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So is student debt an economic problem or not?

Brookings Institution: A different way to look at student loans and student debt
It certainly seems like $1 trillion in student debt would be a bad thing

Have a bunch of student loans? Well, don’t worry, say a couple of Brookings Institution researchers. You aren’t any worse off than a generation ago.

But that may depend on how you count — and whether you graduated.

According to a report by researchers Beth Akers and Matthew M. Chingos, total student debt has passed the $1-trillion mark, as has been widely noted; it now exceeds the nation’s credit card debt. But by studying two decades of data from the Federal Reserve Board’s Survey of Consumer Finances, they said they found no evidence of broad excessive debt.

From the report:

“First, we find that roughly one-quarter of the increase in student debt since 1989 can be directly attributed to Americans obtaining more education, especially graduate degrees. The average debt levels of borrowers with a graduate degree more than quadrupled, from just under $10,000 to more than $40,000. By comparison, the debt loads of those with only a bachelor’s degree increased by a smaller margin, from $6,000 to $16,000.

“Second, the SCF data strongly suggest that increases in the average lifetime incomes of college-educated Americans have more than kept pace with increases in debt loads. Between 1992 and 2010, the average household with student debt saw in increase of about $7,400 in annual income and $18,000 in total debt. In other words, the increase in earnings received over the course of 2.4 years would pay for the increase in debt incurred.

“Third, the monthly payment burden faced by student loan borrowers has stayed about the same or even lessened over the past two decades. The median borrower has consistently spent three to four percent of their monthly income on student loan payments since 1992, and the mean payment-to-income ratio has fallen significantly, from 15 to 7 percent. The average repayment term for student loans increased over this period, allowing borrowers to shoulder increased debt loads without larger monthly payments.”

So a large portion of the debt growth comes from more people getting graduate degrees, which is a good thing, but that doesn’t make that debt disappear. And loans are paid back over a longer period of time, which reduces the monthly outlay, which affects personal spending budgets. But it also means that borrowers are taking out higher loan amounts and paying back more interest over the lives of the loans. Which, no matter how you parse it, takes more money out of the borrowers’ pockets.

Akers and Chingos argue that their findings mean 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. At the same time, as students take on more debt to go to college, they are taking on more risk. Consequently, policy efforts should focus on refining safety nets that mitigate risk without creating perverse incentives.”

Um, no. Broad-based policies to reduce the costs of higher education, be it at the tuition level or the loan level, are needed. Safety nets are good, but they shouldn’t be the primary focus. The fast-growing cost of a public four-year college education is what propels this; with the disinvestment by state governments in universities, this winds up as yet another sly way of privatizing costs for things, like education, that we should view as a public benefit. 

As Akers and Chingos point out, the financial benefits of a college education are real, but students who drop out with debt find themselves in a bind. In fact, the delinquency rate for all student loans is higher than that for mortgages, credit cards and other consumer debt, which suggests people are having trouble meeting the payments.

It’s also worth noting that Salon reports Chingos’ research has been financed in large part by conservative foundations, including one that takes aim at reducing public employee pensions and another with past ties to Sallie Mae, which profits from student loans. As Salon points out, that might not indict the work, but it’s certainly a detail we should weigh as we contemplate Akers and Chingos’ contrarian take on whether student debt is an economic drag on the economy.

Follow Scott Martelle on Twitter @smartelle

Copyright © 2015, Los Angeles Times
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