March 29, 2024

Today’s Economist: Uwe E. Reinhardt: The Debt of Medical Students

DESCRIPTION

Uwe E. Reinhardt is an economics professor at Princeton. He has some financial interests in the health care field.

In debates on health work force policy, it is frequently argued that medical education is a public good, because it benefits society as a whole.

Today’s Economist

Perspectives from expert contributors.

The implication is that tuition charges at medical schools should be zero or close to zero. Many nations in the industrialized world follow that policy, although they have also kept tuition low for most college students.

Most economists disagree with characterizing higher education as a public good. Only the individual receiving a professional education – including the M.D. degree — owns the human capital that the graduation documents certify to exist.

Medical graduates can use their human capital any way they wish. They can treat patients, do medical research or use their knowledge as business consultants to health-related companies or as financial analysts in the financial markets, as some of them do.

There may be some positive spillover for society as a whole from having this privately owned human capital produced, and these effects (called externalities by economists) might warrant some public subsidies toward the production of that human capital. That argument could be extended to many other forms of human capital, as well — e.g., engineers, scientists, nurses.

According to a fact sheet published by the American Association of Medical Colleges, annual tuition and fees at public medical schools in 2011-12 amounted to $30,753, and the total cost of attendance was $51,300. The comparable averages for private medical schools were $48,258 and $69,738. To most Americans, these will seem staggering amounts.

Which brings me to the sizable debt with which, almost uniquely in the world, American medical students now graduate. The association routinely collects data on these debts. A good summary of the most recent data, for 2010, can be found on the previously identified fact sheet, and I created this table from that source.

American Association of Medical Colleges

As the table shows, some of the students’ accumulated debt by time of graduation from medical school was incurred to finance a liberal arts undergraduate education. The $18,000 shown in the table is actually on the low side. According to the Project on Student Debt, college seniors who graduated in 2010 had an average debt of $25,250, with a range among campuses of $950 to $55,250 a student. Individual students at private colleges may have even larger debts. And debt collectors are doing a thriving business collecting these debts.

Amortization of the large debt accumulated by medical students will clearly take a bite of the income they will earn in medical practice. But at least there will be a sizable future income stream to absorb the hit. Many other college graduates have much smaller incomes or are in even direr straits.

The table below conveys a rough indication of what the amortization of medical-school debt might mean for individual students.

In this table I have assumed that the student modeled here had average debt of $161,300 upon graduation from medical school. From that debt I deducted $24,400, the amount to which $18,000 of debt upon graduation from a liberal arts college would grow in four years at a compound interest rate of 7.9 percent (that’s at the high end of the interest rate medical students are charged on debt). The remainder is debt related strictly to the medical education of the student.

I assume that after residency, the practicing physician has a starting net income (after practice costs) of $150,000 or $300,000, and that these incomes will grow at an annual compound growth rate of 3.5 percent over time. Physician incomes vary considerably across specialties and even within specialties.

To get a feel for the data, readers may want to look at several surveys of doctors’ pay.

According to the association’s fact sheet, students pay an interest rate of 6.8 percent on Stafford loans; for lower-income students, the rate is a subsidized 3.4 percent. For Direct Plus loans, students or their parents pay a rate of 7.9 percent, the rate I used in the table.

Finally, I assume two distinct amortization models. Under one, students pay back their debt with flat annual (or monthly) payments over 20 years. That payment is $13,840 a year. Under the alternative approach, the annual amortization payment rises in step with the assumed annual increase in physician income. The first annual payment in that approach is $10,659.

The data in the table represent these annual debt-amortization payments as a percentage of physician net income in years one, 10 and 20 of medical practice.

Clearly, these payments are a noticeable burden, even over 20 years. For amortization over 10 years, they would naturally be higher. On the other hand, the numbers would decline sharply with reductions in the interest rate charged. The table below illustrates the sensitivity of the first-year payment to interest rates and amortization horizon for the payment stream that increases in step with assumed increases in practice income.

The annual amortization payments would be particularly burdensome for primary care physicians, with their relatively lower incomes. That fact is a potential policy lever Congress might employ if it took seriously people’s lament that America is suffering from an acute shortage of primary care physicians.

I shall muse about that and other options in a future post.

Article source: http://economix.blogs.nytimes.com/2012/09/14/the-debt-of-medical-students/?partner=rss&emc=rss

Economix Blog: Uwe E. Reinhardt: The Debt of Medical Students

DESCRIPTION

Uwe E. Reinhardt is an economics professor at Princeton. He has some financial interests in the health care field.

In debates on health work force policy, it is frequently argued that medical education is a public good, because it benefits society as a whole.

Today’s Economist

Perspectives from expert contributors.

The implication is that tuition charges at medical schools should be zero or close to zero. Many nations in the industrialized world follow that policy, although they have also kept tuition low for most college students.

Most economists disagree with characterizing higher education as a public good. Only the individual receiving a professional education – including the M.D. degree — owns the human capital that the graduation documents certify to exist.

Medical graduates can use their human capital any way they wish. They can treat patients, do medical research or use their knowledge as business consultants to health-related companies or as financial analysts in the financial markets, as some of them do.

There may be some positive spillover for society as a whole from having this privately owned human capital produced, and these effects (called externalities by economists) might warrant some public subsidies toward the production of that human capital. That argument could be extended to many other forms of human capital, as well — e.g., engineers, scientists, nurses.

According to a fact sheet published by the American Association of Medical Colleges, annual tuition and fees at public medical schools in 2011-12 amounted to $30,753, and the total cost of attendance was $51,300. The comparable averages for private medical schools were $48,258 and $69,738. To most Americans, these will seem staggering amounts.

Which brings me to the sizable debt with which, almost uniquely in the world, American medical students now graduate. The association routinely collects data on these debts. A good summary of the most recent data, for 2010, can be found on the previously identified fact sheet, and I created this table from that source.

American Association of Medical Colleges

As the table shows, some of the students’ accumulated debt by time of graduation from medical school was incurred to finance a liberal arts undergraduate education. The $18,000 shown in the table is actually on the low side. According to the Project on Student Debt, college seniors who graduated in 2010 had an average debt of $25,250, with a range among campuses of $950 to $55,250 a student. Individual students at private colleges may have even larger debts. And debt collectors are doing a thriving business collecting these debts.

Amortization of the large debt accumulated by medical students will clearly take a bite of the income they will earn in medical practice. But at least there will be a sizable future income stream to absorb the hit. Many other college graduates have much smaller incomes or are in even direr straits.

The table below conveys a rough indication of what the amortization of medical-school debt might mean for individual students.

In this table I have assumed that the student modeled here had average debt of $161,300 upon graduation from medical school. From that debt I deducted $24,400, the amount to which $18,000 of debt upon graduation from a liberal arts college would grow in four years at a compound interest rate of 7.9 percent (that’s at the high end of the interest rate medical students are charged on debt). The remainder is debt related strictly to the medical education of the student.

I assume that after residency, the practicing physician has a starting net income (after practice costs) of $150,000 or $300,000, and that these incomes will grow at an annual compound growth rate of 3.5 percent over time. Physician incomes vary considerably across specialties and even within specialties.

To get a feel for the data, readers may want to look at several surveys of doctors’ pay.

According to the association’s fact sheet, students pay an interest rate of 6.8 percent on Stafford loans; for lower-income students, the rate is a subsidized 3.4 percent. For Direct Plus loans, students or their parents pay a rate of 7.9 percent, the rate I used in the table.

Finally, I assume two distinct amortization models. Under one, students pay back their debt with flat annual (or monthly) payments over 20 years. That payment is $13,840 a year. Under the alternative approach, the annual amortization payment rises in step with the assumed annual increase in physician income. The first annual payment in that approach is $10,659.

The data in the table represent these annual debt-amortization payments as a percentage of physician net income in years one, 10 and 20 of medical practice.

Clearly, these payments are a noticeable burden, even over 20 years. For amortization over 10 years, they would naturally be higher. On the other hand, the numbers would decline sharply with reductions in the interest rate charged. The table below illustrates the sensitivity of the first-year payment to interest rates and amortization horizon for the payment stream that increases in step with assumed increases in practice income.

The annual amortization payments would be particularly burdensome for primary care physicians, with their relatively lower incomes. That fact is a potential policy lever Congress might employ if it took seriously people’s lament that America is suffering from an acute shortage of primary care physicians.

I shall muse about that and other options in a future post.

Article source: http://economix.blogs.nytimes.com/2012/09/14/the-debt-of-medical-students/?partner=rss&emc=rss

Economic View: Fed’s Moves Offer a Shield Against Europe — Economic View

With such dangers at hand, it’s time for a spot-check on whether financial regulation in the United States has left us prepared. So far — with one notable exception — it’s not looking good.

A core problem in finance is that banks and other intermediaries can take on too much risk, not caring enough that their potential failures may throw people out of work, burden taxpayers and damage the broader economy. The solution — if it can be managed — is to ensure that banks have enough safe, liquid capital so that A) they are betting a lot of their own money, thereby inducing some caution, and that B) they have a large-enough cushion to limit the risk of failure. “Lots of capital, not too much leverage” is the basic formula for a safe financial system.

Such a general approach is needed because it’s again become clear that regulators can’t predict the specifics of the next crisis. Less than two years ago, our government enacted the Dodd-Frank law, the most complex financial regulation bill of all time, based on the work of hundreds of economic and legal experts, all hyper-aware of the issues of risk. Neither this bill nor our government, however, foresaw that we were already living in the onset of the next potential financial crisis, namely the spillover from the euro zone.

Dodd-Frank left questions of capital and leverage largely to the Basel III international banking agreements, the second piece of the new financial regulatory architecture. Basel III, like its predecessors Basel I and Basel II, encourages banks to hold sovereign debt. This has been revealed as a mistake, just as it was wrong for the earlier Basel regulations to encourage banks to hold mortgage securities.

Most fundamentally, Basel III seems obsolete even before it can formally take effect over the next few years. Its standards imply that European banks will have to raise more capital, possibly in the hundreds of billions of dollars. At this point, that’s like wishing a poor man were a millionaire. The question will sooner be one of survival. In lieu of raising new capital, many European banks will stretch the capital they already have and meet minimum capital standards by shrinking, thereby cutting back on lending and damaging economic growth.

The standards may eventually be tossed out or revised, even though they looked good on paper not that long ago. If nothing else, after recent downgrades, there are no longer enough triple-A securities to carry out the requirements.

Despite these problems, the United States may oddly enough be facing this new financial turmoil in a relatively safe position, though whether it’s safe enough remains to be seen. The Federal Reserve took the lead on future capital requirements just last week, but for the shorter run there is a more important Fed policy move. Starting in late 2008, as a response to our financial crisis, the Fed bought government and mortgage securities from banks on a very large scale.

Bank reserves at the Fed rose from virtually nothing to more than $1.6 trillion. Then the Fed paid interest on those reserves to help keep them on bank balance sheets.

It is estimated by Moody’s that America’s biggest banks now have liquid assets that are 3 to 11 times their short-term borrowings. In other words, it’s the cushion we’ve been seeking. Furthermore, a lot of those reserves sit in the American subsidiaries of large foreign-owned banks, protecting the European system, too.

This new safety comes not from regulatory micromanagement but rather from the creation of additional safe interest-bearing assets. While European economies have been losing safe assets through debt downgrades, the United States financial system has been gaining them.

THE Fed’s stockpiled liquid reserves have met some heavy criticism. Hard-money advocates contend that they are a prelude to hyperinflation — although market forecasts and bond yields don’t bear this out — while proponents of monetary expansion have wished that banks would more actively lend out those reserves to stimulate the economy. That second view assumes that the financial crisis is essentially over, but maybe it’s not. As the euro zone crisis continues, it seems that Ben S. Bernanke has been a smarter central banker than we had realized.

The final lessons are scary, but also powerful.

First, don’t assume that the first wave of a financial crisis is the final act. Circa 1931, many people thought that the global economy was recovering, until an additional wave of financial crises caught fire in Europe and later damaged the United States. Mr. Bernanke is a scholar of exactly this period.

Second, no matter what laws are written, good central banking is the most powerful and most influential financial regulator, if only through the broad management of liquidity and safety. The euro zone has put too much responsibility on national governments and too little on its central bank.

Third, good regulation should take account of our rather extreme ignorance. That means emphasizing the more general protections, as embodied in a ready supply of safe liquid assets, rather than obsessing over the regulatory micromanagement of particular bank activities.

On the whole, we still haven’t learned that last lesson. Nonetheless, this time around we may just squeak by, largely because of the prudence of our central bank.

Tyler Cowen is a professor of economics at George Mason University.

Article source: http://www.nytimes.com/2011/12/25/business/feds-moves-offer-a-shield-against-europe-economic-view.html?partner=rss&emc=rss