Is There Really a Student Debt Crisis?

Source: Thinkstock

Source: Thinkstock

When U.S. student loan debt topped $1 trillion, the issue began to frequently make headlines and became a talking point that, for young people, rivals unemployment and often goes hand-in-hand with discussions about the wealth gap — and one that has let President Barack Obama to take executive action. But is the student debt crisis really as dire as we believe it is?

A study from the Brown Center on Education Policy at Brookings posits that the student debt situation isn’t as bad as the media says. The report suggests that the media depends upon anecdotal evidence rather than looking at the whole picture. Data from the Survey of Consumer Finances (SCF) shows that average lifetime incomes have increased accordingly along with debt — the average household with student debt saw an increase of about $7,400 in annual income and $18,000 in total debt between 1992 and 2010. The report also notes that a quarter of the increases in debt since 1989 correspond to Americans obtaining more education and graduate degrees.

Commentators claim that student loan debt is crippling young Americans from starting families and contributing to the economy — even the AP reported that the growing debt is contributing to a widening wealth gap – but the Brookings report says there isn’t concrete evidence to support that notion. According to Matthew M. Chingos, who co-authored the report, “the typical household with debt is no worse off today than a generation ago, with increases in lifetime earnings more than offsetting increases in debt, and monthly payment burdens kept manageable by longer repayment periods.

Chingos also wrote that high-income households hold “a disproportionate share of education debt,” and that many of the outrageous amounts of debt we hear about on the news may actually be coming from quite affluent sources, those who wouldn’t qualify for need-based aid. And those who owe the most wind up making the most — SCF data showed that 40 percent of the student loan debt was held by the top 25 percent of borrowers based on income. 

The Brookings report has received backlash though, with critics arguing that the data didn’t provide a full picture. The report used data from the SCF, which interviews less than 4,500 families and focused “on households led by adults between the ages of 20 and 40 (those most likely to be paying off their own student loan debt).” That analysis can overlook the student debt held by those who are not the head of household and may be unemployed and incapable of paying off their loan debt.

Regardless, the matter of student debt is still perceived as a serious problem by the White House and state legislatures. Obama took executive action in early June to expand the Pay as You Earn program, which caps monthly payments at 10 percent of a borrower’s disposable income and forgives the balance after twenty years of payments. The program previously only allowed new borrowers to take advantage of this plan, but Obama’s June action expanded the plan to include borrowers who took out loans before October 2007 or stopped borrowing by October 2011. This will take effect in 2015. Though Obama took executive action on this matter, he still wants Congress to pass more legislation to improve student debt levels, saying, “no hard-working young person should be priced out of a higher education.”

For those who fear the pressure of student loans, a new proposal in twenty states may help students attend college without the aid of loans, but rather will pay back with a percentage of their income after graduation. The exact details vary between states, but Oregon’s version of this proposal would allow students not forgo paying tuition. Instead, those who completed bachelor’s and master’s degree programs would pay back 3 and 4 percent, respectively, of their gross earnings over twenty-four years, while community college graduates would pay back 1.5 percent.

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