What the New Numbers on Student Debt Really Say

The New York Times seems a bit conflicted about student loans. On Sunday, the New York Times Magazine ran a cover story called “WAIT. I’ve got 80 grand in debt” featuring young people who don’t have the financial resources to strike out on their own. Inside, writer Adam Davidson wrote that “Nearly 45 percent of 25-year-olds … have outstanding loans, with an average debt above $20,000.” The vividly told story continues in the vein of such documentaries as Ivory Tower and my 2012 cover story in Bloomberg Businessweek, “Debt for Life.”

Today, the newspaper zigged in the other direction with a counter-intuitive post on the Upshot blog called “The Reality of Student Debt Is Different From the Clichés.” David Leonhardt reported on a Brookings Institution study that concluded: “The impact of student loans may not be as dire as many commentators fear.”

So who’s right? The New York Times or the New York Times? Let’s dig in. The Brookings study that Leonhardt cites brings important new information to the debate. This chart is the most important one. It shows that the average (“mean”) ratio of student loan payments to income fell significantly between 1992 and 2010. The median ratio—that’s the one for the person at the midpoint between the top and the bottom—has stayed even, in the range of 4 percent.

The Brookings authors, Beth Akers and Matthew Chingos, go on to say that data in the Federal Reserve’s authoritative Survey of Consumer Finances “strongly suggest that increases in the average lifetime incomes of college-educated Americans have more than kept pace with increases in debt loads.” The top quarter of households by income, who are most able to repay, hold 40 percent of student loan debt, they write. They conclude that “the borrowers struggling with high debt loads frequently featured in media coverage may not be part of a new or growing phenomenon.”

The Brookings study is a valuable corrective to the idea that America’s $1 trillion-plus in student debt is the next housing bubble, about to blow up with disastrous consequences. That doesn’t mean all of the hand-wringing about student loans is misplaced. Here are grounds for continuing concern:

• One factor holding down monthly loan payments is that repayment terms have been stretched out, nearly doubling on average from 7.5 years to 13.4 years. Longer terms ease the pain for fresh grads, but they’re no free lunch.

• Interest rates on all kinds of loans have fallen sharply since the early 1990s. When they start to go up again, those payment-to-income ratios for new borrowers will go back up.

• A minority of students really are getting in over their heads. As Davidson wrote in the Sunday magazine, “A college degree is an advantage, but it no longer offers any guarantee, especially for those who graduate from lower-ranked for-profit schools.” The Brookings authors note that “among households with some college but no bachelor’s degree, the incidence of debt increased from 11 to 41 percent.”

• The Brookings study may be missing some of those live-at-home boomerang kids featured in Davidson’s article. A young adult who is living at home and dependent on his or her parents isn’t surveyed in the Fed’s Survey of Consumer Finances. In an interview, Chingos said that there was no increase from 1994 to 2009 in the share of young people living at home a year after college, but he acknowledged that there’s no good data about trends in living at home five or more years after college.

• Student debt is unquestionably higher than it was two decades ago. As in the housing market, debt increases both the potential upside and the potential downside. Loans are a bargain for people who get a good education. But as the Brookings authors write, “Individuals who make bad or unlucky bets will be farther from financial security than borrowers in the past.”

• Regardless of whether this is a new problem or an old problem, we could be doing a lot better. The benefits of a more educated workforce are so great that government at all levels should be striving to make college more affordable. Four-year degrees are still out of reach for many students. As I wrote in 2012, the lowest-income students are more than three times as likely as the highest-income students to be studying for a certificate or an associate’s degree rather than a four-year degree, according to an analysis of data compiled by Mark Kantrowitz, publisher of FinAid.org. (Kantrowitz, now publisher of Edvisors.com, says the latest data show a 3-to-1 ratio for certificates but only a 2-to-1 ratio for associate’s degrees.)

The bottom line is that both New York Times articles are right, despite their different emphases. The main takeaway from the Brookings study is that the $1 trillion-plus in student debt isn’t in itself a problem. It’s who owes it that’s a concern. As the Brookings authors write: “The evidence reported above suggests that broad-based policies aimed at all student borrowers, either past or current, are likely to be unnecessary and wasteful given the lack of evidence of widespread financial hardship. Such policies tend to provide the largest benefits to borrowers with the largest debt burdens, who may be the opposite of those most in need.” Says Chingos: “To the extent that there’s a student loan problem, that’s sort of a symptom of a college-cost problem. That’s where people should be focusing their attention.”

Before it's here, it's on the Bloomberg Terminal.