Dire warnings about student debt have become so common that many people may have a hard time believing that the problem is often exaggerated, as I wrote in my column Tuesday. Sure enough, readers raised several thoughtful questions about the research in the column, which found that large student debts are rarer than widely believed.
I asked Beth Akers and Matthew Chingos, the Brookings Institution fellows who did the research, some of those questions via email. Our exchange appears below.
Q: Your own numbers show that student debt has risen since the 1990s, so do you agree the problem has become worse?
A: Increases in debt do not necessarily indicate a problem, but rather are tied to how much students pay for college and whether they are able to (and choose to) pay their college costs up front or finance them with debt. Debt is only a problem insofar as it is used to finance investments that don’t pay off. And the data tell us that college does pay off, on average. This means that the increased lifetime earnings associated with a college degree outweigh the costs, regardless of whether they are paid up front or financed with debt.
Q: One reason that debt payments, as a share of income, haven’t risen is that loan-repayment periods are longer now. Does that suggest debt is a bigger burden on people than it was?
A: Because the average payment period has become longer, flat (or declining) payment-to-income ratios alone do not indicate that the long run burden of debt has not increased. However, we also show evidence that suggests that lifetime income has increased by more than debt, leaving borrowers with a reduced burden relative to their income in the long run, on average. The typical borrower in 2010 had more debt than the typical borrower 20 years prior, but also more money with which to pay back that debt.
Q: You report that in 1992, 14 percent of households had debt and made a median monthly payment equal to 4 percent of their income. In 2010, the median monthly payment was still 4 percent of income, but this burden was shouldered by 36 percent of households. Doesn’t this represent a significant increase in the aggregate debt burden faced by society and raise the possibility that debt is having a bigger drag on the economy?
A: Yes, it does. If student-loan debt causes households to reduce consumption, perhaps by delaying the purchase of a home, then a large increase in the share of households with debt could have negative implications for the macro economy. However, existing research is inconclusive as to whether this is the case and it’s hard to make the argument that it’s true given the body of evidence indicating large financial returns to higher education.
For example, a widely cited blog post from the Federal Reserve Bank of New York showed that the rate of homeownership among individuals with student loan debt had fallen below the rate among those without education debt. However, one of us looked at data over a longer period of time and found that this was actually a return to a pattern that was evident in the 1990s. This highlights the difficulty of measuring the causal impact of debt on a variety of outcomes, as well as the need for more rigorous research on this subject.
Q: Because you looked at households, your analysis excluded some college graduates still living with their parents, correct? Walk us through your thinking here.
A: If young graduates living with their families are considered financially dependent on their parents, they would be included in their parents’ household and would probably not be included in the analysis due to the age restriction. If they are considered financially independent, they would also be considered part of their parents’ household (and thus could not be sampled as a separate household).
In any case, we think it is unlikely this has a significant impact on our analysis. Data from the Department of Education show that the percent of bachelor’s degree recipients living with family one year following graduation was 27 percent in both 1994 and 2009. Census data on all adults ages 18 to 31, a wider group that includes college students and those with no college education, indicate that the share living at home with parents was stable at around 32 percent between 1981 and 2007, but increased somewhat to 36 percent by 2012. Given the stability in these numbers over the period examined in our study (1989 through 2010), we think it is unlikely that the exclusion of debt held by adult children living with their parents has a significant effect on our analysis of changes in student debt over time.
Q: Some of your analyses exclude borrowers who are not making monthly payments, such as those in deferral. Can you explain what that means for your results?
A: Nearly all of our analysis includes all young households, with a focus on those with education debt. The one exception is our examination of monthly payment-to-income ratios, which excludes borrowers that were not making payments on their loans. If we include these borrowers, we get very similar results. Note that this also makes the average debt-burden ratio smaller because we are averaging in zero payments.
We also exclude borrowers with less than $1,000 in annual wage income, but obtain very similar results if we include borrowers with more than $0 but less than $1,000 in income. We still have to exclude borrowers with zero wage income, because their payment-to-income ratio is not defined, but the share of borrowers with no wage income has not exhibited a clear trend between 1992 and 2010. It was 7 percent in 1992 and 8 percent in 2010, with a decrease during some of the years in between.
Q: That’s an important point. There is no one perfect way to look at these numbers. To take another example we discussed, if you include people who don’t have any education debt, you see a larger percentage rise in student debt since the early 1990s — but you also see an even smaller fraction of the population with large debts. By that measure, only 3 percent of young-adult households have student debt of at least $50,000, rather than 7 percent I reported. (The number I used was based only on those households with at least some debt.)
Next question: Are your results consistent with data on student loan defaults? They’re rising, yes?
A: Default is a measure of extreme financial hardship that can also reflect borrower behavior. For example, borrowers of federal loans who face unaffordable monthly payments should be eligible for income-based repayment options, but may not know this (or may choose not to participate) and default as a result. This makes default a noisy measure of the burden of debt. For the purposes of our study, we think that examining debt and income levels provides a more complete picture of the financial health of a wide range of borrowers. The fact that defaults are rising warrants further study, but it doesn’t say nearly as much about most people’s experiences as the overall data on student debt.
Q: You look at households led by adults between the ages of 20 and 40, which has the advantage of creating a larger sample and describing the experiences of more people. But do you think it might obscure patterns for more recent college graduates?
A: Our report is focused on the health of the market for education debt among relatively young households. Focusing on recent college graduates would be difficult given that students graduate from college at a range of ages and the Survey of Consumer Finances does not identify when respondents graduated from college. Focusing on relatively young borrowers would miss graduates who attended college at later ages, as well as recipients of graduate degrees, an important component of our analysis. Consequently, we believe our approach was the most appropriate one for the research question we were addressing and the data available.
Q: I’d add that other data, which does focus on more recent college graduates, shows a broadly similar picture. For examples, only 5 percent of bachelor’s-degree holders who started college in 2003-04 had borrowed at least $50,000 by 2009, according to the College Board. By comparison, 84 percent had borrowed less than $20,000. It’s not as if other data sets suggest that $50,000 or $75,000 in student debt is typical.
When do you expect that more recent data from the Survey of Consumer Finances will be available?
A: Nationally representative data like the Survey of Consumer Finances are always backward looking, and as a result could miss very recent trends. Most would agree that the economy has improved since 2010, so we think it’s unlikely that the data paint an overly optimistic picture of the financial well-being of households. We’ll know more when the 2013 data are released, which should happen this fall.