Did the White House Really Say Student Loan Debt is Good for the Economy?
Posted By Derek Johnson on August 2, 2016 at 1:54 pm
A recent report from the White House Council of Economic Advisors kicked up a tempest in the higher education world by appearing to argue that student loan debt actually benefits the economy. This rather straightforward conclusion at the end of the 77-page report was reflected in much of the analysis put forth by media outlets. Here are some examples of the headlines the report generated:
The Wall Street Journal:
Source: The Wall Street Journal
Source: Business Insider
The claim is rightly considered controversial, if only because much of the brainpower in higher education policy over the past decade has been dedicated to finding ways to lower, mitigate or eliminate the burden of skyrocketing student loan debt. A detailed report by the president’s economic advisers arguing that this debt is actually a net positive for the economy would seem to fly in the face of those efforts or at least substantially undercut them.
However, there are several major problems with the conclusion the White House reaches in its analysis and the media coverage that followed. First, the substance of the report is significantly more nuanced than the headlines suggest. Secondly and crucially, very little of the evidence cited by the authors supports the claim that rising levels of student loan debt have a positive impact on the economy. In fact, much of the data the authors rely on combine the financial and social benefits of a college degree with the financial and social benefits of student debt.
Student loan debt as ‘part of a balanced breakfast’
The number of students financing college through borrowing has greatly accelerated in the past 12 years, and the White House report catalogues this fact admirably. In 2004, there were 23 million Americans holding student loan debt. Today that number has nearly doubled to 40 million. In 1996, the nation’s cumulative student debt sat at $200 billion. Now it’s more than $1.3 trillion.
The White House report asserts that these higher debt totals are “good” because they reflect the increasing numbers of Americans who are investing in higher education. For many (though certainly not all) students, this choice yields large financial returns in the form of higher lifetime earnings.
“To be sure, many borrowers who work when they leave school earn enough to pay their student debt on the standard 10-year repayment plan. At age 25, the earnings premium seen by a typical bachelor’s degree recipient working full-time and year-round is $16,000 a year (Figure 6), and this is well above the $3,500 annual payment corresponding to a typical debt amount of about $27,000.”
The report uses a barrage of graphs and charts to demonstrate that college debt leads to better economic outcomes:
Source: White House Council of Economic Advisors
Further, the authors use data to argue that higher amounts of student debt tend to be correlated with higher levels of education and higher average lifetime returns on that investment:
Source: White House Council of Economic Advisors
In essence, the report argues that if earning a college degree is good, and if student loans help more people go to college, that in turn means the debt they take on is also good. The actual body of the report is filled with caveats to this general rule, and the authors do a thorough job of explaining how this is not necessarily true for certain groups such as dropouts, low-income students and for-profit students. If more borrowing generally leads to more college graduates, and more debt leads to higher earnings, then student debt must be good, right?
No, not exactly. Both of these visuals amply demonstrate the economic value of going to college and earning a degree, especially when compared with the lifetime earnings of workers with high school degrees. What they don’t display is whether student debt (and in particular rising levels of debt) is in any substantive way related to those positive outcomes.
Few people in the higher education world would dispute that, for most Americans, college leads to better paying jobs and higher economic outcomes. But claiming that student debt is the driver of that positive economic activity (as opposed to piggybacking off of it) is a misleading argument. Many of these financial benefits existed long before borrowing and the cost of college began rising steeply in the 1980s, begging the question of exactly how consumers benefit from increasing levels of student debt.
It’s akin to cereal companies claiming that their sugary products are “part of a balanced breakfast” in commercials by placing it on a table alongside other breakfast foods—think fruit, eggs, oatmeal and orange juice–that are responsible for the nutritional balance they cite.
Diminished returns for student loan debt ‘benefits’
Mark Kantrowitz, vice president of college scholarship website Cappex says increased access to credit can lead to more students reaping the economic benefits of a higher education degree, but those returns become diminished as the cost of college and debt totals continue to rise.
“[The report] is acting as though the student debt is enabling the benefits,” Kantrowitz says. “They’re trying to treat loans as though they’re good. Student debt is good debt in that it’s an investment in the future, but too much of a good thing can hurt you.”
It is true that without federal financial aid, many Americans would be unable to attend college. It also is true that the rising cost of college tuition can in part be attributed to general economic trends, such as state disinvestment, rising enrollment rates and increasing demand for college graduates in the workforce, that are outside of the control of higher education institutions.
But the White House report barely touches on other factors that may unnecessarily contribute to driving up college costs, such as the significant increase in administrative staff and the purchase and construction of expensive, fancy buildings and facilities that serve little to no educational purpose.
The report also does not give nearly enough attention to the concept that increasing student debt totals are steadily eroding the economic value of a college degree rather than adding to it. If it is true that earning a college degree leads to higher financial returns, it is also true that student debt is eating into those gains at increasingly higher rates.
“Yes technically, if there were no student loans, the economic contributions of college education would diminish,” Kantrowitz says. “The problem is we are continuing to increase the debt [that comes with them], which is a drag on those benefits.”
A report by the The Institute for College Access and Success found that between 2004 and 2014, cumulative debt totals for the average undergraduate student at public and private nonprofit colleges rose at approximately twice the rate of inflation and median wages. This likely understates the true magnitude of the problem, as the analysis did not include students at for-profit universities, where the costs are much higher, the economic returns much lower and are responsible for a significant portion of the increase in average and total student debt.
“More students getting a college degree is good for the economy. So if you use the transitive property of equality [to argue for the economic benefits of debt] it’s true, but it’s a little reductive to boil the argument down to single line like ‘student debt is good for the economy,’” said Benjamin Barrett, program associate with New America’s Education Policy Program.
If the cost of college and cumulative debt continues to rise (and historical trends strongly suggest that they will), the risk calculus of borrowing large amounts of money early to pay for schooling will shift for many Americans. Kantrowitz likens the issue to the Laffer Curve in economics: While lower tax rates can yield higher economic activity and more overall tax revenue, after a certain point those returns tend to diminish to the point where the maxim no longer holds true.
While he believes we are still “decades” away from reaching that point in higher education, Kantrowitz said that this is already affecting college attainment among low-income Americans who are being discouraged from enrolling because of worries about incurring high debt.
“If you project out forward there’s going to be an endpoint where debt grows so large that benefits [of a college degree] are outweighed by it. The high cost, high aid model is going to discourage so many people from pursuing higher education that is going to affect the situation long before that,” said Kantrowitz.
Alternative models to student loan debt
There is a massive amount of research prior to the White House report that explores the (mostly negative) economic impact of student loans. Researchers have found that increasingly higher student debt totals can affect consumption on the part of borrowers, prevent them from building long-term wealth and assets and discourage them from starting new businesses.
This reality has already caused policymakers to consider alternative means of funding higher education that eliminate or at the very least greatly diminish reliance on the current federal financial aid model. Senator and former Democratic presidential candidate Bernie Sanders’ tuition-free college plan was eventually adopted by Democratic nominee Hillary Clinton, while former Republican candidate Jeb Bush rolled out a higher education plan that eliminated federal student aid altogether. Barrett’s employer, the left-leaning New America, released a report in April that called for redirecting the federal money dedicated to financial aid and student borrowing to state governments as a means of lowering the cost of higher education.
“I think people are just fed up. I think in this new reality where states are continuing to disinvest when things get rough, and higher education is a balance wheel for state budgets, I can definitely see some major action taking place [in the future],” Barrett says.
None of these proposals would have received serious consideration even 10 years ago, but alternative models have become increasingly mainstream as the problem of student debt continues to get worse. That’s why the conclusion by the White House that student debt should be viewed as a positive has drawn the ire of many advocates of higher education reform.
By combining the benefits of a college education with greater accumulation of college debt, they have intentionally or unintentionally provided justification for a status quo that will only cause the problem to fester.