Comparing Federal Student Loans to Other Household Debt is Popular -- It's Also Wrong

Frustrated college student studying at computer
Frustrated college student studying at computer

As an industry, higher education loves comparisons. We do it with students, credentials, institutions, programs, job markets and graduation rates amongst countless other things. Sometimes these comparisons can be extremely engaging and do much to inform policy. Think, for example, of the rich debate we've seen over the past couple years surrounding college rankings and ratings.

Other times, though, they're just puzzlingly wrong.

Student loans have gotten more than their usual share of attention over the past couple weeks after the Federal Reserve Bank of New York posted its 2014Q4 Household Debt and Credit Report. The numbers and charts get a lot of attention, partly because outstanding student loan volume has surpassed the trillion-dollar mark and partly because, as a category, it's larger than both credit cards and auto loans. The messages the graphics convey are depressing and the takeaway is clear. Student loan debt is crippling families' creditworthiness, hurting the housing market and stifling consumer spending.

Is it really appropriate to compare student loans with mortgages, auto loans and credit card debt? If I put on my consumer hat, it feels like we should. Federal student loan balances aren't trivial: They typically run into the thousands of dollars and at the maximum can easily exceed a mortgage. They're long-term commitments that can range from 10- to 30-years depending on the balance amount and repayment plan. For many, the size of a typical loan payment makes student loans one of a family's largest budgetary expenditures.

If I put on my economics hat though, outside the fact that somebody is lending money and somebody is receiving it, student loans seem absurdly incomparable to practically every other form of household debt for a number of reasons:

  1. You can get federal student loans without a credit check.
  2. You can miss a full year's worth of payments on a federal student loan before the loan actually goes into default.
  3. You can get a federal student loan default expunged and have additional collection costs waived through loan rehabilitation.
  4. You can tie monthly federal student loan payments to a percentage of your income, and
  5. You can have the outstanding balance of the loan forgiven if you enroll in an income-based repayment plan and make a number of years' worth of timely payments.

From this angle, putting student loans up against other household debt is less an apples-to-apples comparison, and more like pitting watermelons against walnuts. Imagine how much outstanding mortgage debt there would be today if people could get a government mortgage with zero money down and no credit check. Imagine what delinquency rates on auto loans would look like if individuals were allowed to miss a full year of payments before banks could finally repossess their cars. Imagine what credit card balances would look like if someone could make an income-based minimum payment each month and have the balance forgiven after 20 years.

In other words, a comparison like this is as interesting as finding that taller people take fewer steps than shorter people over the same distance or that large-mouthed cans drain liquid more quickly than traditional ones. Of course, student loan debt levels are going to rise faster than other types of traditional household debt when you make money unbelievably accessible to millions of people and give them the ability to borrow a lot of it. Of course, student loan delinquencies shoot up when financially struggling families have to choose between no real consequences for missing six months of student loan payments, or falling behind on their mortgage or auto loan, and possibly losing their home or car. Of course, student loan borrowing rises and other household borrowing falls in and around recessions; it's hard to get an auto loan or a credit limit increase when you're unemployed, while taking on a student loan to invest in retraining makes very good sense.

Nobody's suggesting that student loan trends in the context of household spending aren't useful. But we should be using them to better understand consumers' underlying borrowing behavior, which is where we can build and implement policy. It should be prompting policy makers to get a better handle on how much of the growth is driven by rising college costs versus consumer over-borrowing. It should be prompting policy makers to ask why anybody with access to income-based repayment would, or could, ever default on a federal student loan in the first place.

Still, it's an oddity of the higher education industry that despite their extremely generous access and repayment provisions, federal student loans are increasingly seen as college affordability's problem, not its solution. We owe it to ourselves not to let intuitively appealing, but poorly constructed comparisons like these detour us from the debates about college financing and affordability that we should be having.