Sunday, May 03, 2015

Defining the Problem

A few months ago, a tweet made me laugh out loud: “The first rule of philosophy club is hard to define.”

It may seem pedantic, but getting definitions right is actually a big deal.  That’s especially true when it comes to defining problems, as opposed to words.

I was reminded of that in reading the latest New York Times piece about student loans.  It manages to find someone who graduated with an undergraduate degree with $100,000 in debt.  (That’s actually quite rare: most six-figure borrowers have debt from law school, med school, or grad school.)  Even in the case they managed to find, the former student is actually doing perfectly well for himself.  

The student loan default crisis is not a function of high debt loads.  In fact, the highest default rates are among students with total debt of $2,000 or less.  The medical students with six-figure loads do just fine; I’m not worried about cardiologists missing payments.  The students who are likeliest to run into trouble are the ones who borrow a smallish amount for a short time, and then drop out without completing.  In other words, someone with $1,500 in debt from a year at a community college is a higher risk than someone with $50,000 in debt at the end of law school.

Why would that be?

The Times suggests a lack of financial literacy.  After all, the article assures us, “college applicants are children and undergraduates often behave that way.”  If only they understood the implications of borrowing, the article suggests, things would be better.


Start with the basics.  “College applicants are children.”  The average age of a community college applicant is in the mid-twenties.  The Times is clearly focusing on traditional-age students, who are a smallish fraction of community college students.  What the Times counts as “college,” at least implicitly, is more about its readers’ demographics than about the country.

But more basically than that, why would people with the lowest balances have the hardest time paying them back?

Because it’s not about the loans.  The student debt problem is not about student debt.

It’s about entry-level wages, and the low-end job market.  

If defaults increased proportionally with debt loads, then I could see the argument for framing defaults as a student loan issue.  But they don’t.  The relationship is inverse.  

Students from the lowest-income families enroll disproportionately in community colleges.  (They also enroll disproportionately at for-profits, though those have fallen on hard times of late.)  Those students typically have the least access to well-paying jobs; that’s why they’re low-income in the first place.  When life happens and they have to interrupt their studies, it’s not usually because they’ve struck oil or had their internet startup bought by Google.  It’s usually to work at a low-paying job.  When you’re making minimum wage or something close to it, even a smallish loan payment is a big deal.  That’s why payday lenders are so common in low-income areas.  They know how precarious many people are.  

If you dropped out of community college to work a minimum wage job or two, and at the end of the month you have the choice between paying the electric bill and making your student loan payment, what would you do?  

Exactly.  Default is a drag, but it beats homelessness or hunger. A financial literacy class is not going to change that.  

If we want to change that -- and we absolutely should -- we need to define the problem correctly.  The student loan default crisis is not about students and it’s not about loans.  It’s about entry-level jobs and how poorly they pay.

Fix that, and the student loans will take care of themselves.  Just ask your local cardiologist.