The Washington PostDemocracy Dies in Darkness

Is the $1 trillion student loan debt really a crisis?

( (Marvin Joseph/ THE WASHINGTON POST)
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When you read about the more than $1 trillion student loan debt in the United States, the word “crisis” invariably appears. But is it? Donald E. Heller, dean of the College of Education at Michigan State University, offers a different view of the common media portrayal of the issue.

By Donald Heller

For the last couple of years, ever since the outstanding volume of student loans exceeded the $1 trillion threshold — and simultaneously passed both car loans and credit card debt  —  the media have been on a rampage about the student loan “crisis.”

The fact that student loans passed $1 trillion is nothing more than that — a fact.  There is nothing about that level that should give us pause any more than when the volume of loans hit $842 billion or when it will surpass $1.445 trillion.  It is simply a marker that caused the media to pay an inordinate and generally misplaced amount of attention on student loans.

A few facts about student loans are important to understand:

1) Three-quarters of all college students borrow reasonable amounts of money to finance their undergraduate degrees (an average of approximately $29,000 for the most recent graduating class), and they are successfully paying back their student loans.

2) Yes, student loan default rates have risen in this recession – just as they have in each of the recent recessions, and just as mortgage and car loan default rates have gone up.  And given the unprecedented depth of this recession, it is not surprising that we are seeing higher default rates than in recent memory.

The most recent data from the U.S. Department of Education show that three-year cohort default rates – the standard used to measured defaults by the department – are at a level of 14.7 percent for those beginning repayment in 2010, at the depths of the recession.  But that means that over 85 percent of borrowers are not in default.

3) As many challenges as some students are having paying back their student loans, unemployment data demonstrate that people are still much better off having borrowed to attend college than to not borrow and not enroll in college at all.  The most recent data from the Bureau of Labor Statistics show that people holding a bachelor’s degree have an unemployment rate of 4 percent (and even lower if they hold an advanced degree), while 7.5 percent of those with only a high school diploma are unemployed.

4) Yes, some recent college graduates who borrowed to finance their educations have struggled to find jobs in their desired careers, which is hampering their ability to pay back their student loans.  But again, the data show very clearly that one is much better off having a college degree – even if you have to borrow to do so – than to enter the workforce without one.

A recent study conducted by the Federal Reserve Bank of New York examined the labor force participation of younger workers, those age 22 to 27.  It found that the unemployment rate of this age group who had earned a bachelor’s degree was 6 percent, while those without a college degree had an unemployment rate of 13 percent.  Even factoring in underemployment – the classic example of the college graduate working as a barista – these individuals will still be better off in the long run, for as the economy continues to rebound it is those workers holding college degrees who will be best positioned to obtain better-paying, career-focused positions.

There is little or no evidence to indicate that either the federal or state governments will be willing to make major new investments in our nation’s higher education system, either through direct state appropriations to institutions or in the form of a massive infusion of grant and scholarship aid, anytime in the near future.  There is even less evidence to indicate that college prices will be going down in the future.  And for everyone other than those in the top income brackets, their income and ability to pay for college will continue to lag behind the rise in prices.  Thus, student loans will continue to grow and continue to be an important part of the college financing system.

What we do need to do is to provide better information to students and their families so that they can make informed decisions about what are reasonable amounts of borrowing in relation to a student’s career goals.  Colleges and universities certainly have an obligation to do more, but these prospective college students and their families need to take responsibility as well.

It is not uncommon to read stories about college students who say, “I woke up one day and realized I had $50,000 in outstanding student loans and had no idea how I got there.”  And yet nobody would accept at face value someone stating, “I woke up one day driving a Mercedes and had no idea how I was $50,000 in debt.”  There are many pathways for distributing more and better information about paying for college, particularly to those first-generation college students whose families have had no experience with postsecondary education, but that is a column for another day.

We should be concerned with institutions that have very high student loan default rates among their alumni, and they need to be put on the path to reduce those rates.  The Department of Education, through its Gainful Employment regulations, is attempting to put in place tough new requirements for those institutions whose default rates greatly exceed benchmarks for multiple years.  But the higher education industry, led by the for-profit sector, is pushing back, and the department should be supported in its efforts to rein in abuses.

Rather than the hysteria about student loans, and ominous warnings of a “student loan bubble” (echoing the housing bubble which helped contribute to the current recession), the media would be better off focusing on how responsible borrowing can allow students to attend college who otherwise would not be able to afford it, and in particular, afford to enroll in a four-year institution.  While it may be more popular and draw more readers to focus on those student loan borrowers who are the outliers, the reality is that the great majority of borrowers are making good decisions by investing in a college degree that will pay off throughout their lifetimes.