Expert Interview: Mahyar Kargar & Household Finance

May 10, 2018
Student loans

Household Finance

I spoke with Mahyar Kargar, a finance professor and Ph.D. candidate at UCLA’s Anderson School of Management. Mahyar’s key area of interest in his research revolves around household finance. I managed to get in touch with him to talk about his work and insight in household finance.

Could you tell me a bit about yourself?

I am in my final year as a Ph.D. candidate at UCLA in Finance. One of the research areas I am interested in is household finance. This project was based on a conversation I’ve had with William a couple of years ago. It became a paper and it is currently under revision at a finance journal for the possibility of being published.

How does someone go from electrical engineering to studying student loans?

[Laughs] That is a good question! I was very interested in household finance, and as you know, student debt has become the biggest after mortgages. I’ve always been interested in the implications of student loans for different outcomes.

The journey from Electrical Engineering to finance, I was working in the industry for six years. And then I did an MBA here [UCLA] and got really interested in finance.  I eventually decided to pursue an academic life and teach finance. To do that, you need a Ph.D.

[Laughing] Yes, this sounds a little excessive and crazy but it’s been awesome!

With regards to your work in personal finance, Forbes has recently published an article citing your work, could you talk about it?

In a nutshell, what we’re trying to do is to estimate the difference between the price and marginal cost of attending college. There was a policy change that gave us the opportunity to evaluate marginal costs for our sample schools. Now, this is an important parameter for many different reasons. There is a lot of interest currently in the importance of market power in industries and market, and we currently don’t really know what the ramifications are. Increasingly, we can study and quantify it better than we used to before. We want to know how big that is for college development.

The Econ 101 model tells you that market price is equal to marginal cost – this is usually not very realistic, and in many markets, the price has to exceed marginal costs for companies to be able to exist and make profits. And the important thing is the size of this wedge between price and marginal cost, or degree of market power. This matters a lot once you start intervening in the market. An example of this is the government aid program like student loans; it would be interesting to know the price and marginal cost wedge. Why this matters is for the government or whoever designed the policies for aid programs what this “wedge” is.

And there hasn’t been good evidence on this in the education market, specifically. Recently, we have become increasingly interested, and able to talk about the degree of market power of companies in different industries. The reason this has become possible is that of recent advances in empirical methodology and a rise in interest in education finance. With this study, we are more able to shed some light on policy decision making.

Can discuss your findings? And any solutions to the problem?

We found that there were pretty significant mark-ups. Actually, the wedge is pretty significant between price and marginal costs in private colleges in the United States. The goal of this publication was actually trying to estimate the wedge and how this can inform future decisions.

As you can imagine, this is the subject of intense debate; and we don’t have a final answer to this. You shouldn’t think about markups as “evil” or something necessarily wrong but think about it this way; it would be challenging for a new school to open due to barriers of entries, fixed costs, etc. It does not necessarily mean there is something bad going on just because there are markups.

If markups are the concern, then perhaps one solution would be to focus on helping new schools open as opposed to subsidizing existing schools. That is one possible interpretation of our findings. There is not a lot of literature in this field, but one possible solution to this is to allow more schools to open.

In a nutshell, your suggestion is to use these subsidies to open new schools instead of providing loans for existing schools.

Yes! It helps make the competitive environment a little more favorable for these schools to enter.

That seems like it could take a while. It seems like it could take a while for new schools to open and show results

Yes, but what you’re forgetting is that these aid programs could be provided to newer schools. Helping them keep up with other more established schools. As mentioned, this is an understudied area of finance and the answers are not really clear at this point. But I feel that this is the appropriate direction that we can take.

At the moment, there are $1.5T in student loans outstanding. With implementations that you’ve proposed, how do you think this can help the broader economy?

Here’s my opinion:

There is research that looks precisely at these issues which are the real effect of ballooning student debt in the past decade. This student debt is having an adverse impact on people starting families, buying homes, or even starting businesses. That has significant implications for the economy as a whole. If you’re making monthly payments for your student debt, that is money you would have used to buy a home otherwise. These events get postponed and have real implications on the economy. This problem also affects entrepreneurship, if you’re saddled with student debt, it’s harder to get credit to start a business. All of these things have significant effects.


About the Author

Joel Soo

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