The truth about student loans

Credit: NYT
Credit: NYT

The New York Times is currently running a series on student loans, a topic that has been at the forefront of both the media and the general public for some time now. There has been widespread publicity (here’s just one recent example from USA Today) regarding the fact that student loan balances now exceed $1 trillion, an amount in excess of the balances of either consumer credit card debt or  automobile loans.

The first installment of the Times series ran in a most visible location: above the fold in the Sunday paper (the headline and image above is from the web version of the article).

Here’s the article’s lede, which seemingly establishes the case for the headline:

ADA, Ohio — Kelsey Griffith graduates on Sunday from Ohio Northern University. To start paying off her $120,000 in student debt, she is already working two restaurant jobs and will soon give up her apartment here to live with her parents. Her mother, who co-signed on the loans, is taking out a life insurance policy on her daughter.

“If anything ever happened, God forbid, that is my debt also,” said Ms. Griffith’s mother, Marlene Griffith.

Ms. Griffith, 23, wouldn’t seem a perfect financial fit for a college that costs nearly $50,000 a year. Her father, a paramedic, and mother, a preschool teacher, have modest incomes, and she has four sisters. But when she visited Ohio Northern, she was won over by faculty and admissions staff members who urge students to pursue their dreams rather than obsess on the sticker price.

“As an 18-year-old, it sounded like a good fit to me, and the school really sold it,” said Ms. Griffith, a marketing major. “I knew a private school would cost a lot of money. But when I graduate, I’m going to owe like $900 a month. No one told me that.”

It’s hard not to feel great sympathy for this young woman, struggling to pay back student loans with a balance that approaches what some people borrow to buy a house.  But to put Ms. Griffith’s borrowing in perspective, just a few paragraphs further down in the article, the Times notes that, “For all borrowers, the average debt in 2011 was $23,300, with 10 percent owing more than $54,000 and 3 percent more than $100,000, the Federal Reserve Bank of New York reports.”  So Ms. Griffith is hardly emblematic of “A generation hobbled by the soaring cost of college.”  While her circumstances may be difficult, they are not typical.  She is in fact an outlier, in roughly the top 2 percent of all borrowers.  And while outliers might make for good stories, as the Times has demonstrated, they do not provide the examples on which we should base policy.

It is difficult to pass judgment on the decisions made by individuals without knowing their full story, but based on the information provided in this article, it does seem reasonable to question the decision made by Ms. Griffith to borrow such a large sum of money for her baccalaureate degree.  She majored in marketing, a fairly common major these days.  A quick search of the Department of Education’s College Navigator website shows that there are 11 public universities in Ohio that offer bachelor’s degrees in marketing.  The article reports that Ms. Griffith grew up in Ottawa, Ohio, and at least four of these public universities – including Ohio State University – are within three hours drive of her home, and one, Bowling Green State University, is just as close to Ottawa as is Ohio Northern University.

According to the College Navigator website, student expenses at Ohio Northern this year (including tuition, room, and board) are $47,944.  The equivalent price at Bowling Green and at the University of Toledo, a little more than an hour away from her home, are less than half as much.  Even if you examine the net price at these three institutions, both Bowling Green and Toledo are approximately $6,000 – $7,000 less per year on average than Ohio Northern, depending upon her family’s income.

Perhaps Ms. Griffith could not get into one of these public institutions; while we do not know where else she may have applied, and been accepted or rejected, we do have information on the selectivity of these institutions.  While Bowling Green accepts a slightly smaller percentage of applicants than Ohio Northern (the College Navigator doesn’t have equivalent information for Toledo), 76% vs. 82%, the average SAT or ACT scores of students accepted at Bowling Green are lower than its private competitor.  It is possible that neither Bowling Green or Toledo offered her a financial aid package similar to what is shown on the College Navigator website.

There are a couple of points of note here.  First, as described earlier, Ms. Griffith’s case is by no means typical of the current generation of students completing college.  Yes, this generation of students is borrowing more than prior cohorts of students, and yes, their job prospects are not as strong because of the recession.  But these kind of “$120,000 in debt, $900 per month in payments” stories can serve to scare people off from borrowing reasonable sums of money to pay for college, a decision that for the vast majority of students makes all the sense in the world.  To put this in context, the amount borrowed by the average student as noted in the Federal Reserve Bank of New York study indicated above, $23,300, if borrowed in the federal Stafford loan program, would result in monthly payments of $229 at the current Stafford repayment rate of 3.4%.  Even if Congress is unable to agree on legislation to prevent the interest rate from doubling to 6.8%, as it is scheduled to do under the law, the monthly payment would rise to only $268.  Both of these sums are very reasonable, and represent a good investment on attaining a bachelor’s degree for most students.  And if a student was unable to get a job, they could opt into the income contingent repayment plan, which caps monthly student loan payments at no more than 10% of the borrower’s income.

The second important point here is that Ms. Griffith made the decision to attend Ohio Northern.  While the college may not have communicated the implications of her borrowing as clearly as she may have liked, every student (and her parents) have an obligation to be an educated consumer and to understand what they are signing up for.  I understand that she may have felt that Ohio Northern was a “good fit,” but the reality regarding price and the amount of borrowing required has to be part of that fit.  If she and her family could not afford the institution, or were not willing to borrow the amount required to attend it, then she should not have enrolled there.  And this was not a one-time decision; she had to make an affirmative decision every year to borrow more money.  Much of this borrowing had to be in private loan markets, as her balance is well beyond the Stafford loan limits for undergraduate, dependent students of $23,000 in subsidized borrowing and $31,000 in total Stafford borrowing.

Institutions are not blameless; they do have an obligation to provide accurate, clear, and unambiguous information to students and parents regarding the amount of borrowing that is required to attend the institution, and the implications of that borrowing.  But in the end, it is up to the student and his family to decide whether to accept an offer of admission, and corresponding financial aid offer, or not.

One more statistic in the Times article that is in question.  The story reported that, “Ninety-four percent of students who earn a bachelor’s degree borrow to pay for higher education — up from 45 percent in 1993, according to an analysis by The New York Times of the latest data from the Department of Education.”  This figure surprised me, as well as many of my colleagues who research financial aid, because the number we are familiar with is that approximately two-thirds of graduating bachelor’s degree recipients borrowed to finance their education, based on data from the National Postsecondary Student Aid Study.  So the Times claim – based, supposedly on ED data – that 94 percent of students were borrowing, seemed incredulous.  My colleague Sarah Turner at the University of Virginia, after sending an inquiry to one of the reporters, believes that she’s tracked down their error.  Until the Times has had a chance to respond I am going to hold off on posting her analysis.  But once they do, I will add an update with an explanation of the discrepancy in these numbers.

[Update May 16, 2012] The Times issued a correction to the figure regarding the proportion of students who borrow.  You can see my post about the correction here.

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