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?



  1. An excellent post – does anyone know how many law students of any particular law school are actually paying their debt each month? This number should not count those using income based repayment, deferments, or other hardship exceptions. My guess is that the real rate of graduates actually making the full monthly payment each month correlates with the rank of the law school.

    1. Thanks eclinton. Unfortunately, there is no answer to your question. I don’t think law schools have the capability of tracking graduates’ initial repayment plans, but I’m sure your guess is correct. I’ve read that the default rate for law school debtors is low, but I can’t remember seeing the actual data. Maybe buried in ED’s Web site.

  2. Vox has a follow up piece.

    While some of it I agree with, I think, again, what often gets glossed over by the larger new institutions (such as Vox, NYT, and others) and their pundits is credential inflation. Those national folks balk when it comes down to the issue of whether the skills gained via education are required for the jobs held by college grads, or that the saturation of the labor market makes the requirement due to market forces.

    Of course, glossing over this allows people to make the argument that attending college is a no brainer.

    What drove me nuts about the Vox piece was this:

    “The average borrower defaulting on a loan owes just $14,500. On the other hand, the typical medical school graduate owes around $161,772. Which one is in better shape?”

    Well, “shape” is rather subjective, but yes, the person with the advanced degree to work in a highly regulated, highly paid field is better off. But we know you *need* a medical degree to be a doctor–who says you need a college degree to do half (arbitrary number I pulled out of the air) the jobs out there?

    1. I like to think that I try save the credential inflation argument as a last resort when discussing student loan debt. For example, in the two posts by Leonhardt that I criticized recently, he blathered about how important college completion is, which is a textbook example of the sheepskin effect. Credential inflation is an unspeakable anathema to the East Coast media.

      I have a lot of problems with your quote from Vox. Principally, like Akers and Chingos, its problem is equivocating what a student loan “crisis” is. If it’s just everyone having insane debt levels and being unable to repay them, then you’re pretty much restricted to talking about law students and a handful of other graduate/professional-school students. Basic research will tell you it’s Grad PLUS loans, IBR, bankruptcy for remaining private loans out there, and high likelihood of a small but acute write-down.

      If your crisis is widespread defaults, well, then you’re going to have to recognize that when income is zero, the debt-to-income ratio is undefined, so debt balance is irrelevant. You have to look at the aggregate numbers of debt that is in default or is essentially in default, i.e. forbearance, deferment, or high-balance IBR/PAYE. You’ll have to acknowledge that a write-down will have to take place, but the problem for debtors isn’t so much that they’re stuck paying high debts, it’s that they’re dealing with a debt that they should be able to discharge in bankruptcy but can’t. Instead, their wages are being garnished, and they’re being hounded by collectors.

      If you think that so many debtors have so much debt that it’ll slow down the economy ala “balance sheet recession,” then you should expect high debt service payments as a share of monthly income, and you should switch to Keynes mode and advocate writing down the debt so that people will give our society the grandchildren who can actually inherit the ruined economy.

      If your crisis is people (okay, pretty much NYU grads) being forced to come up with high monthly payments or else Citibank will foreclose on their parents’ houses because they co-signed the loans, then the problem is largely restricted to private loans and we should repeal that part of the BAPCPA. (I believe you can shield a loan co-signer in chapter 13.)

      So yes, the defaulters are a problem even though they have relatively low balances, but the class of 2014 medical school debtor who has a higher debt-to-lifetime-income ratio compared to doctors who started in 1980 is a problem too.

      Simply put, it’s way too easy to beat up on the media for sensationalizing debtors with high balances. We should have higher standards of researchers and reporters on the issue.

      1. The other problem is that a lot of good-natured liberals feel that credential inflation is not a problem, because a side-effect of credential inflation is more college, and more college leads to an educated population, and an educated population is a good thing.

        Now the holes in that line of reasoning swallow the argument, but its a tough pill to swallow for some people to say that sending all 18-22 year olds to college for four or five or seven years isn’t necessarily a good thing.

  3. A problem to who exactly? The lenders don’t care as long as they get their money. The finance industry packages and trades these loans 5 times over, so everyone is reaping the rewards. Except the borrowers, but, well, I don’t think that will change.

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