Interview with Constantine Yannelis by Simon Tiu

by Simon Tiu

ChiBus is starting a new column dedicated to interviews with Chicago Booth Professors. We hope these interviews will allow our reader to get to know our teachers outside of the classroom!


What's your background?

I'm semi-local. I grew up in east-central Illinois in Urbana. My father was a Greek immigrant. I went to University Laboratory high school. James Tobin went to my high school. He's a Nobel laureate economist, much more famous than me. I did my undergrad at the University of Illinois. Then I did a master's at Université Paris-Sorbonne in math. I met my wife in Paris while visiting the Musee d'Orsay.

Oh really? how did you meet?

I met her inline actually. Now I think a lot of people meet each other online, I did "inline." We struck up a conversation. Then I returned to the states and did a PhD at Stanford in economics. That's where I really started focusing on student loans as an area of interest.

Awesome, we'll dive into that in a bit, but before that: what do you do in your free time?

Well, I don't have a lot of free time. I'm pretty boring between being an assistant professor and a dad. I have one daughter, her name is Anne, named after my mother. I like to read Middle-Eastern, Byzantine, and European history quite a bit. My daughter takes after me, she's very much a bookworm. I'm very happy to encourage that behavior.

Did your experience at the fed shape your interest in student loans?

Not really student loans specifically, but it definitely shaped my interest in applied work. I think student loans are really interesting because it's a tremendously important area which is significantly understudied relative to other forms of debt. It's the largest area of household debt outside of mortgages, but there's a surprising dearth of research given that these loans are supposed to finance human capital investment, and the primary source of wealth for the US, well, for any nation, is human capital. It's really important that we understand student debt because we need to make smart human capital policy choices. I really like this subject, and while it may not take the rest of my life, I imagine it'll keep me busy for at least a decade or so.

So let's dive into your research on for-profit colleges work. At a fundamental level, how do these for-profit colleges work and what's the problem?

Well, their basic models are quite similar to those of the typical universities you're familiar with-- students pay tuition and take classes. For-profits derive almost all of the revenue from government sources. They're either government grants or federally-guaranteed student loans. No banks would make these loans due to high default rates Unfortunately, the way the system works now leads to a misalignment of incentives. The for-profit institutions sign up students and the students pay tuition, but the dollars for tuition payments ultimately come from the government. In most lending relationships, if the borrower defaults, the lender usually eats the cost. But here, the lender isn't a bank, it's the government, so essentially the taxpayers are on the hook. So, in short, the for-profit universities are strongly incentivized to sign up students but have relatively little incentive to provide actual value and make sure that students can get jobs and pay back their debt.

Is that so much different from other universities or community colleges?

Well, it is different because the money for most community colleges come directly from the government. By the way, I'm not saying that for-profit colleges are inherently bad, only that there's a misalignment of incentives under the current system stemming from the loan guarantees. If you look at the model of elite incentives like Booth, it's quite similar to a VC incubator. Colleges lose money on the median student, but very high earnings students tend to give generous donations back to the school. Clearly, Booth's namesake is a great demonstration of that!

So, how do we fix this?

Well it's a hard problem, and there are some interesting proposals out there, but it's something we're still working through. The best question to ask here is how do we design an incentive system where the incentives of the colleges are aligned with the incentives of the students. One such proposal that is interesting is to arrange some sort of income sharing agreement. Essentially, make it so that the schools have equity in the students so that the schools are incentivized to make their students successful. This isn't a debt arrangement like garnishing wages or income-driven repayment, but more of an income-based arrangement or income-based repayment which could work better than what we have today.

What is visiting the CBO like?

It's actually a really nice place to do academic work. It's essentially a non-partisan organization that does budget estimates for Congress. As an academic, I want to be someone who directly seeks to answer questions, and seek the truth, independent of political or other motivations.

What are you working on now?

I'm working on a few things. For example, I have a new work coming out that argues that almost all the time series variation in student loan defaults is driven by for-profit college expansion and contraction. Ultimately, for-profit expansion and contraction are driven by government policy, so it's pretty relevant to the current debates in student debt now.

Thanks so much for taking the time to chat with me, are there any general words of advice that you would give to us as students?

Booth students are great with student loans. I don't worry about Booth students struggling to repay student loans, because their earnings are typically so high. The data shows that some of you will have high levels of debt, but that our students have an extremely low default rate, especially since there are so many alternative payment options such as income-driven repayment in the rare cases that they do not have high earnings. Booth students almost always have amazing outcomes.

Outside of student loans, I'd probably tell you that the single biggest predictor of success is hard work. I encourage them to work on something with high value and high return, something that's important. I say that because you can work really hard on things that don't matter. Don't sit at a job where you can write a script to automate it away easily. It's hard to say what careers I would recommend because it depends so much individual preference. Option value is extremely important and think about being able to acquire human capital in the future, as the workplace is constantly changing and you will need to learn new things. Geography may also play an important role in your chosen industry. If you want to do tech, many companies are located in California. If you want to do finance, then probably New York City is your best bet.