Too Much Debt, or Not Enough?

The availability of federal student loans has changed the economics of higher education, helping to make college possible for millions of Americans. But as both the proportion of students accumulating college debt and the average amount of individual debt have grown, policy makers have increasingly asked: Do we have too much of a good thing?

That was the fundamental question at the core of a daylong conference sponsored Wednesday by the American Enterprise Institute and the Project on Student Debt, part of the Institute for College Access and Success, a nonprofit group led by Robert M. Shireman, a former education policy official in the Clinton administration. The centerpiece of the meeting, "Advancing America’s Economic Competitiveness: The Role of Student Loans,” was a discussion of whether the mounting debt burden accumulated by the average college student -- which now rests at nearly $20,000 -- has become too great for the individuals and, more broadly, for society. Conventional wisdom, as evidenced by a series of recent reports decrying the growing debt, holds that it has.

Most of the panelists agreed with that premise. Tamara Draut, director of the economic opportunity program at Demos, a nonprofit research group, and author of the forthcoming Strapped: Why America’s 20- and 30-Somethings Can’t Get Ahead (Doubleday), offered a litany of reasons why young Americans -- "the first young adult generation" in U.S. history that has been "asked to shoulder the cost of their higher education through loans" -- can ill afford to continue to accumulate the rates of debt they are now facing. 

Among them: a 30-year downward trend in the median incomes, particularly for men; rapidly rising costs for such things as housing, health care and child care (nearly a third of 25- to 34-year-olds now spend more than 30 percent of their income on rent, compared to 18 percent 30 years ago, she noted); increased credit card debt, and decreased rates of savings. In addition, she said, the threat of debt burden influences students' college choices, completion rates, and inclination to go to graduate school, all of which diminish their long-term earnings' potential.

Is the current debt burden too much? "Absolutely yes," Draut answered, adding that loan debt is "negatively affecting young people's lives." She proposed that the country revamp its financial aid system such that Americans can be assured of packages of federal financial aid that tied to their income, 

Alicia C. Dowd, an assistant professor in the higher education doctoral program at the University of Massachusetts at Boston, emphasized the extent to which some young people, particularly those from lower-income families and certain ethnic groups, may be dissuaded from going to college because of their aversion to taking on debt. (Dowd is spending this year at the University of Southern California, and so her comments focused heavily on what she has found to be the disinclination of lower-income  Mexican-Americans to take out loans for college.)

Easily the most unusual argument against the rising debt burden came from Allan Carlson, president of the Howard Center for Family, Religion and Society. He focused on the social, rather than financial, impact that student loan debt has on borrowers, offering an array of statistics suggesting that fear of imposing that burden on others discourages them from getting married and having children. 

He cited one study showing a decline over time in fertility rates for women with bachelor's degrees, and also described a Creighton University study in which young married couples said that the debt they brought into their marriage was the biggest problem in their relationship (yes, more than in-laws, he noted).

Members of the audience seemed unsure whether to laugh or gasp when Carlson described the federal student loan programs as a "highly effective form of contraception for the college educated" in the United States. His radical solution: The government should agree to pay off one-quarter of an individual’s student loan debt for every child he or she has, up to prescribed levels. Such a change – which he predicted would cost $8 billion to $10 billion a year -- would represent a “modest incentive,” rather than what he sees as a current deterrent, to marriage and child bearing.

Sandy Baum, a professor of economics at Skidmore College and senior policy analyst at the College Board, sought to step away from the “very emotional” discussion that typically surrounds the subject of student debt through an attempt to calculate, quantitatively, a better definition of how much debt is really "unmanageable." The standard definition that most policy makers use now to define students who have excessive debt, she noted, is 8 percent of an individual’s income before tax. 

But Baum, in a paper co-written with Saul Schwartz, a professor of public policy and administration at Ottawa's Carleton University, argued that one person’s unmanageable debt is not necessarily another’s, and that policy makers should instead adopt an approach that would tie the assessment of what is unmanageable for an individual to how his or her income relates to the country’s median income. 

Under such a system, some students should be expected to put much less than 8 percent of their income toward loan repayment, Baum said, but others could comfortably pay much more. The “manageable” proportion of their income that individuals who earn 50 percent of the median income (which translated to about $18,772 in 2004) would be zero – in other words, they would ideally be allowed to defer repayment until their income rose, Baum said. The “manageable” debt repayment for those earning three times the median (or $112,629 in 2004), she said, would be 17 percent of that annual income. 

Baum suggested that the federal government and lenders could use a refined version of the approach she laid out as the basis for systems of loan repayment that would make how much and when borrowers pay back their loans contingent on their income after college.

Her view that the student loan debt problem may not be quite as bad (or at least as uniformly painful) as often portrayed was echoed by Susan M. Dynarski, an associate professor of public policy studies at Harvard University. She said that as she listened to Draut, Carlson and others describe all the hardships student loan borrowers faced – “they can’t pay their bills, they’re not having children, their marriages are crumbling” – she felt like she was in an “alternate universe,” since “we know that the returns from schooling are at an all-time high,” in terms of additional economic payoff that college graduates have compared to Americans without a college education.

In Dynarski’s view, the significant economic payoff that individuals gain from a college education means that it is not unreasonable to expect them to pick up a meaningful share (in terms of repaying their loan debt) of the cost of that education – a cost already subsidized by the federal government (which subsidizes most federal loans), their states (for those at public institutions) or, at private institutions, their colleges’ endowments.