Maybe the college student debt burden isn’t so crushing after all. That’s the surprising gist of a new study by economists at the president’s Council of Economic Advisers (CEA).
It’s surprising because burgeoning student debt has become a new economic worry and a political “cause celebre.” It adds to the hurt of millennials, who already face a tough job market and are living with parents in record numbers. Defaults could go higher. Strapped borrowers won’t qualify for home loans. The recovery will suffer. Both Bernie Sanders and Hillary Clinton made proposals to lighten the debt load.
What are the facts?
Clearly, college student debt has exploded. Since 1996, outstanding loans have risen from $200 billion to $1.3 trillion, says the CEA. The number of borrowers has nearly doubled over a shorter period, from about 23 million in 2004 to more than 40 million now. Counting undergraduates at community colleges and four-year colleges, more than half (56 percent) borrow.
Almost all these loans are backed by the federal government. If borrowers default, taxpayers pick up the tab. The justification for federal support is that both individual borrowers and society benefit. College graduates earn about 70 percent more than high school graduates, a gap called “the college premium.” Higher earnings make it easier to repay the loan, and the country benefits from a better-educated workforce.
That’s the theory. The reality, as the CEA discovered, is more complicated.
For starters, the college premium may be overstated. Some of the earnings advantage enjoyed by college graduates may stem from inherent talent or harder work. As the report says: “Students who attend college may [be] more skilled or more connected.” They would do better even if no one went to college.
Similarly, debt burdens may be exaggerated. Although the average loan balance — after correcting for inflation — rose 25 percent to 30 percent from 2009 to 2015, the “debt owed by the typical student remains modest,” the report asserts. For undergraduates who attended two- and four-year colleges, more than half of loans were less than $20,000, 42 percent were less than $10,000 and only 10 percent exceeded $40,000.
Graduate students incurred the largest debts; 43 percent of loans exceeded $40,000. But their repayment record was the best of any group, mainly because they took better-paying jobs and were “better equipped to manage [their] debt.”
Still, default rates have risen. At five years out of school, about 70 percent of loans are being repaid or have been repaid. Of the rest, some are in officially sanctioned “deferment” or “forbearance” and will someday resume repayment. The highest default rates occurred at community colleges (23 percent in 2012) and for-profit colleges (18 percent). Most hurt, the CEA says, were some low-income and minority students, who never graduated but have unpaid debts.
The good news about this bad news is that the debt levels aren’t yet high enough to depress the overall economy, the CEA contends. As a share of the economy, student debt today is about one-ninth the size of mortgage debt in 2007, when the country was on the brink of the financial crisis. The smaller student debt today curbs the danger to disrupt the economy.
For example, student debt didn’t cause home buying to collapse among the young. True, homeownership for those 24 to 32 dropped from 42 percent in 2005 to 33 percent in 2014. But the main reason, says the CEA, was an almost 20 percent decline in the earnings of recent graduates. A comparison of homeownership rates for college graduates with and without debt showed little difference — and none by age 34.
The lesson of all this seems obvious. The young today don’t need debt relief. They need good jobs. If those materialize, repayment rates will rise. So will homeownership rates. It’s as simple and difficult as that.
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