By Phil Hill
I have been very critical of the Brookings Institution report on student debt, particularly in my post “To see how illogical the Brookings Institution report on student loans is, just read the executive summary”.
D’oh! It turns out that real borrowers with real tax brackets paying off off real loans are having real problems. The percentage at least 90 days delinquent has more than doubled in just the past decade. In fact, based on another Federal Reserve report, the problem is much bigger for the future, “44% of borrowers are not yet in repayment, and excluding those, the effective 90+ delinquency rate rises to more than 30%”.
More than 30% of borrowers who should be paying off their loans are at least 90 days delinquent? It seems someone didn’t tell them that their payment-to-income ratios (at least for their mythical average friends) are just fine and that they’re “no worse off”.
Well now the Federal Reserve Board themselves weighs in on the subject with a new survey, at least as described by an article in The Huffington Post. I have read the Fed report and concur with HP analysis – it does argue against the Brookings findings.
Among the emerging risks spotlighted by the survey is the nation’s $1.3 trillion in unpaid student debt, suggesting that high levels of student debt are crimping the broader economy. Nearly half of Americans said they had to curb their spending last year in order to make payments on student loans, adding weight to the fear among federal financial regulators that the burden of student debt on households will depress economic growth for years to come.
Some 35 percent of survey respondents who are paying back student loans said they had to reduce their spending by “a little” over the past year to keep up with their student debt payments. Another 11 percent said they had to cut back their spending by “a lot.”
The Fed’s findings appear to challenge recent research by a pair of economists at the Brookings Institution, highlighted in The New York Times and cited by the White House, that argues that households with student debt are no worse off today than they were two decades ago.
The full Fed report can be found here. Much of the survey was focused on borrowers and their perceptions of how their student loans impact them, which is much more reliable than Brookings’ assumptions on how convoluted financial ratios should affect borrowers. In particular, consider this table:
Think about this situation – amongst borrowers who have completed their degrees, almost equal numbers think the financial benefits of a degree outweigh the costs as think the opposite (41.5% to 38.1%). I don’t see this as an argument against getting a degree, but rather as clear evidence that the student loan crisis is real and will have a big impact on the economy and future student decision-making.
Thanks to the Federal Reserve Board for helping us out.
Update: Clarified that this is Federal Reserve Board and not NY Fed.