Moaz Maamoun

145049
Management Science
ECO102 Group E
Dr. Amr Edris
Student Loans: Do College Students

?Borrow Too Much or Not Enough

Are Student Loans Becoming an Issue?
Introduction
The people arguing that student loans simply disappear under
higher earnings. Christopher Avery and Sarah Turner have looked up
on this. Christopher Avery is Roy E. Larsen Professor of Public Policy
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and Management, Kennedy School of Public Policy, Harvard

University, Cambridge, Massachusetts. Sarah Turner is University
Professor of Economics and Education, University of Virginia,
Charlottesville, Virginia.
Summary
What's the general economic consensus on the impact of student
loans on the household finances of those who hold them? There is
little evidence to suggest that the average burden of loan
repayment relative to income has increased in recent years? Using
data from 2004-2009, the authors find that the mean ratio of
monthly payments to income is 10.5 percent for those in repayment
.six years after initial enrollment
They boost that number with a 2006 study by Baum and Schwarz to
conclude that two trends cancel each other out: there's rising debt
but steady student debt-to-income ratios. How can this happen? It
can be attributed to a combination of rising earnings, declining
interest rates, and increased use of extended repayment options.
This is how, though average total undergraduate debt jumped 66
percent to a value of $18,900 from 1997 to 2002, average monthly
payments increased by only 13 percent over these five years. The
mean ratio of payments to income actually declined from 11 percent
.to 9 percent because borrower
Let's put this a different way. If you asked economists looking at
the data if student loans could be having a macroeconomic effect,
especially through a financial burden on those that have them,
they'd say that the actual percent of monthly income paying student
loans hasn't changed all that much since the 1990s. They may be
making larger lifetime payments, since they'll carry the debts
longer, but that's a choice they are making, which could reflect
positive or negative developments. Certainly there's no short-term
strain. So there aren't any economic consequences worth
.mentioning when it comes to student loans

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I always thought this approach had problems. First, they were

only looking at the
pre-crisis era, so we couldn't see the impact of
student loans once we hit a serious problem. And they were just
rough averages of short-term income aggregates, rather than
looking at specific individuals with or without student-debt and
seeing what kinds of spending, particularly on longer-term durable
goods, they do. Part of the problem is that student loans have
happened relatively quickly, so quantitatively it's hard for data
agencies to adjust their techniques to see this data easily, and not
.just lump them in with other debts
That is starting to change. The Federal Reserve Bank of New York
is doing some high-end analysis of student loans, and their
economists Meta Brown. They find that over the past decade,
people with student loans were more likely to have a mortgage at
.age 30 and a car loan at age 25
Derek Thompson at The Atlantic Business responds critically, arguing
that: First, cars and mortgages are falling out of favor with young
people, so this is likely a secular trend; Second, young people are
essentially doing a debt swap, switching cars and mortgages for
education to take advantage of an education premium, and the cars
and mortgages will come later; and finally, though this is, at best, a
short-term drag on the economy and reflecting short-term problems,
.it'll super-charge our economy come later
What should we make of this?
It's possible that there is a secular trend to it, with young people
not wanting mortgages or cars. But why wouldn't the spread
survive? People with student loans are a broad category of people,
and it is difficult to assume that it's just people moving to become
renters in urban cores driving the entire thing. The collapse of the
spread between the two coinciding with the crisis makes it hard to
.believe it's just a coincidence
As discussed at the beginning, the overall idea in the student
loan data literature is that student loans shouldn't have a negative
impact on consumption, especially at the national level. The extra
cost of servicing the debt is more than balanced out by the extra
income earned, even if the length of the debt needs to adjust to
meet that. Indeed, there's often a "best investment ever" or "leaving
money on the table" aspect to the discussion of higher education

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and student loans. So if this data holds, it's a major change from the
.normal way economists understand this

And the issue of student debt is where the problem with the
education premium is going to hit a wall. The college premium is
driven just as much by high school wages falling as it is by collegeeducated wages increasing, which has slowed in the past decade.
So if you have to take on large debt to secure a stagnating collegelevel income, it suddenly isn't clear that it is such a great deal, even
.if there's a strictly defined "premium" over the alternative
It isn't clear that the upswing in people, particularly women,
taking on additional education is involved with this collapse in
borrowing, as the ages of 25 and 30 cut off many people in school. I
think it would reflect the collapse in the housing market, but the
auto loan market is there as well. It is true that the economy as a
whole is deleveraging, but that is largely reflective of housing and
.foreclosures
How much this reverts if we get back to full employment and
whether there's a swap that could lead to a better long-term
economy are good questions, but the fact that we even have to put
the question these way shows a change in what economists
believed about student loans. No matter what, this shows that
.education isn't enough of an insurance against the business cycle
And I actually see it the other way - right now Ben Bernanke is
working overtime to try and get interest rates to the lowest they've
ever been, and he still can't induce borrowing by college-educated
young people. Congress also lowered interest rates on new student
loans, though too many student loans are out there at high rates
given the disinflationary times. If the lower lending isn't the result of
institutional issues with credit scores, that means college-educated
young people are particularly battered in this economy. And there
.could be a low-level drag on the economy for the foreseeable future
The biggest question is how student loans are impacting
household formations. Young people are living with their parents for
longer at a point where getting an additional million homebuyers
would supercharge the economy. Are they living at home because
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they are unemployed, or because they are un(der)employed and

have student loans? If it is the second, then there's definitely a
.serious lag on the economy
Reference
Avery .C (2012) Journal of Economic PerspectivesVolume 26,
Number 1Winter 2012Pages 165192

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