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More On The Consequences Of Student Loan Debt

May 3, 2007

I don’t want to be “that historian guy with a weblog” who talks about the consequences of student loan debt, as I’ve done here, here, and here. But if I’m the only one doing it, I guess the excerpts below from a Chicago Tribune article, by Gail MarksJarvis, are again appropriate. Please pardon the interspersed commentary.

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– “About two-thirds of students borrow money to pay for college, and the average graduate leaves a four-year program with about $19,000 in student loans and $3,000 in credit card debt.”

Lacy: I think these strangely low and – to me at least – relatively unalarming numbers are the consequence of light debt loads from those in the upper classes and heavy loads from students with lower/working-class backgrounds. The mean, therefore, appears less vicious than the situation on the ground.

– “According to the College Board, borrowing to pay for college generally makes sense because education builds earning potential. The typical college graduate earns about 73 percent more than the typical high school graduate, and the higher pay covers the cost of four years of tuition and fees by the time the graduate is 33. The higher cost of private colleges adds an extra burden. But by age 40 students typically have covered those costs too.”

Lacy: How can they know that payoffs are occurring by the age of 40 when student loan debt loads have only increased heavily in the past 20 years or so, since the mid-1980s? If most students graduate college at the age of 22, then that means that College Board has only two-three years of data. And if student loan debt has been increasing over that period, then the numbers don’t reflect the real load and payoff time of more recent students.

– “In a recent poll of 1,508 college graduates between 21 and 35, Mathew Greenwald & Associates found that 44 percent delayed buying a house because of the burden of student loans. And 28 percent postponed having children. About 27 percent skipped medical or dental procedures, and 32 percent said college loans and credit card debt for college forced them to move back into a parent’s home or live there longer than they expected.”

Lacy: And I wonder how many of the 56% that have bought houses in the past ten years had to do so with an ARM because of student loan debt? I wonder how many of the 56% were among the recent spat of defaulters when the interest rates rose?

– “A 2003 national student loan survey by Nellie Mae, a subsidiary of SLM Corp., found that 54 percent of graduates said they wished they had borrowed less for college. If they had known in high school what they experienced after college graduation they would not have taken on as much student debt as they did. That contrasted greatly with 1991, when Nellie Mae found only 31 percent of graduates regretted their debt levels” (italics and bold mine).

Lacy: These numbers indicate that full information (the assumption of economists) about debt was likely not available, and therefore that the market for student loans has not reflected truly rational decision making.

– “With the cost of college climbing at a faster rate than inflation, College Board researcher Sandy Baum and Saul Schwartz, a professor at Carleton University in Canada, recently explored the question, ‘How much debt is too much?’ While people who borrow often believe they will not be overextended if a lender seems confident they can handle a loan, Baum and Schwartz warn against that assumption” (italics mine).

Lacy: Because student loans occur in the context of not-for-profits, I do think that some students assume that lending is done with their best interests in mind. Students don’t assume a predatory student loan market, as the psychology of the endeavor at hand (education) prevents natural defenses against irrational economic decision-making. And the endeavor, education, is power after all.

– ” ‘Lenders determine the maximum amount that they are willing to offer loan applicants on the basis of extensive analysis of loan histories,’ according to the researchers. But the lenders focus on how likely a default will be–in other words, the odds that the borrower will be completely unable to repay a loan. They do not look at what paying will mean to the individual’s lifestyle. ‘Our sense of what the word ‘manageable’ means is quite different from what lenders have in mind,’ Baum said.”

Lacy: The student loan market it entirely predicated on analyses of future income. What about students who change majors? What about changes in career, or market fluctuations while in the midst of earning a degree? There are so many variables at work here that there is NO WAY TO RATIONALLY CONTROL OR PREDICT THE OUTCOMES FOR UNDERGRADUATES. For professional students, heavy debt loads are entirely appropriate and necessary. But incomes for lawyers, doctors, and MBA graduates are more predictable and higher than those for undergraduates.

And of course the statement above about lifestyle considerations is an important one.

– “For many years analysts of student debt relied on the idea that graduates should not devote more than 8 percent of their gross income to repaying student loans. Baum and Schwartz trace the idea back to the mortgage industry, which historically has limited housing payments to 25 to 29 percent of monthly income and then assumed that other debt would not exceed 8 percent of income.”

Lacy: I don’t recall a student loan officer ever giving me this 8 percent number. And if they did at some point, it’s not a number often repeated.

– “They also found that family backgrounds matter. When they analyzed the Nellie Mae study the researchers discovered that people from low-income families felt more burdened by loans than other graduates–even when the loan size and existing income levels were the same.”

Lacy: This is the same psychology of those from lower incomes who refuse to go to college based strictly on the idea that ALL debt is bad. – TL

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