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The Reality Behind the Student Debt Crisis

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Photo by Damir Spanic on Unsplash

Lost amid all the political news this week is a new White House report on student debt in higher education. One thing I was curious to see was what conclusions it drew about the macroeconomic impact of high debt levels. Politicians, especially presidential candidates, sure seem to think it’s a pretty big problem.

From the report comes a different view:

The rise in student loan debt has created challenges for some borrowers with lower earnings, but has not been a major factor in the macroeconomy.

— Despite its steady rise over the past decade, aggregate student loan debt remains small relative to aggregate income. In 2015, total student loan debt was 9 percent of aggregate income, up from 3 percent in 2003. By itself this is considerably smaller than the rise in mortgage debt prior to the crisis and it has also been accompanied by a reduction in other forms of consumer debt.

— Additional student debt, as an investment in education, is associated with additional income, putting many households in a better position to buy homes or start businesses. By age 26, households with student debt are more likely to buy a house than those that did not attend college. By age 34, college attendees with and without student debt are equally likely to buy a home, and both much more likely than those without a college education. Research studies have found that conditional on a given education, higher student debt explains, at most, a small fraction of the decline in homeownership among younger households.

— At the same time, the increase in defaults on student loans as well as the increase in high loan balances for low earners can be real concerns at the individual level, potentially leading to compromised credit and reduced home buying for some individuals.

A few brief thoughts from AEI’s education scholars. First, Jason Delisle:

The report is important for dispelling a dangerous myth that we see a lot, which is that student loans hold back the economy. We’ve heard that this time and time again from advocacy groups complaining about rising levels of student debt. They say student debt is forcing people to delay things like buying a house, starting a family, all productive things. This report is pretty clear that isn’t the case…

One point I think many will miss but is very important: the administration is trumpeting the millions of student loan borrowers who have taken advantage of the Obama administration’s income-based repayment for student loans. OK, that’s an accomplishment. But then another theme of the report is that the economic returns for students who pursue a higher education are quite large. Indeed. So here is the question I have: Why are millions of borrowers flocking to enroll in a program that allows them to cap their student loan payments at a small share of their income if the return on an educational investment are large? Something seems amiss there. I’ve done a lot of work showing that the income-based repayment program is too generous as a result of Obama administration changes, which may explain this disconnect.

And Andrew Kelly:

The solutions trotted out by Dems this cycle — refinancing of student loans, lower interest rates on new loans, a three month moratorium — are designed to help solve the problem that advocates have identified as the crisis (the stock of student debt). But this report (and others) makes clear that the real repayment problems seem to be among students who drop out and have small balances (often $5,000 or less).

Lower interest rates won’t help folks with small balances who aren’t repaying nearly as much as they’ll help those with average or large balances, most of whom have no trouble repaying because they have the highest educational attainment!

And a chart illustrating Kelly’s point:

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