A mea culpa from the media.
The student loan repayment “crisis” is not as it seems.
Or not as it has been portrayed, endlessly, with terrifying stories of people who are trapped by financial obligations they cannot possibly meet.
All of those heart-wrenching stories of students who had racked up so much student loan debt that they couldn’t fathom earning enough to pay it back? Over time, the anecdotal evidence builds and chilling stories cause many to wonder if a college education is worth the risk of default, the debt incurred.
A report produced by a senior economist at the Federal Reserve Bank of Kansas City seeks to calm nerves and offer a more complete picture.
Kelly D. Edmiston, senior economist with the Federal Reserve Bank of Kansas City, led the effort, joined by Lara Brooks and Steven Shepelwich.
He was alarmed by the tenor of reporting around the topic. As a former professor at Georgia State in Atlanta, he knows the value of a higher education to lifelong earning potential.
As an economist, he took to crunching the numbers.
His conclusion on student loan debt: “It’s not a big issue for most people, but it is a huge issue for a tiny group of people.”
The most relevant figures from his report, the ones that should overshadow all of the other data, are these:
The median individual student loan debt for the first quarter of 2012 was $13,662. The average debt that people owed was $24,218.
Twenty-five percent of borrowers owed less than $5,977 and 25 percent of borrowers owed more than $29,155.
The perspective missing from all the highly publicized stories of people with massive amounts of student loan debt is that less than 3 percent had debt more than $100,000. Only half a percent had debt over $200,000.
So how did this important issue become so skewed, with so much context lost?
Argument by anecdote.
“You hear about these people with $100,000 worth of debt, and they are delivering pizza and can’t declare bankruptcy on their loans,” Edmiston said. “But if someone is working their job, a decent job, and is repaying their student loan debt, well, that’s not a story.”
It’s not that the individual stories aren’t accurate. It’s just that they do not impart a broad understanding of the situation for most people.
The context, the big picture, gets lost. And with plentiful numbers to draw from, sometimes more numbers just confuse the issue.
Edmiston also stresses that even the vast majority of those who owe around $30,000 are employed and making regular payments. Their student loan debt was part of creating the asset of being a better-educated, more employable person.
“For the most part, people are borrowing money to make an investment in themselves,” he said. “It’s unsecured debt, but there is an asset attached to it, that human capital that you gain in college.”
Secretary of Education Arne Duncan has termed student loan debt as “very good debt to have.”
He is considering the long term there, not endorsing taking out loans willy-nilly. Given the paybacks to lifetime earnings and the stability that offers, Duncan knows that a bit of debt taken on for an education is an investment, not a detriment.
The lifelong benefits of the education are indisputable.
People with a four-year college education earn 66 percent more over a lifetime than those without a degree.
“Americans took out more student loans in September, boosting consumer credit $11.4 billion,” read a Washington Post headline in November.
It’s not that the story is incorrect. These latest figures are reporting on the beginning of an academic year, when more students are taking out loans.
Edmiston also points out that most of the increase in outstanding debt is due to more people borrowing, not necessarily a bad thing if they are retraining themselves for future employment. He notes that increases in the average debt they are holding is moderate.
Another factor is that the cost of a four-year college education skyrocketed and the economy tanked at the same time. State schools in particular have been hit hard by dramatic drops in funding. To make up the difference, they have raised tuition.
According to the State Higher Education Executive Officers Association, state and local funding for higher education is at the lowest levels in more than two decades.
Common sense should be the key when borrowing money.
Earn a four-year degree in a marketable field. Complete school and your likelihood of defaulting on the loan drops dramatically. Do not borrow more than you need to cover tuition expenses.
The Department of Education is doing a better job of educating people about both the risks of borrowing and programs that can help with options for repayment.
In November, the government issued rules for a new program that will allow borrowers to “pay as you earn.”
It’s a plan geared toward recent graduates. People must have taken out a first federal loan after Sept. 30, 2007, and received a loan after Sept. 30, 2011.
Repayment is income-based and capped at 10 percent of discretionary income. Also, there is debt forgiveness at the 20-year mark, instead of 25 years.
The program is not for everyone.
The former student has to meet hardship requirements of low income versus the debt owed and other factors.
And as the borrower’s income rises, so do monthly repayment bills. But that also means the debt will be relieved faster.
As with any loan, it’s important to read the fine print. That simple step will keep the situation from really becoming a crisis.
THE KANSAS CITY STAR