Are We All Overreacting to Student Debt?

Commentary about business and finance.
June 24 2014 5:50 PM

Are We All Overreacting to Student Debt?

The answer depends on whose student debt we’re talking about.

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Point No. 2: Paying off student loans is no harder than 20 years ago.

College debt has grown since the early 1990s, but so have wages for bachelor’s degree holders. And Brookings suggests that the two trends have balanced each other out somewhat: As the study demonstrates, debtors are less likely to spend 10 or 20 percent of their incomes on loan payments than they were in 1998.

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Courtesy of the Brookings Institution

The problem with these numbers isn’t necessarily that they’re wrong. It’s that they need to be read with lots of context. First, the paper itself notes that a major reason monthly debt burdens have shrunk is that the government began offering plans that allow borrowers to pay back their loans in smaller installments over longer periods of time. In other words, they’ve stretched out the process to make it less painful. That’s great from a policy perspective, but it doesn’t change the fact that graduates are taking on more debt today relative to their incomes than a couple decades ago.

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Second, as Sicha notes, these figures only include households with at least $1,000 in wages and who are paying back their student loans. So they essentially exclude the unemployed, as well as the millions of borrowers who are in default, deferment, or forbearance. This does indeed seem like a huge oversight.

In short, what Brookings is telling us is that the students who aren’t having trouble with their loans aren’t having trouble with their loans. When I brought this up with Chingos, he countered that in every year they studied, from 1989 to 2010, roughly one-third of borrowers weren’t paying back their loans, meaning the long-term trend hasn’t changed.

But here’s the problem with that reasoning: The percentage of troubled borrowers might not have moved much—but there are many, many more of them. In 1989, 16 percent of young households had any student debt. By 2010, that number had more than doubled to 37 percent. If the same proportion are floundering, that means millions of additional individuals are in financial jeopardy.

All right, so back to the main question: Are we overreacting to student debt or not?

Let’s get meta for a second. There are two kinds of conversations that tend to dominate the topic of student debt: One is popular on Facebook, the other with policy wonks. The Facebook version is all about student loans as the scourge of a generation. The main characters are (largely) white liberal arts graduates who took on too many loans then had no idea what to do with their degrees when they graduated. It’s the story of that art history grad with $50,000 or more in debt serving you a cappuccino.

Those young people are real but relatively rare. Their problems do speak to some of the screwed-up facets of American institutions of higher education, which manage to charge outrageous tuition by preying on the status anxiety of upper-middle-class 18-year-olds and their parents.

But if you talk to people who study education policy for a living, they’ll tell you that the real victims of student debt aren’t English grads who took out a bit too much money to attend the University of Michigan or Oberlin. Those kinds of borrowers usually end up just fine. However, there is a huge contingent of working-class and minority students—some of whom are among the first of their families to attend college—who are getting chewed up by student debt. These are young people, and increasingly older adults, who might not have gone to college 20 or 30 years ago, but do now because the economy is brutal for job-seekers without a degree. They borrow for school, often to pay the inflated tuition at an unscrupulous for-profit institution or little-known vocational school, then frequently drop out. Suddenly, they find themselves in debt, with no degree and no guidance on how to manage their loans. They’re the reason almost 15 percent of borrowers default on their student loans after three years, and if anything, the media has underreacted to their plights.

I don’t think Sicha is trying to defend the Facebook-friendly version of the student loan crisis. He’s just taking justifiable umbrage at the idea that someone would try to minimize the problem, and he’s raising some justifiable questions about the data. But for its flaws, the Brookings study basically seems to have its heart in the right place: It’s designed to move our focus onto the troubled borrowers we don’t hear about. Its broad point is that there’s a very large group of student debtors who are faring just fine, and we don’t need to give them an extra hand through mechanisms such as refinancing or mass student loan forgiveness. Instead, we need to help out those “who make bad or unlucky bets,” as the report puts it. In other words, we should be very worried about those marginal, working-class students who get dropped into financial purgatory for the sin of trying to get an education. The art history majors? Not so much.

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