Student Debt: Probably as Bad as We Thought

By William Spriggs

The Brookings Institution, looking at data from 2010, has issued a report claiming the student debt issue isn’t as bad as people think. Using Federal Reserve data on households headed by 20- to 40-year-olds, they conclude that horror stories of people struggling with student debt are exaggerated. Problem is, more current data suggest student debt is more serious than Brookings suggests.

The Brookings study looks at the debt among households headed by people ages 20 to 40, which means it misses people who have returned to their parents’ households, or had incomes below $1,000 and who weren’t making payments on their loans. The data used in the study was incomplete and therefore skewed. In 2010, the incidence of adults living in “shared households,” that is adults living with other adults (including adult children not in school living with their parents), increased from 27.7 percent in 2007 to 30.1 percent in 2010; including an increase of about 300,000 children 18 to 24 living with their parents. The Brookings data ignores this group. In October 2010, among those 16 to 24 no longer enrolled in school, the unemployment rate for those who had some college or an associate’s degree was 15.4 percent for men and 10.6 percent for women; and was 9.9 percent for men and 9.3 percent for women with college degrees. It is likely, those unemployed may have missed Brookings’ earning cutoff or struggled and were not making payment on their loans.

What the Brookings study does not cover is the more recent period, in which student loan debt has become a problem for more than just young people as more debt is being held by parents. The New York Federal Reserve Bank reports that overall student debt increased from $363 billion in the first quarter of 2005 to $579 billion in the first quarter of 2008. By 2010, it stood at $758 billion and by the end of 2012 was at $966 billion. The Brookings snapshot of 2010 was at a midpoint in an escalating debt issue. Meanwhile, the average student debt balance grew from $21,867 in 2010 to $24,803 by the end of 2012. The Brookings study excludes this data because educational attainment of the borrowers isn’t available. However, the more current data show how big a problem student debt is in the economy.

What the Brookings study tries to suggest is that young college graduates in 2010 who borrowed money for school aren’t struggling with student loans more than in the early 1990s. From that perspective, the student “debt crisis” isn’t likely to cause new problems for the current generation seeking to buy homes, cars or start retirement savings. As with the housing bubble, we shouldn’t worry that overall debt is rising because the value of the underlying asset is rising, too.

Well, there are two problems with that. The earnings of those 20 to 40 is not rising. The median income for households 25 to 34 in 2012 was slightly below the 1988 level. And, the more recent data for newly minted college educated workers’ wages is that they are flat for men and down for women since 2000.

Further, the increase in student debt incidence is not limited to young people. Student debt held by those 40 to 49 nearly doubled from the onset of the Great Recession at the beginning of 2008 to the end of 2012, from $87 billion to $167 billion, while the number borrowing increased from 4.2 million to 6 million. The delinquency rate (those more than 90 days late) rose from 11.2 percent to 16.1 percent. This may be hurting young people more, since many home purchases by young couples are aided by parental gifts. And, while these loan volumes and delinquencies do not create the risk to banks that mortgages do, the weakness of the household balance sheet is a risk to the real economy because it shows the potential fragility of demand for other goods and services.

The Brookings study does remind us that the increase in students taking out loans reflects the increasingly diverse college student body and potentially greater intergenerational mobility. This is emphasized by the National Urban League’s report on African American college students showing the large number of “independent” adult college students and the relative low income of black students, which means greater needs to borrow. What is disturbing is that the Brookings study overstates the case that loans are affordable, undercutting the need to lower student loan interest and debt service.