Quite a debate is going on over whether the student loan problem is or is not a “crisis.” Even though outstanding student loans total over $1 trillion, more than credit card debt, it’s possible to argue that this is not really that disturbing.
And that is just what Beth Akers and Matthew M. Chingos of the Brookings Institution do in their new report, “Is a Student Loan Crisis on the Horizon?” Their answer is no, since “increases in the average lifetime incomes of college-educated Americans have more than kept pace with increases in debt loads.”
While some writers (Mike Konczal of the New Republic and Malcom Harris of Al Jazeera America) have challenged the study, David Leonhardt of the New York Times pretty much accepted it in his June 24 article. He did highlight one element that he finds troubling: Students who take out loans and never finish college face a particularly difficult burden because their salaries are likely to be lower than if they had finished school.
True, but beyond that, the Brookings study gives us plenty of reason to question its upbeat mood.
The study examines the debt of young households—people from the age of 20 to 40—over time, starting in 1989 and ending in 2010. Among the findings:
- The incidence of education debt has increased dramatically. In 1989, 14 percent of those households had education debt; in 2010, the figure had risen to 36 percent.
- For those who carried debt, the mean per-person debt grew from $5,810 to $17,916. The median debt went from $3,517 to $8,500.
- In 2010, about a quarter of those with debt had balances above $20,000.
- Among households with some college but no bachelor’s degree, 11 per cent were in debt in 1989, but 41 percent in 2010 (this is what David Leonhardt found scary).
The above numbers seem worrisome on their face.
Akers and Chingos attempted to analyze the causes of this higher debt. They found:
- Increases in educational attainment—that is, education at the postgraduate level—explained about 25 percent of the increase. Thus, the additional increase in human capital—and presumably earning power—could justify some of the additional debt.
However, given the state of postgraduate jobs in the legal field and higher education, how likely are good careers for those with high educational attainment?
- Rising tuition is the major cause of the increased debt. In real terms as well as nominal terms, students paid a lot more for their education in 2010 than in 1989.
But was the education any better? (Perhaps that is a question for a different article.)
They also compared these households’ payment-to-income ratio over time and concluded that “typical borrowers are no worse off than they were a generation ago.”
- Between 1992 and 2010, households with student loans increased their debt from $12,000 to $30,000, but their annual income increased from $43,000 in 1992 to just above $50,000. Thus, Akers and Chingos point out, a mere 2.4 years of average earnings would cover the increase in debt. Nothing to look at here.
- However, this moderate impact can be explained in a couple of ways that may be troubling.
- Average repayment terms have increased to 13.4 years from 7.5 years. (Thirteen years is getting close to the length of some mortgages.)
- Average interest rates fell over this period (from 8.3 percent to 5.5 percent). (How long will those rates continue?
Some other relevant points aren’t addressed in the study.
- The 18-year period covered a boom time in the American economy that ended with a severe recession starting in 2008. Only two years of the recession and post-recession are covered by Akers and Chingos. Thus the increases in household income that made debt payments less burdensome may well have ended.
- The number of graduates with debt continues to go up, and the amounts they borrow continue to rise. Seventy-one percent of those who graduated in 2012 had debt, and the average debt was $29,400.
- Finally, the Federal Reserve Bank of New York is worried about rising defaults. In March 2012, a group led by Meta Brown estimated that nearly half of all student borrowers are in “deferral or forbearance.” Of the rest, about 27 percent have past-due balances and 21 percent are in default. Thus, the bank predicts that “this form of debt will remain a critical policy focus for generations to come.”
This article is titled “He Said, She Said” because I recognize that statistical information can be read many ways. While the conclusions drawn from this study seem too rosy, some of those shouting “crisis” may have their own agenda. At least one of the two authors mentioned at the beginning favors more government intervention, such as President Obama’s scheme of Pay As You Earn, which limits debt payments to 10 percent of one’s income and provide loan forgiveness after 20 years.
The Pope Center has discussed those programs previously. We see them as furthering government employment at the expense of private employment and as drawing students into long-term indenture.
At thirteen years of paying debt, on average, as reported by the Brookings study, that indenture is bad enough as it is. And it may indeed constitute a crisis.