The Student Loan Fairytale: We Don't Live Happily Ever After

Once upon a time, we used to be able to see through to the truth at the core of an otherwise imaginary tale.

Nowadays, we prefer the entertainment.

Keep it simple, parse and spin a few facts, repeat the story often enough and before you can say “Fiction is the willing suspension of disbelief,” that narrative comes to be a universally accepted truth. Case in point: a recent series of challenges to the widely held view that today’s high level of education-related indebtedness is evolving into a socioeconomic WMD.

The Brookings Institution characterizes these concerns as “often hysterical.” According to Reuters, the worry is “overblown.” Their conclusions appear to hinge on select Federal Reserve Bank of New York data, which the authors use to proclaim that today’s student debtors are no worse off than their predecessors were.

Reuters takes that a step further by calling attention to what it describes as a “larger trend in which heavy borrowing is increasingly rewarded with big salaries.” We read about some highly compensated college grads that appear to be successfully managing their enormous debt loads and college faculty who believe that “people who borrow a lot tend to end up with high-paying jobs” as a matter of course.

As the folks at Brookings put it, “lower-income people” should view debt as a “tool” to be exploited. An assertion that’s echoed by Reuters: “The more you study, the more you earn, even if it means building up much larger debts.”

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On Higher Debts & Higher Income

What lends credibility to that argument is research that links higher education with higher lifetime earnings. But that only speaks to the learning side of the equation. It would be helpful to see the results of a study that adjusts career income for the all-in cost of the enabling education—a cost that includes interest and factors in failure rates too, when you consider that 41% of students leave school without earning a degree.

The developing narrative goes on to suggest that more highly educated workers are in short supply. Consequently, they’re able to command higher salaries, which enable them to more quickly repay the higher debts they’ve accumulated along the way.

Once again, a portion of the storyline is accurate: Certain major areas of study are indeed in high demand, particularly in the technology sector. Also, the more you earn, the greater your ability to tolerate higher loan payments.

The rest of it, though, is a fairy tale.

How Bad Is It, Really?

Consider the rates of delinquency and default. Brookings, Reuters and others often refer to calculations that are based on data that’s contained in FRBNY’s quarterly reports. But like many casual observers, they incorrectly divide the principal balance of the loans that are past due by the aggregate amount of all student loans—some $1.2 trillion-worth—even though only half of that amount is actually in repayment. Consequently, the resultant metric is understated by a factor of two. And that doesn’t take into account those loans that aren’t characterized as past due, because the debtors had been granted some form of payment accommodation.

As for the default numbers, here too the emerging narrative omits the fact that unlike any other form of consumer debt, the vast majority of these loans (roughly 85% are directly made or guaranteed by the federal government) are only thus declared when the borrowers have missed nine or more consecutive payments. Certainly, that’s not how auto loans, mortgages and credit card debts are managed. And even if all that wasn’t the case, the understated percentage of student loan defaults is still higher than for any other form of mainstream consumer borrowing.

Some of the other truths that are disregarded (perhaps because they conflict with the emergent narrative) include how education debts are expected to be repaid during the lowest-earning segment of a typical college graduate’s career (a fundamental program deficiency that explains why so many borrowers are seeking relief); how nearly half of all grads are underemployed and therefore undercompensated (FRBNY data that refutes the “high demand” assertion), or how Millennials who are forced to choose between “life and debt” are a good part of the reason for the decline in the rate of first-time home ownership.

Narratives such as this aren’t just misleading, they’re toxic. That’s because once we’ve bought into a story, we’re naturally inclined to work really, really hard to fit the contradictory reality that is ultimately revealed into the comfortable false premise we’ve come to accept. And when we’re unable to do that, we’ll look for someone to blame.

The storytellers are happy to help with that as well.

This story is an Op/Ed contribution to Credit.com and does not necessarily represent the views of the company or its partners.