Drowning in Debt or Investing in the Future

1
Drowning in Debt or Investing in the Future?

• Sandy Baum
• The College Board and Skidmore College
• Michigan Default Aversion Symposium
• November 2006

2
Grants Versus Loans, Percent Share of Total Funds
1991-92 to 2005-06
Source The College Board, Trends in Student Aid,
2006
Source The College Board, Trends in Student Aid
2006
3
Growth of Stafford, PLUS, and Nonfederal Loan
Dollars in Constant (2005) Dollars, 1995-96 to
2005-06
Source The College Board, Trends in Student Aid,
2006
Source The College Board, Trends in Student Aid
2006
4
Median Debt Levels of Undergraduate Degree
Recipients Who Borrowed by Degree and
Institution Type in Constant (2003) Dollars,
1992-93 to 2003-04
Source NPSAS 1993, 1996, 2000, and 2004,
Undergraduates calculations by authors.
Source The College Board, Trends in Student Aid,
2006
Source The College Board, Trends in Student Aid
2006
5
Distribution of Total Debt Levels of Degree
Recipients, 2003-04
Source NPSAS 2004, Undergraduates calculations
by authors.
Source The College Board, Trends in Student Aid,
2006
Source The College Board, Trends in Student Aid
2006
6
Distribution of Annual Earnings by Level of
Education, Ages 3544, 2005
Source U.S. Census Bureau, 2006, PINC-03.
Source The College Board, Education Pays, Second
Update, 2006
7
How Much Debt is Too Much?Baum and Schwartz,The
College Board and TICAS, 2005

• Banking industry standards
• Relative living standards
• Need analysis
• Income contingent repayment
• Studies of borrowers in repayment

8
Life-Cycle Model

• Modigliani and Brumberg (1954), Friedman (1957)
• Consumption depends on permanent income, not just
  current income
• Standard of living smoothed over lifetime.
• Implies young people borrow in anticipation of
  higher earnings.

9
Evidence from Borrowers in Repayment Nellie Mae
2002

• Index of perception of burden
• Is repaying your loans harder than you had
  anticipated it would be?
• If you had it to do over again would you borrow
  less? About the same amount? More?
• How burdened do you feel by your student loan
  payments?

10
Perceived Burden

• Payments lt 7 of income no problem
• 7 - 11 - sense of burden begins to be apparent
• 12-17 - greater expression of difficulty
• gt 17 clear break in calculated index

11
Borrower Perceptions Good News
Source Baum and OMalley, Nellie Mae, 2003
12
Borrower Perceptions Bad News
Source Baum and OMalley, Nellie Mae, 2003
13
Need Analysis Institutional Methodology
14
Proposed Benchmarks20 of income above 150 of
poverty(single individuals)
Source Baum and Schwartz How Much Debt is Too
Much?
15
Years in Repayment
Source Baum and OMalley, Nellie Mae, 2003
16
Low-Income Borrowers
Source Baum and OMalley, Nellie Mae, 2003
17
Low-Income Borrowers
Source Baum and OMalley, Nellie Mae, 2003
18
Policy Issues

• Information
• Income-contingent repayment
• Loan forgiveness
• Interest rates
• Private loans