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.

Millenial who has returned to living in childhood bedroom.
He'll be fine.

Photo by Michael Turek/Thinkstock

Earlier today, the Brookings Institution released a report, “Is a Student Loan Crisis on the Horizon?” Its implicit answer: “Not really!” The report argues that much of the panic over student debt is the product of media hype. The typical borrowers are “no worse off now than they were a generation ago,” it concludes. As for those art history majors with $100,000 in loans we always hear about? Well, they’ve been around for a while: The “borrowers struggling with high debt loads frequently featured in media coverage may not be part of a new or growing phenomenon,” Brookings reported. It earned a glowing write-up from David Leonhardt at the New York Times, who tweeted out this catchy stat:

As you might expect, there were objections. Over at the Awl, Choire Sicha delivered an extended thrashing of the report, titled “That Big Study About How the Student Debt Nightmare Is in Your Head? It's Garbage.”

Jordan Weissmann Jordan Weissmann

Jordan Weissmann is Slate's senior business and economics correspondent.

It’s not garbage. At the same time, contra Brookings, student debt already is a crisis—but a poorly understood one. So here’s the big question: Are we overreacting to student debt or not?

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Before we try to answer that question, let’s first unpack the two big takeaways from Brookings:

Point No. 1: Debt burdens have grown, but they’re smaller than you think.

Here are some stats you’ve probably heard before: More than 70 percent of four-year college graduates borrow for school, finishing with an average of $29,000 in debt. These are the kinds of straightforward numbers that are engineered to soar around Twitter with ease. The problem with them is that they mash together all sorts of students—graduates at Ivy League schools, graduates at expensive but unheralded private colleges with limited financial aid budgets, graduates from budget public campuses, and so on and so forth. They also focus on students straight out of school.

The Brookings study tries to take a slightly broader and more nuanced view. Using the Federal Reserve’s Survey of Consumer Finances, it looks at households headed by Americans between the ages of 20 and 40. Of those individuals with education debt, it concludes, 58 percent owe less than $10,000. And yes, only 7 percent owe more than $50,000. It’s worse than 20 years ago, but six-figure loan balances are still a rarity.

140624_MBOX_DistributionOfDebt

Courtesy of the Brookings Institution

In his critique, Sicha essentially argues that we shouldn’t trust the data Brookings draws from. He has some decent points. Because the Fed reports on households, it doesn’t actually have information on individuals. To deal with this, the Brookings team just takes each household’s total debt load and divides it by the number of people living together. So if a couple owed $40,000 to the Department of Education, they’d each get marked down as owing $20,000. That’s not exactly precise, but it’s not crazy.

More glaringly, the report excludes borrowers who can’t support themselves financially and live at home with their parents, since their households are probably headed by people older than 40. (Just to complicate things, if that borrower is financially independent but still living in mom and dad’s basement for some reason, then the Fed counts him as his own independent household.)

I asked one of the study’s co-authors, Matthew Chingos, about this. He said he and his partner, Beth Akers, weren’t worried that leaving out boomerang kids would affect their results, because roughly the same percentage of college graduates live at home one year after school today as they did in the early 1990s. Moreover, they’re evenly distributed across the borrowing spectrum. By their logic, the live-at-home grads shouldn’t affect the long-term trends or skew the data in any particular direction. 

140624_MBOX_PercentOfGraduates

Courtesy of the National Center for Education Statistics via the Brookings Institution

I don’t know if I buy their point entirely. More than one-fifth of all college graduates younger than 35 now live at home, and the financial situations of older boomerangers might differ systematically from kids who leave the nest within a year or two of getting their degrees. But there’s a bigger point to be made: The Brookings findings here aren’t wildly different from what we already know about student loan debt. The Federal Reserve Bank of New York, which does look at individual credit reports, finds that only about 12 percent of all student loan borrowers—including those older than 40, who are responsible for about one-third of the total debt—owed more than $50,000 at the end of 2012. Since younger borrowers tend to have lower average balances, there’s no reason to think that their pie charts look much more terrifying than the one below. 

So maybe no more than 7 percent of young student debtors owe more than $50,000. Maybe it’s no more than 12 percent. In the end, the point is that they’re still far more rare than media portrayals make them out to be.

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