September 27, 2010

Is There Really a Student Loan Problem?

It seems to me that there is more and more press and discussion on the high cost of college and "burdensome" student loan debts.   College is very expensive for sure and the costs have risen considerably over the past 25 years.   Student loan debt levels have also gone up along with increased costs.  

But I wonder... Is student loan debt really a big problem?  

Note:  there are definitely individuals with large student loan debts that are a burden to them.   Those people may have a student loan problem themselves.   I'm wondering more if the amount of student loan debt carried by households nation wide poses a 'big' problem for us as a country in general.

First of all we have to get a better grasp on how many people actually have debt and how much debt people really have.

The 2007 Survey of Consumer Finances has data on debt levels.   They list the debt amounts and what percent of the population has the kind of debts in question.    The 2007 numbers are a little old but not hugely different then today.

From the 2007 SCF we can get the following data points:

15.7% of families had education loans
10.7% of the bottom 20% of income earners had student loans
13.0% of the 2nd income quintile had loans

Median debt level for all families was $12,000
The bottom 3 income quintiles had median debts of $8,700, $9,700 and $10,000 respectively.

Mean debt for all families was $21,500
For the bottom 3 income quintiles the mean debts were $17,200, $15,700 and $19,400 respectively.

The site discusses student loan debt levels.   They have a little newer data and they have more information on how many graduates walk away with higher debt levels.  They say: 

"The median cumulative debt among graduating Bachelor's degree recipients at 4-year undergraduate schools was $19,999 in 2007-08. One quarter borrowed $30,526 or more, and one tenth borrowed $44,668 or more. 9.5% of undergraduate students and 14.6% of undergraduate student borrowers graduating with a Bachelor's degree graduated with $40,000 or more in cumulative debt in 2007-08."

Two key data points there: 
1) Half of graduates owed less than $20,000

2) 90% owed less than $40,000.

So your typical college graduate has a loan of about $20,000.    One in 10 students walks away owing over $40,000.    

Another data point is a report from the College Board that says that "17% of 2007-08 bachelor’s degree recipients who graduated with more than $30,5001 in education debt."

Debt as % of Income

I think more important than the amount of debt is the amount of debt in relation to the borrowers income.   If someone has $50,000 in debt then that means much different impact if you have a income of $25,000 than if your income is $100,000.

The report College on Credit: How Borrowers Perceive Their Education Debt By Sandy Baum and Marie O’Malley from the National Association of Student Financial Aid Administrators has some information breaking down the debt as a % of the borrowers income. 

Table 3 on page 11 shows the percent of people at varying amounts of debt / income levels.   For people with bachelors degrees specifically the rates are:

Debt / Income % borrowers
Up to 4% 18%
>4% to 8% 31%
>8% to 12% 19%
>12% to 16% 14%
>16% to 20% 5%
>20% to 24% 4%
>24% 9%

Almost half of borrowers (49%) have debt payments of 8% or less of their income.   For someone making $50,000 salary 8% of that would be a debt payment of $333 a month.   Or for someone with wages of $25,000 they'd be paying about $167 a month.  This is not a burdensome debt level.

The 9% of people with loan payments over 24% of their income are hurting the most.   That may include people with very low salary levels and those who are underemployed.   For example if you get $50,000 in loans and then can only get a job paying $24,000.   Your loan payments are $575 a month and your salary is $2000 a month so you're using 28% of your income for your student loan payments.    You could also have someone with $100,000 in loans and $48,000 income in the same situation.

So How Big Is the Problem??

I don't think that $20,000 in debt for a college education is what I'd call a giant problem.    Even $40,000 isn't an unmanageable amount of debt unless your income is low.

Granted more debt is not a good thing, but you have to consider what value people are getting out of these loans.   Is college education not worth owing $20,000 or $40,000?    If you don't think its worth owing that much then you should not be going to college in the first place if you ask me.   If college isn't going to get you a higher wage than if you hadn't gone to college at all then it doesn't make financial sense in the first place. 

Compare Student Loans to Car loans.

Looking again at the 2007 SCF we can find data on the amount of car loans households have.

34.9% of households have vehicle loans
Median vehicle loan debt for families holding the debt is $11,600

Now look back for the numbers on student loans.   15.2% of families had median debt of $12,000.

Twice as many families have car loan debts and the median debt levels for households who have either is similar.

So I could conclude that the student loan "problem" is only half as bad as the car loan "problem".  But we don't seem to think we have a car loan problem do we?     If the student loan "problem" is only half as bad then I guess we don't really have a student loan problem either.   (Or have I uncovered a vehicle loan problem that nobody is talking about?)

Isn't owing $20,000 for a college education a better value than owing $20,000 for a new car?   I would argue its a lot better deal.    The college education stays with you forever and opens doors to higher paying jobs.   The new car will quickly depreciate and break down after several years.   Yet we all seem OK with spending money on new cars.

Very Few People actually  have very Large Student debt Levels

It seems that anytime I read anything in the press about the student loan "problem" it is obligatory for them to mention someone who has $180,000 in student loan debt and utilizes their art history degree from an obscure private school you've never heard of as a night clerk at 7-11.   I have tried in the past to find any kind of data on the amount of people who have very large debt levels but not seen anything on that topic.   The closest I've found is the bit from saying that 10% of undergrad graduates have debts over $40,000 level.      $40,000 in debt is a pretty hefty amount but its not $100,000 or $150,000.   I don't know exactly how many people really have debts over $100,000.   Since we know that only 10% of the borrowers have over $40,000 in debt then less than 10% of the population owes more than $100,000.    I would hazard a guess that less than 1-2% of borrowers end up owing over $100,000.   If anyone has evidence to the contrary then I'd love to see the data.  

A small minority of people do have student loan debt over $100,000.  Many of those people are in a tough spot for sure.  However many of those people with very high student loan debts are professionals with graduate or professional level education including doctors and lawyers.   Those professionals will have relatively very high income levels.    A doctor who makes $200,000 a year should not be overly burdened by a $100,000 student loan debt.   

Summary points

Half of borrowers owe less than $20,000 
Twice as many households owe money on car loans with a similar median debt level.
Only than 10% of borrowers end up owing over $40,000
Only 9% of people have debt payments / income ratio of 24% or more
Very few households owe very high amounts

If you add all that up I don't personally think there is a major problem with student loan debt.   The amount of debt is on the rise and that is something to be concerned about but the vast majority of borrowers do not have excessive debt levels or overly burdensome debt payments.  The anecdotal evidence of very high debt borrowers are not representative of the typical borrower.

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