Q. What are the main points of your research on the Student Loan Crisis?
A. The research paper aims to test the hypothesis that there’s a [student loan] crisis looming in some way. [Some argue] that we’re already in a widespread crisis, which I think implies that as a country we’re in a different position now, in terms of student loans, than we were a generation ago. So we used data that tracked a national representative group of U.S. households and looked at their income and education debt from the late 1980’s and early ‘90s, through 2010.
First, we found that we can explain about one quarter of the increase in debt based just on the fact that more people are going to college and getting graduate degrees. Just that simple fact explains about a quarter of the overall increase in debt. Tuitions are also another likely culprit. Given data limitations we couldn’t quantify that quite as well, but everyone agrees that a big reason that debt has gone up so much is that tuition has gone up so much as well.
We also looked at two different kinds of measures of the financial well being of households—a long-run measure and a short-run measure. The long-run measure asked, “Among households with student loan debt, has the increase in their level of debt been more than the increase in their lifetime income?” We found that the increase in their total debt has been about two and a half times the increase in their annual income.
But we also looked at the ratio of people’s monthly payments to their monthly income as a measure of their short-run financial position. We found that the median payment-to-income ratio has been flat, at about 4 percent, for the last 20 years and that the mean payment has actually fallen payment quite a bit. So if anything, on average, people are in a better position now than they were 20 years ago.
What about the outliers of the findings?
We also looked at people in the outlier part of the distribution, the part we’re all particularly worried about—the horror stories you read about in the paper about people with $100,000 in debt. There still aren’t a whole lot of those, though there are more than there used to be, and the majority of them have graduate degrees. So that really is a story about graduate debt, not undergraduate debt. But if you look at the share of people who have really high payment-to-income ratios, student loan payments of 10, 15, or 20% or more of their monthly income, the percent of people in those categories is lower now than it was in the 1990’s.
What would critics of your paper say? Have there been any rebuttals that you think you might want to address in subsequent work?
I think what a lot of people are reacting to are actually the things that we haven’t said. One is that debt has gone up so much that there are now serious problems, and I think that [they’re] right. But I think that people have a hard time differentiating between a debt problem and a cost problem. And to the extent that there’s a debt problem, I think it’s really mostly a symptom of a cost problem. The reason debt has gone up so much is that college costs have gone up so much.
So if you were to wave a wand to make the trillion-dollars in student debt go away, that wouldn’t fix the underlying problem. So to just think about the debt issue in isolation and say, “Oh, we want to lower people’s interest rates, we want to forgive their debt,” that’s just going to basically be a give-away to mostly higher-income households, who are generally the more educated part of our country.
What do you say to people who say that there’s a student loan bubble and that, when it bursts, schools are going to go out of business?
Well the debt is held mostly by the government, taxpayers, and partly by private firms, but almost never by the colleges themselves. So if people stop paying their debts, the colleges don’t really have any skin in the game. I think the broader question of a bubble is whether education is over-priced.
If you go back to the housing bubble, prices kept going up, the bubble popped, and suddenly people owed more on their houses than the houses were worth. And so to think of the analogous situation in education, prices would have to keep going up, and then suddenly the broader economy would realize that a degree isn’t worth that much. That [situation] is not particularly likely, given that the returns on having an education have been going up, and the share of the population that is educated has not been going up nearly as fast as the returns have.
Are there some programs that are over-priced? There probably are. I think that part of the reason the [education] market is so dysfunctional is that we don’t have good information on quality and cost. When people shop for college, some can’t get good information on what the labor market outcome is going to be. So they make more mistakes than they would in a world where they had access to better information. So I think that if we can do something about information, it might put some downward pressure on cost.
What policy changes can be made that might have an impact on the quality of education in the U.S.?
I think that on the information front, there’s a lot the government can do. 10, 20 years ago it would have been hard, but now we have these huge databases. The government knows where everyone went to college, particularly people who got financial aid and took out loans. The IRS and Social Security Administration know how much money people have made. So in terms of producing information that tells you, for a given program at a given college, what the employment rates of folks are after they graduate, how much money they make, how that compares to what they paid, and how much debt they took on, that’s very doable. Right now, there’s a law in place that Congress passed a few years ago, that says the government can’t do that, but it’s certainly well within the power of policy makers to change that and have better information.
What is the trade off on the notion of education for employment vs. education for the sake of learning?
I think different people will value different things about education. When I think about policy around this, I don’t want to [just] give information about the income people make at different programs so people can all pick the ones with the best income, and we end up with only engineers and no social workers. But when people sign a promissory note to take out a loan they’re going to have to pay off, potentially over the rest of their life, I think they should go into that with accurate knowledge of whether they’re going to have a good chance to pay that back or not.
For me, it’s more about a minimal standard—making sure that people make decisions that won’t make them worse off than they would have been if they’d never gone to college in the first place, while still acknowledging the fact that there are more considerations to make just money. How important different things are is going to be different for different folks.
Originally published August 28, 2014.
Dr. Matthew Chingos is a Senior Fellow and the Research Director of the Brown Center on Education Policy at the Brookings Institution, a Washington, D.C.-based think tank. He recently co-authored a report with Beth Akers entitled ‘Is a Student Loan Crisis on the Horizon?,’ and has received considerable media attention for arguing that, “typical borrowers are no worse off now than they were a generation ago.” An expert on education-related topics in both K-12 and postsecondary levels, Dr. Chingos holds a B.A. in Government and Economics and a Ph.D. in Government from Harvard University.