Day: 2014/06/25

Good News: The Student Loan Crisis Has Been Canceled

…According to the Brookings Institution’s Beth Akers’ and Matthew M. Chingos’ paper, “Is a Student Loan Crisis on the Horizon?” The authors find that not only is there no crisis today, but there won’t be one in the future. (“Crisis” here, I gather, means debtors being unable to make their payments and taxpayers being forced to write-down some billions in student loans.)

Before picking through their paper, though, I have to give special credit to The New York Times‘ David Leonhardt, who crows:

The deeply indebted college graduate has become a stock character in the national conversation: the art history major with $50,000 in debt, the underemployed barista with $75,000, the struggling poet with $100,000. … Such graduates make for good stories (and they tend to involve the peer group of journalists).

This comes mere days after The New York Times Magazine ran an article officially declaring that millennial college graduates who were living with their parents weren’t leaving. Many of the subjects had significant student loan debts and low-paying jobs. I’m not saying the participants were typical of their age group, but I’m impressed that Leonhardt can undercut his own publication. I admire gall.

As for Akers’ and Chingos’ paper, take a look at John Haskell’s response. He argues that the authors commit a composition fallacy by comparing student debt repayment during the more recent economic disaster with the halcyon days of the 1990s.

It’s an excellent point, and I have some of my own to add.

One, on page 4 of the report, the authors aggressively lean on the college premium as evidence that “the growth in debt is not [obviously] problematic.” The idea is that if the gap between college graduates’ earnings and high school graduates’ widens, then college is a good bet. The flaw, and there are many with this kind of thinking, is that both sets of earnings can be falling simultaneously but so long as high school graduates’ earnings are falling faster, then student debt can still be a problem even as the premium is growing.

Two, the authors make an implied structural unemployment argument when they write, “In 2011, college graduates between the ages of 23 and 25 … had employment rates 20 percentage points higher [than high school graduates].” However, not going to college isn’t the cause of lower employment rates among high school graduates. It’s because there’s slack demand for labor in the economy. It’s not too much of a stretch to hypothesize that employers prefer college graduates even for menial jobs.

Three, as always with college premium discussions, not everyone gets the average college degree, and not everyone has the average debt level. The authors only bring this up in their conclusion, which I think is unfair to readers.

Four, Akers and Chingos challenge the rhetoric of a student debt crisis by analyzing data on households with householders aged 20-40 from the Federal Reserve’s Survey of Consumer finances. It’s a minor point, but people who have higher debt levels are probably more likely to be living with their 40+-year-old parents than on their own. I doubt the effect is that large, but it’s something Akers and Chingos should have noted.

Five, it’s one type of composition fallacy to compare past trends with current outcomes, but it’s another to omit prospective factors from one’s predictions. The authors assume today’s college graduates won’t suffer from “cohort risk” due to the persistent output gap. It’s a pretty big if, and Akers and Chingos won’t pay anyone’s student loans if they’re wrong.

Having said that, when the authors find fairly low monthly payment-to-income ratios (excluding debtors making less than $1,000 per year) it may appear too good to be true, but we should acknowledge it.

Monthly Student Loan Payment-to-Income Ratios, 1992-2010

I’m not sure what this means given the simple calculation I did above. It’s pretty surprising that student loans are such a small amount of monthly incomes. It might be that they’re excluding the billions of dollars in student loans that are in default, forbearance, deferment.

Finally, since the conversation on student loan debt is creeping towards amputating graduate school debtors from undergrads, gaze upon Akers’ and Chingos’ Figure 4:

Akers and Chingos Figure 4

The Survey of Consumer Finances is given only once every three years, but even between 2007 and 2010, the spike in graduates’ debt is evident. Who wants to bet that these aren’t Grad PLUS loans? Seriously, that program is not long for this world.

The authors conclude that their results should encourage Washington to not tweak the student loan system based on a perception of widespread financial hardship. They do not, frustratingly, discuss any of the existing indicators of a present student debt crisis. 11 percent of student loan balances are delinquent, 11 percent of debtors (minimum) with federal loans are in default, and $322 billion out of $1.043 trillion in federal loans are in deferment, forbearance, or default. (Calculated from here) Since we know the economy isn’t roaring forward and won’t without systemic reform, it’s hard to believe that all these loans will be repaid in full. If this doesn’t count as a crisis, what does?