Posted tagged ‘student loan debt’

Mismeasuring the Burden of Student Loan Debt

October 14, 2015

Rising higher education costs along with the volume of outstanding student loans, now in excess of $1.3 trillion nationally and greater than the volume of credit card or motor vehicle loan debt, are prompting  concerns about the impact that student loan debt is having on economic growth. Student loan debt grew at the fastest rates on record during the 2000s, doubling from $600 billion to $1.3 trillion over the past decade. Popular reports annually rank the debt loads of students graduating from colleges and universities in each of the 50 states. New Hampshire, is notable for being at the top of the list as having students graduate with the highest levels of debt in the nation.

debt of grad 2013

But the average debt levels of recent college graduates in any state says little about the impact that student loan debt has on a state’s economy. First, the schools from which students graduate aren’t necessarily the states in which students choose to reside (and repay their debts) after graduation, and second,  reports of the average debt levels of recent graduates provide no information about the outstanding balance of student loan debt (and thus overall student loan debt burden) held by residents of each state. The latter is necessary to understand the impact that student loan debt is having on a state’s economy.  I had not seen data on the balance of student loan debt on a state-by-state basis until a journalist (Ryan Lessard of the Hippo Press here in New Hampshire) passed along data from the U.S. Department of Education that was recently released by the White House. The data includes information on federal student loan debt only, and does not include private student loans or other loans used to pay for college – such as home equity loans taken out by parents, but is still extremely useful in understanding the differential impact of student loan debt in each state. The data present a different view of the student loan debt issue than do the data released annually on the debt of recent college graduates. In this post I add some economic and demographic data to the student loan debt data from the Dept. of Education to examine different measures of the relative burden that student loan debt places on individuals, and thus the economy of each state.

As of January of 2015 there were 212,000 individuals residing in New Hampshire with outstanding federal student loan debts totaling $5.1 billion dollars according to the U.S. Department of Education. The $5.1 billion compares to my estimate of $4.5 to $5.6 billion in credit card debt and $37.8 billion in home mortgage debt in the state.  In contrast to reports showing that the most recent graduates of colleges in NH have the highest student debt levels, the average outstanding loan balance among all of NH’s borrowers (regardless of where or when they graduated), at $24,048, was near the bottom of all states.

outstanding balnace by state

As I documented in a recent study of student debt, New England and the Northeast have the highest college costs in the nation, with graduating student’s debt levels similarly high. So why would NH’s average outstanding student debt balances be among the lowest in the nation? If NH residents with student debt had been paying off those debts for a longer period of time (that is borrowers were longer removed from college i.e. older on average) then their debt levels would be relatively lower even if their original debt levels were higher on average. In addition, if recent grads in NH, and their higher debt levels, leave the state, while somewhat older individuals move into the state, the state would be trading individuals with higher debt levels for those with more modest student debt levels. This seems like a plausible explanation based on some of the analysis of NH’s demographic trends I’ve written about in this blog and elsewhere. In addition, some of the discrepancy results from the new data on total student loan balances by state that includes all debt from students at two and four year colleges, as well as graduates and those with debt but who did not graduate. Thus the data released by the White House is a much more comprehensive measure of student loan debt at the state level. In addition, because it aggregates student loan debt of individuals who reside in each state, it is a more appropriate measure of the burden of student debt on any state’s economy.

Student loan debt is a problem, it has retarded household formation in NH and the U.S. and contributed to a slower than anticipated recovery in the housing market.  It has other negative impacts on younger individuals and families as well, but how large of a burden is student debt on any state’s economy and what is the best metric to assess it? It is not an easy question to answer.  The White House (Dept. of Education) data helps tremendously but analyzing it raises almost as many questions as it answers. The $5.1 billion in federal student loan debt held by borrowers living in NH represents about 7.1 percent of the state’s 2014 gross state product. Using this measure , NH ranks in the middle of all states on student loan debt burden, higher than indicated by the average student loan debt in the state. Because NH has a high percentage of students who have attended (and graduated) from college, even with below average student debt levels among all borrowers, the aggregate debt as a percentage of the state’s economy is higher than in states with lower average levels of debt among borrowers.  States with a high percentage of college attendees and graduates in their populations are likely to have a higher student loan debt to GSP ratio regardless of the average outstanding loan balance of borrowers. But is 7.1 percent a problem for the state’s economy?

debt as a pct of gspI think the student loan debt burden is probably better understood from its impact on individuals.   Only about 20 Percent of the adult population (age 18+) in New Hampshire have student loan debt and the debt has its greatest impact on a subset of the adult population. The typical repayment period of student loan debt is 10 years so, in theory, the population between graduation (or leaving school) and the age of about 35 should be most affected by student loan debt and assessing the impact of student loan debt should focus on impacts among this demographic group. For this analysis I use the characteristics of each state’s population ages 24-34 to assess the relative impacts of student debt on each state. The chart below uses the average outstanding student loan debt in each state and the average annual earnings of residents age 24-34 in each state to calculate how much of the annual earnings of 24-34 year working individuals with at least an associate’s degree go to student loan repayment in each state. Using the average outstanding loan balance in each state and assuming a combined federal subsidized and unsubsidized loan  interest rate of 4.5 percent, on a monthly basis, almost all states have average student loan burdens that require monthly payments of less than $300. The one exception is DC, not presented on the graph, where the $40,000+ average loan balance and $413 monthly payment is attributable to the high percentage of law school and other professional and advanced degree student who reside in the city.

monthly paymentA monthly student loan payment of $300 is not an inconsequential amount but less than most new car loan payments. Still, as a percentage of annual earnings, student debt payments clearly could influence the ability of younger people to purchase a home or make other significant financial commitments.  Combining monthly payments (annualized)  with the average annual earnings of college graduates ages 24-34 living in each state provides a measure of student loan debt service as a percentage of the earnings of graduates in each state.  Again, the chart shows that New Hampshire, along with several other states with both high college costs and high debt, rank relatively lower on repayment as a percentage of annual income.

burdens as a pct of earnings

The examples of several states highlight the importance of different variables in assessing the impact of student debt on any state’s economy.  The average debt of recent graduates from colleges in Vermont is in the middle among all states, yet the average loan balance of all borrowers in the state is higher than the debt levels of recent grads.  As a percentage of the earnings of working college grads ages 24-34, however, student loan debt in Vermont is the highest among all states. This suggests that recent grads (with their moderate level of debt) may be leaving Vermont while the state attracts or retains individuals with higher levels of student debt. It also suggests that the high percentage of the earnings of 24-34 year olds in the state that is absorbed by student loan debt service is, in part, a function of relatively modest average earnings  in the state.

avg debt and pct of earnings scatterplot

Another illustrative example is Georgia, a state with a relatively low average debt among recent graduates from its colleges, but with the highest level of debt among all borrowers of any state. From my limited experience in Atlanta, it is seems the city hasn’t been as overrun with northerners since Sherman’s march to the sea. This time the northerners have come armed with college degrees and promissory notes.  A state with below average student debt among recent graduates from its colleges but with above average student debt among all residents can’t address it’s high student loan debt burden by increasing state support for colleges or by providing more student aid.  Georgia appears to be gaining individuals with higher levels of educational attainment (“talent”) at a cost of higher student debt levels and greater debt burden among its residents. That is not a bad tradeoff as the state gets a more skilled workforce at a low cost to state government. Georgia reinforces a point that I repeatedly make, the importance of being attractive to skilled individuals with higher levels of educational attainment. NH makes this point as well, it has the highest average debt levels of recent graduates but relatively low average student debt for all borrowers in the state. We know NH losses a lot of its recent graduates to other states as I have documented in this blog and elsewhere, but attracts a lot of college graduates from other states, especially in the 25-40 age range.  These individuals, if they have student loan debt, have likely paid-off a good portion of it.  NH too has upgraded the skill of its labor force at a relatively low public cost by importing or attracting talent from other states.

New Hampshire, Vermont and Georgia are just three of many examples of how the debt levels of recent college graduates in a state must be interpreted with caution and in particular, when debating state-level policies directed at rising student debt levels. This brief analysis suggests different ways to assess the burden that student loan debt places on the residents of any state as well as on a state’s economy and shows that those burdens cannot be simply assessed by the most common assessment, looking at the average debt of recent college graduates. Reports on the average student loan debt of recent graduates by state can be an especially misleading indicator of the burden student loan debt places on any state’s economy.  I am not arguing here that student loan debt is not a problem, but like most public policy issues it is subject to errors of popular sentiment and conventional wisdom that can distort decision-making by policymakers. My purpose in this post is to explore some alternative measures (other than the average debt of recent graduates) of the impact that student loan debt has on each state’s economy. I welcome suggestions for better measures or criticisms of the ones examined or the methodology in this post.

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Competition Raises Rather Than Lowers College Costs

October 9, 2013

I’ve written about student loan debt and college costs in the past.  A report I recently completed on the issue was released earlier this week, you can read it here .  It is long and detailed so even if your aren’t that interested in the topic it is an effective substitute for a strong drink or a mild sedative as a sleep aid.

The report didn’t get a lot of media coverage and in any case it is difficult for media coverage to capture more than a few highlights of a long study that deals with complicated issues (although Kevin Landrigan at the Nashua Telegraph did his usual good job, as did Kathleen Ronayne at the Concord Monitor).  One small portion of the study that I think is interesting and important examines the issue of competition in higher education as a contributor to higher tuition levels.  Colleges in New England and the Northeast have higher tuition prices on average than colleges with similar characteristics (public, private, selectivity, state support, etc.) located elsewhere in the country.  No doubt the region has some of the finest higher education in the country but not every institution in the region is world-class with an ability to charge a premium for educating students.  I thought state-level differences in cost-of-living would account for some of New England’s and the Northeast’s higher tuition prices but multivariate (regression) models using data from about 700 four-year colleges and universities across the country failed to demonstrate that cost-of-living differences were significantly related to differences in tuition prices among universities with similar characteristics but in different regions of the country.

Tuition FactorsOne characteristic of higher education in New England and the Northeast that distinguishes them from other regions of the country is how many colleges and universities are located here.   It is possible that increased competition for students and for faculty could increase college costs in New England and elsewhere.   To date, few colleges and universities have been willing to compete on price.    Colleges generally compete by offering more and better faculty, facilities, student services, and amenities. Colleges want to be the best they can be and they compete for students, for faculty, and with businesses for talent (PhD’s in fields in demand). This is especially true in a region like New England where there is a high concentration of higher education institutions and where there is a large base of technology, business, and professional employment that is more likely to employ individuals with advanced degrees and to compete with colleges for available “talent”.

To test the degree to which competition among colleges might influence regional college costs and prices, I had to develop a meaningful measure of competition among colleges. The study operationally defined the level of competition among colleges in each region as the percentage of regional employment that is employed in higher education.  Specifically, I calculated a “location quotient” for higher education employment in each state and averaged the location quotients for each state in a region to arrive at regional location quotients for nine census divisions (regions).  This measure roughly approximates the degree of choice students in each region have regarding college enrollment.  The figure below highlights regional differences in the concentration of higher education employment.  I won’t get into a discussion of location quotients (LQ) but a LQ of greater than 1 for a service industry indicates it is serving more than local markets and is also “exporting” its services.  We know colleges in New England attract student  nationally and internationally.  The darker regions of the country are where there is a greater concentration of higher education employment (and thus the potential for competition among them).

Higher Ed Emp Concentrations

Testing the impact of the LQ measure of regional competition on tuition and fee levels shows the variable to be significantly related to tuition levels at both public and private colleges, with regional location quotients showing a larger impact on tuition and fees at private colleges than at public colleges (implying that competition for students at private colleges has a greater impact on prices than it does at public colleges) .  The elasticity of tuition and fees with respect to our measure of competition was small (.10) at private colleges, and even smaller (.076) at public colleges. However, as the chart below shows, the magnitude of the difference between higher education employment in New England and other regions is great (indicating much higher levels of competition among colleges in the New England region), so this small elasticity still implies that competition has a relatively large impact on tuition and fees at colleges in New England.

Higher Ed Location QuotientsAs an example, New England’s location quotient of 2.35 is about 140 percent larger than is the location quotient (or concentration of higher education employment) in the South Atlantic region. The elasticity of tuition and fees at private colleges with respect to this measure of competition suggests that for every 10 percent increase in higher education competition in a region, tuition and fees will be one percent (1%) higher. Thus the 140 percent difference in higher education competition in New England compared to the South Atlantic region implies that all else equal, we can expect tuition and fees at private colleges in New England to be 14 percent higher than in the South Atlantic region.  For public colleges, with a smaller elasticity of tuition and fees with respect to competition, these results imply that tuition and fees would be about 10 percent higher in New England as a result of higher levels of competition among colleges in the region.

I think these findings have important implications for tuition prices, student debt, and higher education in New Hampshire and New England and their economies.  The biggest reason student debt levels are so high in New Hampshire is the fact that the primary strategy used by families for reducing the cost of college and for limiting student debt is attending a lower cost, in-state, public institution.  Over the past decade more New Hampshire families have attempted that and with little success because of the high cost of attendance at New Hampshire’s public colleges and the low levels of grant aid awarded by them.  State aid plays an important role in tuition prices at public colleges (just as endowments do at private colleges) and has a big impact on NH’s prices but even accounting for differences in state aid, competition for students and faculty appears to be contributing to higher tuition prices among  public (and private) colleges in the region.

Like all of us colleges want to be the best they can be and they compete with other colleges on national and regional rankings to prove it.  A sad byproduct of that is that most rankings count per student spending heavily in their assessments so that any college that can offer as good or better educational services while restraining expenses will suffer in national rankings.  It is important for public institutions to remain a key strategy for families in limiting the cost of college and student debt.  It is probably more important now than national rankings and competing for a shrinking population of college age students.

Competition is a wonderful thing and it is addicting (I know –  it is my drug of choice).  I am a believer in markets and I believe that the market for higher education is changing and will result in more price competition among private and hopefully public institutions. The competition won’t be on price exactly,  it will be based on “value” not just price (it won’t do anyone any good to say I got the “cheapest” education unless the result of that education is greater opportunity for success in the labor market and in life).  Competition among public colleges and public colleges with private colleges could accelerate market-based changes  in higher education by focusing on value, not on facilities, amenities, high-profile faculty or programs, or whatever basis colleges typically compete on.  Given the fiscal realities of states, colleges will not be able to compete with private institutions by spending more to be the best.  When you can’t effectively compete on one field you are wise to move the competition to one more favorable to your chances of success.  Public colleges can do that and parents and families in New Hampshire and New England looking to limit college costs and debt would be winners if they did.


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