Student debt and wealth and here we go again

Robin Hiltonsmith has a report at Demos called “At What Cost?” It purports to show the lifetime wealth hit a median couple graduating from public college will face due to student debt. The report has a number of defects, a few of which I detail below.

1. The debt assumption is 50 percent higher than it should be.
The author’s model is somewhat complicated, but at its core, the method for measuring the wealth impact of student debt is what you would expect. You take an initial debt amount, you figure out how much it would cost (principal plus interest) to pay it back, and how long it would take to do that. You take this cost figure and you determine its future value. And voila, there is your estimate. Or to put it more simply, you figure out how much extra money you would have if, instead of paying back your student loan, you invested that money and received all of the returns and compound gains such an investment entails.

This whole calculation therefore turns on what the initial debt assumption is. The author sets it at $53,200 for a median married couple of public college graduates. This is not accurate. The author’s numbers comes from a 2012 Project on Student Debt report, which found that the average debt of indebted graduates going to public and private non-profit four year universities was $26,600. So you double that and get $53,200.

This is the wrong figure to use for two reasons. First, it is an average, not a median. The report claims $53,200 would be the median debt of the couple, but then uses an average. Second, the figure combines the debts of public and private non-profit students. The report claims the couple both graduated from public universities, but then uses this combined figure.

So what is the real figure for median public university graduate debt? To answer this, we should probably consult what the Project on Student Debt calls “the most comprehensive and reliable source of financial aid data at the national level, the National Postsecondary Student Aid Study (NPSAS).” Its latest data release on this question is from 2007-2008. It found that among all public university graduates (including those with no debt), the median debt was $7,960. Among those with debt, the median was $17,700.

So if we take the latter figure and double it, we’d get $35,400 as the median debt for a couple of indebted public university graduates. The author is overstating the debt total by 50% by using figures that do not measure the kind of indebtedness he is using it for.

This 50% difference is massive because the whole point of the study is to measure future value. With a debt that much lower, you’d pay much less back (both in principal and interest) and finish paying it off earlier. Due to compounding returns of wealth investments, the wealth hit would be way lower than what the author ultimately concludes, were he to use the most accurate figures.

2. By ignoring the alternative, the model does not measure the actual wealth cost.

Here is the problem with studies like this. You can’t just say “well if they didn’t have this debt and saved all of the money they put into the debt, they’d have X amount more.” Why? Because to actually know whether this is true, you have to know what the alternative world would look like. For most liberal sorts, the alternative is that you tax people in order to provide enough higher education subsidies such that this student debt does not accumulate. So in that alternative world, the couple in question has to pay more taxes than in the status quo world. How much more? Well it depends on how you set up the tax, but unless its super-regressive, you’d presumably expect these folks to pay somewhere near the amount they “save” in lower student debt into taxes to fund the subsidies that allow the student debt to be lower.

If you factor in those tax costs (and you must), it’s not obvious that they would receive any wealth boost. If a wealth boost remains, it would be dramatically lower because, again, most of the money that the model assumes to go from student debt and towards personal savings would actually go from student debt and towards higher education taxes. Granted, the non-debtors would also have to pay that increased tax, so the gap between debtors and non-debtors would presumably collapse, but the dollar-denominated wealth boost would not be nearly what the estimate implies.

3. Fairness concerns
There are a variety of fairness concerns that I wont go into deeply here. But basically the study says: if you gave this median couple $53,200 at age 22, they’d have a bunch more wealth when they retire. But the couple is also among the richest and wealthiest couples in the country. So would that be a good policy really? To give rich and wealthy people more money to make them wealthier? What about couples that are non-attendees? Will they also get that $53,200 cash grant? Probably not, which would be a deep class war injustice.

Edit: The report has since been edited to reflect that the student debt figure was an average, not a median. This makes the report clearer, but it does not change the fact that average is not the appropriate figure to use here, especially if you use average figures for debt, but merely median figures for everything else (household income for example). Also, the figure continues to be an average for public/private university graduates combined, not just public graduates.

Response from Author
A few comments on your article. We corrected the reference to the average student debt burden to note that it represents the overall average, i.e. among both public and private 4-year university graduates.

On your first point though, the reason we used the average student debt figure of $26,600 rather than the median is 1. it’s the industry standard. The Project on Student Debt figures are cited extensively in both the media and the policy world, and we wanted to use a number that people are familiar with. 2. it’s the only way to extrapolate the findings to the entire $ 1 trillion figure debt burden (i.e. to produce our 4 trillion estimate). We wanted to make a prediction for the total economic drag that might result from the outstanding student debt burden, and only by using an average could we do so. 3. the only median data available as you mentioned is from 2007-2008, before the recession, and when the overall student debt burden, at $579 billion, was a little more than half of what it is today. We wanted to paint as current a picture as possible, reflecting the scenario today’s graduates are facing, and 5-6 year-old data would not allow us to do so. Finally, in truth, it’s not terribly important what number we pick for student debt. The real question that the paper tries to address is what is the “multiplier” effect of student debt on lost wealth, so we could emphasize just how far back the early-life sacrifices that debt forces borrowers to make set them back in their financial futures.

And on your second point, we don’t need to paint an alternative world; the data we use to build the model is from the Federal Reserve showing the actual financial situations of households with and without debt now. The picture we try and paint is of two best-case scenarios (no unemployment, rigorous savings patterns) of an indebted and student-debt-free household, of which there are many, under current conditions. Additionally, the “alternate” world is much more complicated than you depict. Debt-free college would not necessarily require a tax increase as large as the current gap in higher education funding which is now being filled by debt. Educational reform very well might (and should) hold down college costs, which would reduce its price, and it would also have economic spillover effects, in terms of freeing up young households to consume and invest, which would in turn balance out some of the cost. Finally, even if a tax increase were required, such taxes would be paid over the entire course of a households’ working life, which would reduce their impact on household financial security, since the cost wouldn’t be front loaded to the critical beginning of adulthood.

Like our previous research suggests (i.e. The Great Cost Shift) we believe public investment in higher education needs to be restored as but a part of fixing the problem.