College Student Loan Debt: A Tale of Two Time Periods

THE Brookings Institute released a study earlier this week arguing that “the impact of student loans may not be as dire as many commentators fear.”  The authors of the study arrive at this conclusion by examining data from the Federal Reserve tracking student loan debt between 1989 and 2010.  Their key findings include:

  1. Roughly one-quarter of the increase in student debt since 1989 can be directly attributed to Americans obtaining more education, especially graduate degrees.  The average debt levels of borrowers with a graduate degree more than quadrupled, from just under $10,000 to more than $40,000.  By comparison, the debt loads of those with only a bachelor’s degree increased by a smaller margin, from $6,000 to $16,000.
  2. Increases in the average lifetime incomes of college-educated Americans have more than kept pace with increases in debt loads.  Between 1992 and 2010, the average household with student debt saw an increase of about $7,400 in annual income and $18,000 in total debt.  In other words, the increase in earnings received over the course of 2.4 years would pay for the increase in debt incurred.
  3. The monthly payment burden faced by student loan borrowers has stayed about the same or even lessened over the past two decades.  The median borrower has consistently spent three to four percent of their monthly income on student loan payments since 1992, and the mean payment-to-income ratio has fallen significantly, from 15 to 7 percent.  The average repayment term for student loans increased over this period, allowing borrowers to shoulder increased debt loads without larger monthly payments.

Figure. Monthly Student Loan Payment-to-Income Ratios, 1992-2010

Ratio of Loan Payments to Income

Some, such as David Leonhardt, would suggest this study confirms that student loan debt concerns are overstated:

The deeply indebted college graduate has become a stock character in the national conversation: the art history major with $50,000 in debt, the underemployed barista with $75,000, the struggling poet with $100,000.

The anecdotes have created the impression that such high levels of student debt are typical. But they’re not. They are outliers, and they’re warping our understanding of bigger economic problems.

However, the Brookings study is less compelling when we take into account the difference in the labor market for college graduates in the 1990s vs the past decade and a half.  The data the study relies on begins in 1989, after tuition rates started their current climb:


Because the study relies on the changes in debt levels, it would be interesting to see what that change in debt levels would be from the late 1970s (when tuition rates were relatively flat) to current times.

Further, the student load debt crisis is of more recent vintage, so looking at data aggregated over a 21 year period blurs the picture of the problem.  Specifically, as the authors of the study state, debt levels have risen for debt holders.  However, this increased debt burden is mitigated because “[b]etween 1992 and 2010, the average household with student debt saw an increase of about $7,400 in annual income and $18,000 in total debt.”

As the below chart from the Economic Policy Institute highlights, the period from 1992 to 2010 is really a tale of two economic circumstances for college graduates in terms of employment and wages:

Likewise for entry level wages:


And for real wages for all college graduates:


As a result, aggregating the two time periods is a bit misleading.  The job market, wages, and student loan debt for college graduates of the past decade are different than their 1990s counterparts.  Taking the experiences of those from the 1990s and projecting those experiences on current/recent graduates is misleading.


Matt Leichter of the blog Law School Tuition Bubble (if you are interested in higher ed data/stats, read his blog) adds some of his thoughts on the Brookings study:

One, on page 4 of the report, the authors aggressively lean on the college premium as evidence that “the growth in debt is not [obviously] problematic.” The idea is that if the gap between college graduates’ earnings and high school graduates’ widens, then college is a good bet. The flaw, and there are many with this kind of thinking, is that both sets of earnings can be falling simultaneously but so long as high school graduates’ earnings are falling faster, then student debt can still be a problem even as the premium is growing.

Two, the authors make an implied structural unemployment argument when they write, “In 2011, college graduates between the ages of 23 and 25 … had employment rates 20 percentage points higher [than high school graduates].” However, not going to college isn’t the cause of lower employment rates among high school graduates. It’s because there’s slack demand for labor in the economy. It’s not too much of a stretch to hypothesize that employers prefer college graduates even for menial jobs.

Three, as always with college premium discussions, not everyone gets the average college degree, and not everyone has the average debt level. The authors only bring this up in their conclusion, which I think is unfair to readers.

Four, Akers and Chingos challenge the rhetoric of a student debt crisis by analyzing data on households with householders aged 20-40 from the Federal Reserve’s Survey of Consumer finances. It’s a minor point, but people who have higher debt levels are probably more likely to be living with their 40+-year-old parents than on their own. I doubt the effect is that large, but it’s something Akers and Chingos should have noted.

Five, it’s one type of composition fallacy to compare past trends with current outcomes, but it’s another to omit prospective factors from one’s predictions. The authors assume today’s college graduates won’t suffer from “cohort risk” due to the persistent output gap. It’s a pretty big if, and Akers and Chingos won’t pay anyone’s student loans if they’re wrong.

Six, on page 13, the authors note the difficulty of comparing stocks to flows, specifically that between 1992 and 2010 the average household with student debt gained only $7,400 in income but added $18,000 in debt. Okay, so the debt-to-income ratio is deteriorating, but that’s not a problem, they say, because if you divide both figures by 18 years, you get about 2.4 years worth of income increases equal to the total annual debt increase.

Another point I would add is that credential inflation is masking whether a person’s wages are truly tied to their level of education.  In other words, a person with a degree who earns $X wages at a job that does not require college level skills.  The person may have received the job because of their college degree as a result of the market being flooded with college degree holders, but a person with a high school level skills could perform those job tasks.  In that case, it’s market forces rather than needed skills that “required” a college degree for that job.

John Haskell

About John Haskell

John graduated from the University of Southern Maine with a degree in Political Science, and from the University of Maine School of Law. He has worked in both the public and private sectors, and currently, works with a small business services company in the Mid-Coast area.