The non student loan crisis

The public conversation about higher education is filled with doom and gloom about recent college graduates––particularly those with four year degrees or more in non-STEM fields––because of supposedly crushing student loans combined with low salaries. Increasingly we are also being told that getting a four year degree in a non-STEM occupation is the road to a debt-ridden life because of out of control tuition, too high student loans and too many college graduates working in jobs that pay too little to pay off those loans. One problem: by and large its not true.

In a must-read report for the Brookings Institution entitled “Is a Student Loan Crisis on the Horizon?” Beth Akers and Matthew M. Chingos lay out the facts. Using data primarily from the the Survey of Consumer Finances (SCF) administered by the Federal Reserve Board they conclude:

Despite the widely held belief that circumstances for borrowers with student loan debt are growing worse over time, our findings reveal no evidence in support of this narrative. In fact, the average growth in lifetime income among households with student loan debt easily exceeds the average growth in debt, suggesting that, all else equal, households with debt today are in a better financial position than households with debt were two decades ago. Furthermore, the incidence of burdensome monthly payments does not appear to have become more widespread over the last two decades. 

What they find is that the increase in the wage premium of those with four year degrees or more trumps higher student loans. And that those with higher loans––typically those with graduate/professionals degree––get an even larger wage premium which makes the loans a good investment, not a crushing burden. In addition they found that the ability to spread out those loans over a longer period of time has led to monthly payments no greater, if not lower than previous generations. Specifically they found:

… 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.

These data indicate that typical borrowers are no worse off now than they were a generation ago, and also suggest that the borrowers struggling with high debt loads frequently featured in media coverage may not be part of a new or growing phenomenon. The percentage of borrowers with high payment-to-income ratios has not increased over the last 20 years—if anything, it has declined. (Emphasis added.) 

The bottom line: student loans, for those that earn a four year degree or more, are a good investment not a national crisis.

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