Is student loan debt really a crisis?

A crisis for whom? Dollar image via www.shutterstock.com

Americans owed nearly US$1.2 trillion in student loan debt as of March 2015, more than three times the amount of debt from just a decade ago. Part of this increase in debt is due to more students attending college, but part can also be attributed to just the borrower holding more debt.

Between the 2007-08 and 2011-12 academic years, nationally representative data from the US Department of Education show the median debt among graduating college seniors who took out loans rising from $20,000 to $26,500. This trend has likely continued over time due to rising tuition prices, meaning that the 70% of students who borrow for a four-year degree can expect to take on over $30,000 in debt in the future. Many students are struggling to repay their loans, as evidenced by high rates of default, delinquency and forbearance due to economic hardships.

These concerns have led some politicians (primarily Democrats) to call mounting student loan debt a “crisis,” while offering potential solutions such as reducing interest rates on student loans, allowing students to refinance their loans at lower rates, or more recently, proposing debt-free public higher education.

But is student loan debt really a crisis?

Debt crisis for whom?

As a professor whose research focuses on higher education finance and accountability policy – and who married an attorney with lots of student loan debt – I look at the student “debt crisis” differently.

I can see the types of students for whom debt is a crisis.

Although there are some exceptions, the crisis is generally not with people like my wife and me, who have advanced degrees and the ability to manage high debt payments due to earning more money (and knowing whether and how to use income-based repayment programs that cap debt payments at a certain percentage of one’s income).

The real crisis is for those with dismal job prospects. eric731, CC BY-NC-SA

Rather, the crisis is among students with relatively little debt but dismal job prospects.

Research by the New York Federal Reserve Bank found that 35% of students with less than $5,000 in debt defaulted within six years, twice the rate of students with more than $100,000 in debt.

Additionally, these students with low debt amounts and low earnings are disproportionately likely to be dropouts. Sixty-three percent of students who started college in 2003-04 and defaulted on their loans by 2009 were college dropouts, while students with a bachelor’s or associate degree were only 4% of defaults.

Impact of debt

Student loan debt has also been blamed for a range of other negative outcomes in various media articles, including delaying marriage, having children and purchasing a home.

The raw data certainly support the relationship between student loan debt and delaying these key markers of adulthood. It is true that the home ownership rate of young adults without debt exceeded the rate of those with debt for the first time in 2012.

But identifying a causal impact of student loan debt on these outcomes is harder to do: the characteristics of the types of people who went to college and borrowed are different from those who either did not go to college or went to college without taking on debt. For example, students may not borrow for college if their parents foot the bill – and these individuals may also get help putting down a down payment for a house.

Part of the declining home ownership rate among those with debt is likely because college graduates are more likely to move to expensive urban areas than those who did not attend college or take on any debt. Most of the students with little debt are dropouts, not graduates.

In my view, the best empirical research examining whether student loan debt affects home ownership is a working paper by Jason Houle and Lawrence Berger that has found a significant, but small, relationship between student loan debt and home ownership.

However, two different factors could be at play to cause this relationship.

It could be because prospective buyers with debt are unable to obtain a mortgage due to part of their income being needed to pay off student loans. But it could also be because those with debt perceive that they will be rejected if they apply for a loan (even though it may not be true).

Who should be the focus of policy

Student loan debt is increasingly becoming an unpleasant part of life for millions of Americans, but for many borrowers – particularly those with advanced degrees and high debt burdens – debt is far from a crisis.

For example, the Brookings Institution’s Elizabeth Akers stated in her recent congressional testimony that although the length of student loan payments has increased over time, the average monthly payment has barely increased.

Senator Elizabeth Warren, a darling among progressives, pushed back against Akers, contending that the increasing length of payments construes a debt crisis.

While I’m certainly sympathetic to students frustrated by years of student loan payments, policies designed to help struggling borrowers should focus on students with the greatest need.

Students who left college without a degree and are unable to find a decent job are facing a crisis as they struggle to make ends meet. Our limited resources should be used to help these students complete a credential and repay their loans instead of targeting lawyers with six-figure debt loads.

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