The nation’s collective $1.3 trillion in outstanding student loan debt has surpassed credit card debt and auto loan debt to become the nation’s second-largest debt category, after only home mortgages. Journalists and politicians have labeled this a “crisis” and drawn comparisons with the financial crisis of 2008.
Scholars who closely study the issue are more skeptical of the sky-is-falling narrative. Sandy Baum of the Urban Institute has called the student loan crisis a “bogus crisis.” In a forthcoming book, Beth Akers of the Brookings Institution and Matthew Chingos of the Urban Institute write that, while there are serious problems with the student loan system, “there is no evidence of a widespread, systematic student loan crisis, in which the typical borrower is buried in debt for a college education that did not pay off.”
Some context is valuable here. Take the following three statements, all of which are true.
1. The share of borrowers in default is rising. The Department of Education touts just-released data which show that the share of borrowers entering default last quarter fell to 1.7% from 2.1% last year. But new defaults were not completely offset by borrowers exiting default—in other words, the flow of water into the tub slowed, but the water level still went up. Among recipients of federal Direct Loans not still in school, 11.7% were in default at this point in 2013. That has risen to 15.1% in the most recent data release.
The share of outstanding balances owed by borrowers in default is lower, but still growing. While the risk to taxpayers is overstated by the share of borrowers in default, the potential for higher losses to the government is real, and growing.
2. Those who borrowed the least are most likely to default. This is perhaps the fact that runs most counter to the “crisis” narrative pushed by the media. In their telling (and that of Senator Bernie Sanders), hordes of students graduate with six-figure debt loads which they have little hope of paying back. The reality is much different: the average outstanding balance for a Direct Loan borrower in default is just $16,200, compared to $30,900 for a borrower in current repayment. The gap between these two figures has widened in recent years, suggesting that defaulters are looking less and less like the typical student loan borrower.
Borrowers who default are more likely to have attended cheaper, poorer-quality schools. They are also less likely to graduate, meaning they have paid tuition for fewer academic years. By contrast, the very small slice of borrowers with balances above $100,000 (they represent around 4% of all borrowers) is populated with graduate degree holders—doctors, lawyers, dentists, and aspiring entrepreneurs with MBAs. While they have a lot of debt to pay down, these individuals are in the best position to do so.
3. Students are borrowing more than they should to attend college. Most people with student loans likely believe they are paying too much—and with good reason. The rise in college tuition over the past several decades has far outpaced the rate of inflation, rising an inflation-adjusted 139% at private nonprofit colleges since 1985, and 222% at their public counterparts. When tuition charges are higher than they should be, students must borrow more to attend. Graduates may still reap large benefits from a college degree, but high payments on student loans mean less to spend on housing, food, and other expenses.
A growing body of economic literature supports the Bennett hypothesis, namely the idea that federal student aid itself is responsible for the rise in college tuition. When the federal government makes more money available, colleges will naturally increase prices to capture the largesse. A New York Federal Reserve study last year found that a dollar increase in subsidized student loans leads colleges to raise tuition by 58 cents.
Critics of the “crisis” narrative argue that high levels of student debt are acceptable, since a college degree is an excellent investment which generates higher earnings later on. This is not true for everyone, as I have written. But even when the system works, borrowers are still stuck with higher bills than they would be absent government intervention. The extra money to pay down loans has to come from somewhere, and the lack of spending or investment in that “somewhere” slows economic growth.
Now, does all this demonstrate that there is a student loan crisis? It depends on your definition of “crisis.” Here we have a credit system where defaults are common, but concentrated among a particular group of borrowers—most of whom did not borrow very much to begin with. However, even people who have no trouble paying down their loans still represent a drag on the economy. This is not a healthy system, and it has the potential to get much worse. But is also unlikely to mirror the housing market and precipitate the sort of financial calamity that brought down the economy in 2008.
The other side of all this is that if the media continue to highlight fake problems such as graduating with six figures in debt and no job, the real problems will fly under the radar and the system will continue plodding along without serious reform. Winston Churchill once said never to let a good crisis go to waste. If there is a student loan crisis, we may be doing exactly that.
This column originally appeared on Forbes.
Preston Cooper is a policy analyst at the Manhattan Institute. You can follow him on Twitter here.
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