Student Loans: Is There Really A Crisis?

A look behind the hysteria about debt-saddled college graduates

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Illustration of a student in graduation attire, with a price tag hanging off the cap

Student debt is completely out of control, right? The more than $1 trillion in outstanding college loans is front-page news and is pretty much the only educational issue the presidential candidates are talking about. Yes, ballooning student debt is causing real hardship for some Americans. But as with many educational flare-ups, the public debate is giving us more noise than signal. So before you decide to skip college based on the hysteria, here are a few things to keep in mind.

Students with $100,000 debt loads are far from the norm. On May 13 the New York Times took a long look at student loans. The paper profiled a student who just graduated from Ohio Northern University, a private Methodist college, with $120,000 in debt. That is a staggering amount, which is no doubt why the Times led with this young woman. But the article subsequently noted that just 3% of student borrowers owe more than $100,000; only 10% owe more than $54,000.

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Meanwhile, median debt for the two-thirds of U.S. college students who borrow to finance their education is only $12,800.  That’s actually less than the difference in annual earnings between those with a college degree and those with only a high school education — a gap that government data shows is growing as the economy becomes more skill-based. That’s part of the reason for the rapidly rising student loan debt: we’re in the midst of an economic downturn, and people are returning to school to upgrade their skills. It wasn’t lost on Americans that college graduates were much less likely to be unemployed during the past few years.

Doubling the interest rate for federal student loans is less calamitous than it sounds. Under federal law, interest rates on federally backed Stafford loans are set to double from 3.4 to 6.8% in July. That sounds terrible, but the rate increase would only affect new loans. And for the average borrower, the higher rate — assuming, and that’s a big if, Congress doesn’t prevent the increase from kicking in this summer — would hike repayments by about $6 a month. Not trivial over the life of a loan, but not crippling either.  The loan fight is more about Washington budget politics than it is about education policy.

It’s clearly in the public interest to help subsidize students to attend college. But where is the public interest in subsidizing especially expensive or niche choices like the kid who chose to go to Ohio Northern? That’s much less clear. Particularly since researchers including Alan B. Krueger, who chairs President Obama’s Council of Economic Advisers, have found that when it comes to predicting lifetime earnings, other factors such as ambition and tenacity seem to matter more than where you go to college.

(MORE: College Endowments: Why Even Harvard Isn’t As Rich As You Think)

It’s partly good news that student loans are surpassing credit card debt. Last fall the Federal Reserve gave parents everywhere a heart attack back in 2010 when it declared that student loan debt for the first time had surpassed credit card debt in the U.S. But what got less attention is that while student debt is rising, credit card debt is falling— by 11% in 2011, after also falling in 2010. Given our collective spending habits, that’s good news.

What should worry us more than the national student debt load — which is still not well understood because the data are so murky — is the likelihood that particular categories of students are getting a bad deal. Students at for-profit schools, for instance, are incurring more debt and in many cases getting little or no value for their money. These students tend to come from low-income families and returning military veterans and are the most likely of all college students — public, private, four-year, two-year — to default on their loans and torpedo their credit scores in the process. As a country, we need to do a better job of informing prospective students before they take on large debt loads at a certain school that other good — not to mention less costly — options are available.

The Obama Administration is taking steps to make information about college costs and performance more easily available to students and parents. The administration is also proposing a “Race to the Top” for colleges and universities in an effort to control costs — something that is long overdue. The availability of loans has spared higher education from pressure to cut costs or become more efficient and has also made it easy for state legislatures to cut spending on higher education and shift those costs to students through loans. In other words, loans have become something of a third-party payment system to finance bad habits throughout higher education policy.

(MORE: Can Obama Really Lower The Cost of College?)

At some point, a more ambitious overhaul of federal financial aid programs is needed to better target aid for those who most need it and to reduce perverse incentives for colleges and universities, which currently get rewarded for enrolling students but not for graduating them, or teaching them anything or controlling costs along the way. In a forthcoming column, I’ll look at some ideas for fixing the federal government’s core student aid program, Pell grants.

For now, we are most likely in the middle of a higher education bubble. It will correct, as all bubbles do, probably as a result of an improving job market but also as new providers of competency-based credentials gain credibility. A college diploma signifies many things beyond the specific skills or knowledge that come with a particular degree. As more efficient and reliable signals become available through online and other new education providers, the value of a diploma from certain institutions and in certain disciplines will change. Traditional higher-education providers — for instance, M.I.T. and Harvard — are getting into the online game alongside a slew of innovative start-ups.

In the meantime, higher education still makes sense for many Americans, especially for low-income students who the data show clearly have the most to gain by attending college. Just this week the hedge fund run by Peter Thiel, the billionaire entrepreneur with two degrees (B.A. and J.D.) from Stanford who is currently running around urging young people not to go to college, listed an analyst position explicitly calling for the applicant to have a “High GPA from a top-tier university.” When Slate’s Matt Yglesias called attention to the irony, the posting was changed. You decide if that says more about Yglesias’ influence in the human-resources field or about what the people doing the hiring actually think of the value of a college degree.