Thursday, April 12, 2012

Private Debt 2012 (15): $870B + $693B + $730B + ...


There are two kinds of news stories about student loans. One group of stories emphasize the huge total of student loans. Calculations from the New York Fed for the end of 2011 find: " The outstanding student loan balance now stands at about $870 billion, surpassing the total credit card balance ($693 billion) and the total auto loan balance ($730 billion)." The Student Debt Loan Clock, which for illustrative purposes continually updates the total student loan debt outstanding, is on the verge of crossing $1 trillion.

The second group of stories emphasize the problems of particular students who have large loans and great difficulties in paying them back...

The outstanding student loan balance now stands at about $870 billion, surpassing the total credit card balance ($693 billion) and the total auto loan balance ($730 billion)

Some things cannot be said often enough. Excessive private debt is the problem.

Timothy Taylor is the Conversable Economist and the Managing editor of the Journal of Economic Perspectives, based at Macalester College in St. Paul, Minnesota, which can be read free on-line courtesy of the American Economic Association.

In the linked post, he writes

Sometimes student loans pay off; sometimes not. What facts and concerns should the average student thinking about such loans be keeping in mind?  Christopher Avery and Sarah Turner tackle this question in "Student Loans: Do College Students Borrow Too Much—Or Not Enough?" in the Winter 2012 issue of my own Journal of Economic Perspectives.

Taylor considers some of the issues raised in the article:

Most students are borrowing amounts that are within standard loan guidelines

"My own guess," Taylor writes, "is that part of what is happening here is that larger loan burdens are being offset by lower interest rates, so the overall ratio of loan payments to income has risen by less than one might otherwise expect."

The median level of student borrowing isn't excessively high.

He quotes from the article: "Examples of students who complete their undergraduate degree with more than $100,000 in debt are clearly rare: outside of the for-profit sector, less than 0.5 percent of students who received BA degrees within six years had accumulated more than $100,000 in student debt."

Students considering loans should think about the typical employment and pay prospects for that major.

Taylor: "I do think that many students agonize a little too much over their major, while not agonizing enough over the extent to which they are building a skill set."

That struck me as a funny line. I don't know why.

Some students borrow too little...

Taylor: "Sending a message that all students should try a few years of college, even if it requires taking on tens of thousands of dollars in loans, is borderline irresponsible."


Timothy Taylor's conclusion:

Given the growing wage gap between those with a college degree and those without, it will make economic sense for lots of students to borrow, especially at today's rock-bottom interest rates. But with student loans, we're talking about young adults often in their late teens and early 20s making financial decisions that could be with them for decades to come. It's a transaction that should be made with caution and consideration.

My conclusion:

I'm not Ann Landers. This is not a personal advice blog. I don't have much interest in "stories [that] emphasize the problems of particular students". What interests me are the big, sweeping forces that arise from aggregate economic activity, which in turn affect the environment in which economic activity occurs. What interests me is the setting that gives rise to (for example) "the problems of particular students" -- particularly when it seems to be that more and more particular students are having such problems.

"Several decades ago," Taylor writes, "it was a low-risk option to spend a few years working part-time and attending a big public university". But the environment has changed.

I'm not into coping. I'm into solving. I will never recommend that you are cautious and considering when you make your personal decisions. Nor will I recommend you throw caution to the wind.

What I do recommend is that you think about why things have been getting generally worse for "several decades" now. Think about the accumulation of private debt and ask yourself whether it plays some role in that decline.

If you don't have an answer, that's fine. Just keep asking the question.

My first visit to Timothy Taylor's site was to his The Price of Nails.


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