 0.5 percent a year.

But let’s say we could somehow turbocharge worker productivity enough to achieve average real economic growth of 3.4 percent a year indefinitely (and even higher rates in the short-term as we continue to recover from the Great Recession), instead of the 2.1 percent long-term rate that the Social Security trustees assume. This is optimistic, but it did happen between 1995 and 2005 (albeit when the labor force was growing more rapidly than today). Let’s assume that all of this additional growth results from higher productivity, instead of by expanding the labor force through more immigration or higher employment rates, and that it raises earnings uniformly for all workers.  

Crunching the numbers with DYNASIM, Urban Institute’s projection tool, we find that such economic growth would in fact significantly improve Social Security’s long-run balance sheet, pushing back by three decades the date when the system could no longer pay full benefits, from 2035 to 2064.

Impact of Economic Growth on the Social Security Trust Fund Balance, 2020–85

But those financial gains won’t last. Strong economic growth generates a lot of tax revenue for Social Security right away without immediately changing benefits. Over time, however, economic growth puts the system on the hook for much higher benefit payments. As the economy grows faster and people earn more, they eventually receive more Social Security benefits once they retire.

Under the high-growth scenario we considered, those higher benefits start squeezing Social Security by about 2050, when the system permanently begins owing beneficiaries more payments than it collects from taxes. That annual deficit then soars under the high-growth scenario as more retirees begin collecting sizable Social Security checks, growing much more rapidly than under the low-growth scenario. (These estimates compare annual tax receipts to scheduled benefits, not actual benefits, since Social Security would have to cut benefits paid each year to prevent the system from going broke.)

Impact of Economic Growth on Annual Social Security Deficit, 2020–85

Faster economic growth, however implausible, might delay Social Security’s insolvency but won’t permanently solve the system’s financial woes. Instead, we’re going to have to make hard choices about raising taxes and cutting benefits. The presidential campaign is a good time to begin the debate.

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Five benefits that SNAP delivers

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January 11, 2016

Last week, Republican presidential candidate Jeb Bush released a plan to end the Supplemental Nutrition Assistance Program (SNAP), formerly known as food stamps, and replace it with new federal “Right to Rise” grants that states could use to pay for programs to assist lower-income families. Without more details, it’s impossible to assess how these new grants would provide benefits to eligible families, but SNAP has successfully provided support to millions of Americans over its 50-plus year history so replacing the program carries its own risks. Here are five ways in which SNAP has helped families reduce food insecurity and supported the country’s most vulnerable citizens.

  1. SNAP reduces poverty. Research shows that SNAP reduces food insecurity, and also helps lift people out of poverty. As part of the newly released book SNAP Matters, in which leading scholars examine the role and impact of the program, Laura Tiehen and her colleagues examined how adding SNAP benefits to family income affects the number of people who would otherwise fall under the official federal poverty measure. They found that in 2011, an additional 3.9 million people would have fallen into poverty without SNAP.

    The program’s impact was even more pronounced when the researchers used the Census Bureau’s supplemental poverty measure (SPM), an alternative metric that adjusts the official pov­erty measure by taking into account many government programs designed to assist low-income families and individuals, and certain expenses from cash income. Using the SPM, the researchers estimated that 4.6 million people were lifted out of poverty by the purchasing power of SNAP benefits.

    Other research suggests that SNAP can improve long-term health and well-being. Hilary Hoynes and her colleagues, for example, examined data from the original rollout of the food stamp program in the 1960s and 1970s and found that access to food stamps in childhood led to a significant reduction in the incidence of obesity, high blood pressure, and diabetes decades later.

  2. SNAP reduces food insecurity. The rate of US food insecurity jumped significantly at the beginning of the Great Recession and, despite some progress toward economic recovery, has not abated since that time. In 2014, 48.1 million people—about one in six Americans—lived in food-insecure households, defined as households that reported low diet quality and variety and low food intake. But without SNAP, rates of food insecurity would be even higher: our colleagues Caroline Ratcliffe and Signe-Mary McKernan have estimated that receiving SNAP reduces the likelihood of being food insecure by roughly 30 percent.

    Food insecurity can interfere with normal childhood development, and increases the likelihood of poor health outcomes in both children and adults. Failing to address food insecurity in a focused, energetic manner puts our future workforce and health as a nation at risk—and we already have some of the worst health outcomes among many other high-income countries.

  3. SNAP serves our country’s most vulnerable citizens. Close to 70 percent of SNAP participants are in families with children; more than one-quarter are in households with seniors or people with disabilities. In addition, about two-thirds of recipients are not expected to work because they are children, elderly, or disabled. How likely is it that overburdened and economically distressed states will find the resources and the political will to protect those who are least able to advocate for themselves?

  4. SNAP supports work. While households must meet specific income tests to qualify for the program, participants can and do participate in the labor force. Between 2000 and 2013, the number of households receiving SNAP benefits while working more than tripled, reaching 7.1 million. And most households that receive SNAP include someone who works: Among households with at least one working-age, non-disabled adult, more than half work while receiving SNAP and more than 80 percent work in the year before or the year after receiving benefits. SNAP can be an important supplement to income for those who a struggling with inadequate wages.

  5. SNAP gives states flexibility in administering the program, even as it protects recipients with consistent federal requirements. The federal government pays for SNAP benefits for anyone who is eligible, but the program is administered by the states, which can modify who is eligible for benefits and how households apply to the program.

    In contrast, the shift to a state block grant approach for the Temporary Aid to Needy Families (TANF) program in the mid-1990s eventually resulted in less assistance to the very families who may need it most. Those policy changes converted cash welfare assistance from a federal program to block grants and states ultimately shifted funds away from assistance to eligible families; in 2014, only 23 percent of families in poverty received cash benefits from TANF, down from 68 percent in 1996. During roughly this same period, the number of Americans living in extreme poverty (defined as living on less than $2 per person per day) rose dramatically, increasing 130 percent between 1996 and 2011.

    Researchers Luke Shaefer and Kathryn Edin estimate that the SNAP program helped buffer the growth in extreme poverty; when SNAP benefits are counted as income, extreme poverty rose only 67 percent, but the domestic safety net after welfare reform was not sufficient to ameliorate the most significant levels of deprivation.

There are far too many families without work or in low-paying jobs without enough food to eat. We are eager to see real long-term solutions that focus on policies that would give Americans a fair chance to achieve what families most want: a good education, a reliable job, safe neighborhoods, and strong schools for our children. We don’t have enough details to know whether Bush’s proposal would provide more or less support for low-income Americans, but the experience suggests that letting states run such programs on their own eventually results in less support for those who need it. 

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Bush cut Florida taxes, but mostly for high-income residents

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December 17, 2015

As part of his presidential campaign, Jeb Bush has proposed a detailed plan for federal tax cuts. The Tax Policy Center’s analysis of his plan is available here. As governor of Florida from 1999 to 2007, Bush signed into law a number of different tax cuts—from relatively small sales tax holidays to the complete elimination of a tax on wealth.

Although Bush has claimed he cut taxes by a cumulative $19 billion during his eight years in office, an independent estimate by Martin Sullivan of Tax Notes put the total closer to $13 billion based on reports published by the Florida Legislature’s Office of Economic & Demographic Research. (The discrepancy is mostly about Florida’s estate tax, which was killed by federal, not state, legislation.)

Bush’s biggest tax change was the reduction and eventual elimination of the state’s intangibles tax, a 0.2 percent tax on the value of stocks, bonds, mutual funds, money market funds, and unsecured notes. Bush argued the tax penalized retirement planning and called it “stupid, insidious, and evil.” Opponents of the tax cut argued it benefited the rich at the expense of other Florida residents. Sullivan estimated the intangibles tax cut was three times the reduction in sales taxes (the next largest cut).

 

Bush taxes

 

Florida is one of seven states that do not tax individual income. Instead, it relies heavily on sales taxes and, at the local level, property taxes. Bush did not reduce the rate on general sales taxes during his tenure, but he and the legislature held several sales tax holidays and exempted some products (such as advertising agency and printer purchases) from the tax. Bush also cut property taxes, unemployment taxes, and repealed a per-drink tax on alcohol served bars.

The policy changes that created the largest revenue increases during Bush’s term were both gambling related. While Bush was governor, Florida expanded its lottery (for example, by introducing more scratch-off games) and authorized slot machines—although Governor Bush opposed it

This is one in a series of posts from the Urban Institute’s State and Local Finance Initiative examining the records of current and former governors running for president.

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Always zoom out to examine a governor’s economic record

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December 11, 2015

The Urban Institute’s new interactive graphics of historical state economic data provide an important tool for analyzing the records of governors running for president: context. A state’s economy depends on a lot more than what the governor does.

As a result, you should always keep (at least) three things in mind when you assess a governor’s economic record:

  1. The national economy
  2. The state’s long-term trends
  3. The governor’s limited ability to affect a state’s economy relative to other economic factors

State unemployment rates offer a good example of why you should always zoom out when considering economic data.

Lesson #1: The New Jersey and Ohio unemployment rates have dropped considerably since Governor Chris Christie and Governor John Kasich took office (in 2010 and 2011, respectively). But so has the national unemployment rate. Both governors’ terms began after the Great Recession, when unemployment was high, and both states followed the nation as the economy improved and unemployment dropped. In fact, the unemployment rate in both states has roughly mirrored the national rate for decades.

Christie Kasich unemployment record

Lesson #2: Maryland’s unemployment rate was below the national rate throughout former governor Martin O’Malley’s time in office—as much as 2.6 percentage points lower (in October 2009). But that was nothing new: the state’s rate was consistently under the national rate well before O’Malley took office.

O'Malley unemployment record

Lesson #3: Former governor Jeb Bush presided over the lowest unemployment rate (3.1 percent) in Florida’s history during March and April 2006. And for most of his second term, Florida’s unemployment rate was at least 1 percentage point below the national rate. But a year after Bush left office, Florida’s rate equaled the national rate, and a year after that it was 1 percentage point above it.

The big changes in unemployment were consequences of the national housing boom and bust, which affected Florida more than most states. In fact, Florida’s dip below and spike above the national unemployment rate closely mirrors its house price rise and crash during the same period.

Bush unemployment record

The takeaway from these three lessons is not that voters should ignore the economic records of governors. But voters should be leery of overhyped claims of success (or failure). Better yet, voters should look into something governors actually can control: policy decisions.

This is one in a series of posts from the Urban Institute’s State and Local Finance Initiative examining the records of current and former governors running for president.

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Tax Policy Center: Bush’s tax plan would add $6.8 trillion to the national debt, benefit high-income households

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December 8, 2015

Today, our friends at the Tax Policy Center (TPC) are releasing an analysis of Republican presidential candidate Jeb Bush’s tax plan. (Here’s what you should know about how TPC conducts its analyses.)

Writes TPC’s Howard Gleckman:

The Bush plan includes some important ideas for increasing savings and investment, simplifying the tax code, and curbing tax avoidance. However, it would add trillions of dollars to the federal debt, largely by lavishing big tax cuts on the highest-income Americans and US-based multinational corporations.

For more on all things tax policy and 2016, including a detailed overview of every major candidates’ tax proposals, check out TPC’s new election hub.

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