The report “Is a Student Loan Crisis on the Horizon?” by Chingos and Akers makes the case that while borrowing has risen over time in the U.S. (and the percent of those who borrow), the return of that schooling has increased as well. They maintain that the typical student holds debt that is well below the lifetime benefits of a college education and most students are not struggling to repay their debt. Thus they conclude that the media is exaggerating the picture.
They base their conclusion on two main findings: 1) the average increase in student debt can easily be paid back within 2.4 years’ worth of average earning increase, and 2) the percentage of income devoted to repay student debt has remained unchanged since the early 1990s.
This is contrary to warnings of a loan crisis posed to future generations and the economy. If students are repaying their debt on time, and at the same rate as the early 1990s, what is the problem?
The answer is the analysis of the data. The report uses mean figures, acceptable if the data was evenly distributed. But larger proportions of the population have incomes and student debt volumes that are lower than the mean (in both cases, about 70 percent of the population earnand borrow less than the mean). Thus, to represent the larger share of the population, it would be more accurate to use median figures. This correction leads to a significant difference in the result. Chingos/Akers show mean annual income increasing by $7,411 (from 1992 to 2010), while student debt increased by $18,000 leading to only a 2.4 years’ worth of income needed to pay back the increased debt. The use of median figures from the same dataset shows that income rose by only $2,145, and borrowing increased by $9,317 which almost doubles the result to 4.3 years’ worth of income needed to pay back the increased debt.
There is also a question of the age by which a student borrower must repay in full. Chingos/Akers do not look at average income by age (that is the income trajectory of an individual over time). While their study covers households between 20-40, the actual borrowers must complete their repayments within 10 years of graduating, which is the case of the most common federal loan, the Stafford loan. Recent graduates do not immediately start earning an average bachelor’s income. Chingos/Akers’ measure of “average income until the age of 40” overestimates the income available to pay back the debt. If we use data that tracks the median annual earnings among full-time workers from ages 25 to 32, we can see that the income of those with a Bachelor’s degree (or more) only increased by $1,000: from $44,000 in 1992 to $45,000 in 2010 (see graph below). According to the authors’ logic, it would take over nine years’ worth of yearly increase in earnings to pay the medium increase in loans.
There is a lack of independent verification of the Brookings findings. Indeed there exists a strong consensus that student debt poses a growing concern.
- The length that current graduates are paying their loans is up by 80 percent compared to the 1990s. In 1992, the average length in repayment was 7.4 years, it is 13.4 years now.
- Delinquency has doubled in the last 10 years: from 6 percent in 2003 to almost 12 percent in 2014.
- Default rates for the 2005, 2007, and 2009 school-leaving cohorts have all now reached roughly 25 percent. There is a pronounced worsening of the cohort default rate schedules over time −- Default rates are higher for later cohorts at virtually all durations.
- In the early 1990s, roughly 17 percent of student were negatively amortizing their student debt after two-years of graduation, now this percentage is almost 60 percent.
- In a snapshot of 2014, the New York Federal Reserve data shows that only 29 percent of borrowers are repaying with a decreasing balance. This leaves 71 percent of borrowers with repayment difficulty: 34 percent are current, but their balance is increasing. 20 percent are now current, but have previously experience problems (their balance has increased since they graduated), and 17 percent are delinquent or in default.
The Brookings report is good news to colleges who depend on the federal subsidy from student loans for income. Ultimately however, the fate of student debt will be determined not by new measurements but by what happens to it in real time as defaults and debt forgiveness continue to mount. Unfortunately, we still better keep our eyes on the horizon.
*To see graph of median annual earnings among full-time workers ages 25 to 31 click here.