Math is infinite.
Conjure up the largest number you can you can imagine and multiply that value by itself over and over again. You still wouldn’t reach an endpoint because there is none.
I thought about all that as I read Dr. Joel Elvery’s intriguing article on student loan debt in a recent issue of Forefront, a publication of the Federal Reserve Bank of Cleveland.
According to Dr. Elvery’s calculations, the average monthly installment for student loan borrowers between 20 and 30 years old amounts to a very manageable $351 per month. I use the words very manageable because that payment represents less than 9% of the average pre-tax starting salary for recent college graduates, as reported by the National Association of Colleges and Employers ($48,127 for 2014 grads, or $4,010.58 per month).
As such, it would be perfectly reasonable to ask, “Then why the big deal about student loan debt?”
I reached out to Dr. Elvery for a bit more detail behind the numbers. He wrote that the data for his analysis was drawn from the Federal Reserve Bank of New York’s Consumer Credit Panel.
This is the same FRBNY that recently reported how education-related debts that are 90 or more days past due totaled 11% of the nearly $1.3 trillion in loans that are currently outstanding.
It is also the same FRBNY that acknowledges in a footnote that this percentage rate is understated by roughly 50% (because only about half of these debts are actually in repayment), which makes the true percentage of student debts that are over 90 days late closer to 22%. And that doesn’t even take into account loans that are between 30 and 90 days past due (which, frankly, is the proper way to measure delinquency). Nor does it take into effect loans that are in temporary forbearance because the borrowers are unable to make the payments.
All told, the percentage of troubled student loans that are currently in repayment is actually closer to 40%.
No matter how you do the math, though, the fact remains that student loan payment delinquencies are significantly higher than for any other forms of consumer debt — the raw 11% statistic is nearly three times that of credit card obligations that are similarly uncollateralized.
So a better question to ask might be: Why are so many borrowers having so much trouble when the average installment payment amount appears to be so reasonable?
As Dr. Elvery explained in our email exchanges, his calculations involved a certain amount of data “cleaning” to address what he describes as “high outliers and other noise.” He offers as an example the process of estimating what borrowers would normally pay on loans that are 90 or more days past due; loans he terms as “in default.” His rationale for these downward adjustments is that the contractual payments on loans that are declared to be in default typically increase as a result.
Generally speaking, that’s true, but not in this case.
Unlike all other forms of consumer finance, student loan defaults are actually measured at 270 or more days past due. Consequently, the monthly payments are likely to remain unchanged until that time, which means that Dr. Elvery may have adjusted payments that didn’t need to be adjusted in the first place.
On the other hand, Dr. Elvery elected to include loans with zero payments due, even though these could represent debts that are in deferment (because the borrowers are still in school) and in forbearance (because the borrowers are unable to meet their contractual obligations).
Simply put, by excluding some high-value outliers and including certain zero-value payments, Dr. Elvery may have inadvertently excluded data that could have contributed to a fuller explanation.
Given the infinite nature of math, the most enlightening analysis is sometimes accomplished with the least amount of tinkering.
This story is an Op/Ed contribution to Credit.com and does not necessarily represent the views of the company or its partners.
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