Numbers Can’t Tell The Whole Story

We’ve all seen a lot about student debt of late: the massive numbers, and the challenges that students and their families face. It’s on television, the web, traditional media and in our collective zeitgeist. Student debt is everywhere – and it is poorly understood. A recent book does a fantastic job shining a light on the numbers. Numbers, though, are only part of the story.

Sandy Baum, one of the nation’s most respected economists on issues of higher education finance, has a new book: Student Debt: Rhetoric and Realities of Higher Education Financing. It is a welcome beacon of clarity and data-driven information. An emerita professor of Skidmore College, Baum has a PhD from Columbia University and a lengthy record of publications. She currently is a fellow in the Education Policy Program at the Urban Institute. Baum is methodical and organized in her thinking and writing. The book is somewhat akin to a legal brief, with each chapter starting with an abstract. Data is highlighted and argument rests on a smart interplay of fact and assertion. It’s vital to be aware of which is which.

Student Debt demonstrates that the media’s portrayals of student debt are misguided and confusing. Debt, Baum reminds the reader repeatedly, is neither good nor bad. Baum rightly notes that borrowing has enabled many students to earn an education and that higher education enabled more successful careers. One has to look at who has debt, why, and who is and is not able to cover their higher education debt. She breaks down categories to make clear that not all borrowing is the same. Students from high-income families tend to carry more debt than students from low-income families. Within these categories, it is essential, Baum stresses, to identify which groups are suffering and why. Most students who borrow successfully discharge their debt.

Baum emphasizes that student borrowing is about cash flow and not about paying for an education. Borrowing provides cash, and an education to students, before the education pays off. This is an elegant way to explain student borrowing from the perspective of an economist. Baum is not interested in whether students or their families understand student borrowing through this lens. This difference – between what economic models prove and what students at the financial aid office might say – is missing from Baum’s narrative and her thinking.

The size of overall student is staggering. Baum explains that the more than one trillion in current student debt includes many years of borrowing for undergraduate and graduate education. She points out that rates of borrowing have slowed. Baum deliberately helps the reader understand that within these large populations of students borrowings, anecdotes of individual students do not tell a complete story. Some students make very bad choices. Others use the student debt and have successful academic and professional lives.

Where are the extremes? The greatest increase of student borrowing, from 2003 to 2011, was for students at for-profit institutions. The students with the highest dollar figures of debt are in graduate school. Income is not growing and inequality has increased. This has heightened the stakes for students who are making guesses about the right levels of risk and return. Rates of borrowing do not necessarily align with rates of salaries matched to educational credentials.

Baum believes that the dollar figures and rates of student borrowing have grown because the cost of college has increased and students need financial help with living expanses. Data supports her. She references people who have wrestled with repayment and the variation in how students address debt. Baum is aware of the difficult choices students face in financing their education.

When it comes to default rates (nationally around 12%), Baum emphasizes that it is only 6% for private nonprofit colleges, 8% for four-year publics, 16% for for-profits and 19% for community colleges. Importantly, most of the default takes place for those with the lowest levels of debt: students starting out at community colleges and for-profit colleges.

Baum is concerned that without appreciation of these distinctions, students and political leaders will make poor decisions driven by fear of debt “horror stories.” There is little solid research on the impact of student debt, and no real studies that consider the alternative, the lack of higher education for the student. Baum reviews policy suggestions, arising out of the debt panic, and does not find well-considered plans. Public education is a common and individual good, and if we are going to support it, we need better ways of financing it. How those plans may work, or when they may be implemented, are beyond the scope of this book. Baum emphasizes, correctly, that one way or another, someone has to pay.

Right now, loans and credit are needed. Baum states that “most potential students will be better off incurring the necessary debt and getting an education than they would be skipping the investment.” She also cautions that “the fact that returns are high on average and for most people does not mean that higher education pays off for everyone.”

Policy makes a difference. Baum concludes Student Debt with a provocative set of suggestions, all of which involve reasonable changes within the current system. Undergirding her proposals is the primary value of helping students make better choices about debt. If students do not know and/or cannot make informed choices, problems will continue. She argues that institutions that do not serve students well should not receive financial support or be allowed to take part in federal financial aid programs. At the top of the list, of course, are the for-profit institutions that have the highest levels of default and the lowest levels of student completion. Along similar lines, she believes that institutions can be incentivized to do more to limit debt, to decrease default rates, and to inform students more thoroughly. Baum wants limits on loans: for part-time students, for particular programs, and for Grad PLUS and Parent PLUS. More effective tracking is needed, too, so that institutions can do a better job understanding student debt.

Her big ideas include developing more and better income-driven repayment plans. Student repayment options could be made easier. Baum does not believe that all student debt should be forgiven (“such a misguided idea it is hard to know where to begin”). However, she does believe that some borrowers should be able to receive relief. Baum is very good on pointing out the problems with broad-brush solutions. She suggests that there could be limits on amounts of unpaid interest that is added to student debt. This is a relatively easy way to control ballooning numbers. She sees little good in garnishing social security payments, a current policy that causes hardship for seniors and disabled people who have no real potential for increased earnings.

One of Baum’s more interesting proposals is to stop calling private loans “student loans” and to get the government out of this part of the debt market. She connects this reform with another: start treating student debt like other debt in bankruptcy. It is possible to provide lines of credit instead of preset loans. All of these make sense.

The lens and tools Baum uses in Student Debt are economics and public policy. These are vital, but they are not enough to make sense of the bigger picture – or how it might change it. Baum does not explore how different stakeholders or groups have argued for different kinds of financial systems for higher education. There is little history or appreciation for societal context here. She does not spend time exploring why some stakeholders – lenders, for example – are fine with the current system and levels of borrowing.  Further,  Baum does not look deeply into how different subcategories of students, by race, gender, background or region, behave. She does highlight the increase in older student debt, but the data is national and broad.

The greatest shortcoming in Student Debt, though, is the absence of psychology or behavioral economics. Baum does not evidence understanding or curiosity in how students feel about debt, nor is she interested in how those feelings might have an impact on student’s academic performance, their aspirations, or their relationship with higher education. Rational decision-making is a wonderful ideal and it helps greatly when it comes to formulas, charts and theories. In life, particularly when it comes to young adults, rational economic decision-making is common. This is not to say that students don’t have good reasons for their decisions. Invariably, the vast majority do. But student decisions are often based on personal experiences, local contexts, and more often than not, complex webs of opportunity, constraints and obligations.

Getting the math right is essential. Changing policy and behavior, though, demands more than numbers. It calls for thoughtful and systematic study of how students feel, how they think, how they make decisions – and an appreciation of why. The reason that the student debt is such a hot button topic in today’s society is because people are worried and have lost faith in higher education’s care and concern for them. The argument that it works out well for most students simply is not enough.

Sandy Baum’s Student Debt is a vital contribution to the study of higher education finance and student debt. More research is still needed.

David Potash

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