The student debt crisis—despite dire warnings from the media—is not as bad as it is portrayed, researchers Beth Akers and Matthew Chingos say.
In their book Game of Loans: The Rhetoric and Reality of Student Debt (Princeton University Press, 2016), the authors say the popular myth of looming crisis has obscured the real problems facing student lending.
Yes, there are problems, the authors say, including students borrowing far more than they need or can repay, but there is no evidence of a widespread systemic student loan crisis in which the typical borrower is buried in debt for a college education they did not pay off.
Moreover, many of the fixes proposed by politicians, such as reducing interest rates, would benefit affluent borrowers and do nothing for those who truly need help.
Why has the rhetoric around student loans become so divorced from reality?
Chingos: There are a couple of reasons, and a big one is that who borrows has evolved over the last couple of decades. In the early ’90s, levels of borrowing were a lot lower.
But borrowing was mostly a middle class thing because people from very low-income families had access to programs that covered more of the price of college when college prices were lower. And because those prices were lower, people from high-income families just paid them.
Fast-forward to the present and you see that a lot of people from fairly affluent families—the top quarter of income distribution—are borrowing much more than they used to. That top quarter holds about 35 percent of all student debt in the country.
So the people who you read about out there with the big balances—$100,000 or $250,000 or whatever—are often doctors and lawyers who can pay it, but they don’t like paying it, and that becomes a big part of the narrative.
So the conversation is being driven by how the media reports it?
Chingos: Yes. I think there is a tendency in the media to focus on outliers. Who wants to read about someone who gets a B.A. and has the average amount of debt—which is about $30,000—and gets a job making $40,000 a year and they don’t like making their payments, but they do it and in the long run it pays off?
That’s not a very interesting story. But someone who has $100,000 in debt and a degree in film studies and lives in mom’s basement—that’s the kind of sob story that, while of course it is a really dispiriting story, is not representative. But it makes for more exciting journalism.
Why is there so little pushback? Why are there so few people in higher education saying that this is not reality for most people?
Akers: There is some pushback, but it’s a relatively unsympathetic argument to say, “Look, these are outliers and we shouldn’t be basing policy around them as if they were the majority.”
I think the folks who are part of the student advocate community who are telling these stories just get a lot more attention because, as Matt said, those are more compelling stories. The other voices are out there, but maybe they just have not been as successful in getting heard.
If all the public reads are the stories about students who overpay, then they aren’t going to realize that’s not the truth.
Akers: That’s absolutely part of our motivation for doing this book. Part of the problem is that policies that provide broad-based relief for student loan debt are very appealing to voters.
And so we have politicians reinforcing this notion about a student loan crisis and that the masses are suffering under crushing student loan debt—and they promote policies that suggest that’s the case.
It’s an appealing narrative, but to get to the truth you have to spend a little more time thinking about the issue than most people have the luxury of being able to do.
According to a survey in your book, many students who take out federal loans don’t even understand that they have federal loans. Is that a function of financial literacy—or illiteracy, in this case?
Akers: This was a very shocking finding to us, and I should say this research came out of conversations we had with financial aid officers at institutions who tipped us off. They said their students really don’t have an understanding of their borrowing.
Maybe this is obvious for people who are working on the ground with students, but it was a big shock to me as a researcher who is a bit disconnected from the day-to-day realities of borrowing.
And why is this the case? I think for a long time we’ve been encouraging people to go to college without any sort of qualifications on that encouragement. We tell people that a bachelor’s degree is a golden ticket to financial well-being.
The consequence of that is we’ve gotten to a place where people are not particularly sensitive to price. They’ve gotten in the door of the institution, they’ve been told over and over that getting this degree is the right thing to do, and in order to get it they just need to sign on this line and take out these loans.
As a result, they are often unaware of the financial repercussions of the decisions they’re making.
It’s pretty easy to get a student loan with what you call the no-questions-asked approach. Yet if the process were similar to getting a home loan or a car loan, students would never get funded.
Akers: Exactly. The federal lending system is really not a lending market, it’s a lending program. In a lending market, the lender looks at the borrower and asks whether that person will likely be able to afford the debt—because, of course, they want to get paid back.
That keeps borrowers from getting loans they are unable to repay.
We lack that sort of system in the federal loan program just because we don’t have any sort of underwriting process, and I think that has created a lot of the issues we are seeing.
In the book, you propose a consolidated single loan program. That’s feasible on paper, but what would it take to accomplish that?
Akers: I think it’s completely feasible, in theory. The only evidence we have of interest in that direction—at least from the Republican party—is that Jeb Bush’s higher education platform during his campaign was essentially a single financial instrument program.
In terms of why I’d like to see us move in that direction, you just touched on the fact that there is an issue with financial literacy: Students are unaware of the federal debt that they have.
I think part of the explanation is that we have a complex system and there’s a lot of jargon being thrown around as students are entering college. Reducing that information jargon—by simplifying the process—could go a long way.
A significant portion of the default rate in recent years has been attributed to the for-profit schools, and the Obama administration tried to regulate that. There’s talk that the Trump administration may roll back those regulations. Could that lead to even more defaults?
Chingos: That’s a good question. First we have to see what the Trump administration actually does. There are certainly reasons to think that any Republican administration would be less sympathetic to the need to regulate for-profit colleges.
At the same time, conservative politicians used to say they cared about being careful stewards of taxpayers’ dollars. We have some evidence that a lot of for-profit institutions have not been careful stewards of taxpayer dollars and that’s also true of some not-for-profit and public institutions as well.
So whatever approach is taken, it’s likely to be more of a sector-neutral approach. Of course you could have an approach that is sector-neutral in theory but, if it’s based on outcomes, could end up hitting particular sectors (such as the for-profits) harder than others.
I think regulations that were put in place relatively recently can be rolled back by an act of Congress, but those that were done long ago would be harder to undo.
Tim Goral is senior editor of UB
