Can the Survey of Consumer Finances be used to study student debt?

3 Dec

Some Thoughts on the use of the Survey of Consumer Finances (SCF) to study Student Debt

A recent Federal Reserve Bulletin article provided some interesting statistics on student debt. This post summarizes the numbers in the FRB article and discusses the limitations of the use of SCF to study issues related to student loans.

Summary on Student Loan Analysis in the FRB article:

The analysis in the FRB article on student debt pertains to “young” households defined as households where the head of household was younger than 40 at the time of the survey.

The main student debt results reported in this study are as follows:

  • Percent of young households with student debt went from 22.4 in 2001 to 38.8 percent in 2013.
  • Conditional student debt mean went from $16,900 to $29,800.
  • Conditional median student debt went from $10,500 to $16,800

The Distribution of Student Debt Balances for the Young Household Population is as follows:

Distribution of Student Debt Balances Reported in FRB Article
2001 SCF 2013 SCF Diff.
Less than $25,000 78.2 64.2 -14
Between $25,000 and $50,000 15.6 17.1 1.5
Between $50,000 and $100,000 5.6 13.2 7.6
Over $100,000 0.6 5.6 5
100 100.1 0.1

Numbers in table above are taken form pie charts in Figure B of page 26 of the FRB study.

  • Share of student debt held by young households went up for households making less than $30,000 from around 12 percent to somewhere in the mid 20 percent. The share of student debt held by people making $30,000 to $60,000 per year went down from around 40 percent to around 28 percent.   The share of student debt held by individuals with households making more than $60,000 went up slightly to approach 50 percent.
  • Around 70 percent of families with student debt had one member of the household with a bachelors degree or higher.
  • Young families with student debt pay around 3.8 percent of their household on student loan repayments. One reason why this number is so low is that some households can defer payment on student loans for a variety of reasons.

Comment One: Other studies which examined large databases of recent graduates have reported much larger student debt burdens the FRB study.

Stats in Brief U.S Department of Education

  • This paper found that the percent of BA degree recipients in public 4-year institutions with a repayment burden greater than 12 percent of income rose from 14 percent in 2001 to 26 percent in 2009.
  • In private non-profit institutions this number went from 25 percent to 39 percent.

Amazingly, this increase in payment burdens occurred during a period of modest interest rates.

Comment Two: The under-40-household population is too broad to be useful to study the impact of the rapid increase in student debt mentioned in comment one. A person who was 40 has likely been repaying their undergraduate loans for 18 years and their graduate loans for at least 10.   These older “young” households were not affected by the recent increase in student debt.

Perhaps this issue could be addressed with the chart below but the sample size of the SCF is a significant limitation.

Student Debt Burdens
Age 2001 SCF 2013 SCF
31 to 39

Comment Three: The sample size of groups of households on the SCF defined by different levels of education, age, income and other issue is very small.   The SCF covers the entire population with 4568 cases from a general survey and 1458 cases from an IRS sample of high-income households.   Since higher income households tend to be older I suspect that the IRS sample under sampled the young households that are the focus of this study.   (I can’t answer this issue authoritatively.   Readers interested in this issue need to contact the FRB staff.)

If 30% of the SCF households are under 40 the incidence of student debt numbers are based on a sample of around 1,800. Around 38.8 percent of the population has a student loan the mean and median loan figures are based on a sample size of around 700 or less.   Around 28 percent of people over 25 have a BA degree.   But the number of households with a BA might be a bit lower because of a marriage effect.   Hence, there may be around 200 households in the sample with student debt and a BA.   Less than half of these households have a household head under age 30.

Around 20 percent of students go to the more expensive private non-profit institutions.  Hence I expect the SCF sample contains at most 40 households with people who went to some private school.   It is likely around 10 people in this survey have student debt over $100,000.

The SCF sample sizes are small. The results are likely very imprecise.   I suspect micro data on student loans would provide a more accurate view of student debt in America.

Comment Four: The Survey of Consumer Finances contains a lot of information on household assets, debts and decisions. It would be useful to categorize young households on the basis of their amount of student debt and look at the impact of student debt on financial decisions and outcomes.     One categorization would involve households with no student debt, <$30,000, $30,001 to $75,0000, and greater than $75,000. I am interested in how these household differ and on the changes in these groups in several variables including — home ownership, credit card interest and consumer debt totals interest rates on different types of loans, contributions to 401(k) plans and IRAs.

Student debt is likely to impede the growth of wealth for households through two channels — delayed home purchases and reduced 401(k) contributions.


Again, the sample size of the SCF limits the amount of information, which might be obtained from this exercise.

Comment Five: The report states that “highly educated families continue to hold the majority of education debt in 2013.   Nearly three fourths of education debt is held by families where one member has a BA degree or higher.”

It is a misnomer to call a person with a BA degree highly educated. A BA degree is now required for a lot of entry level jobs that did not formerly require a college education.   Also, the unemployment rate and underemployment rate for current College grads are around 8.5 percent and 16.8 percent respectively.

Concluding Thoughts:. The SCF is not the most useful source of evidence on this topic.   Some additional tabulation based on SCF data might prove interesting but researchers interested in student debt issues should consider other sources of data.

Reprint of seven ways to provide student loan debt relief

27 Nov

The National Association of Student Financial Aid Administrators originally published this article.   I am grateful to them for allowing me to reprint it here.

The original link for the article is here.



Seven Ways to Provide Student Loan Debt Relief

The current generation of students is leaving school with more debt than any previous generation. While postsecondary education remains a good investment for the average student loan borrower, some borrowers will never be able to repay their student loans in full. Moreover, current bankruptcy law and procedures make it very difficult for borrowers with student debt to ever obtain a fresh financial start.

At the federal level, there is some interest in policies that might alleviate student loan debt burdens. The desire to provide student debt relief to borrowers is tempered by concern about the cost to taxpayers when this government guaranteed debt isn’t fully repaid. In my view, it is possible to provide a modest level of student debt relief to borrowers without imposing substantial costs on taxpayers. This could be accomplished by modifying the Income Based Replacement (IBR) Loan Program and through changes to the bankruptcy code.

The IBR program, enacted in 2009, provides four benefits to student loan borrowers.

1.     Reduction in student loan payments when household income is low in relation to qualified student debt,

2.     Reduction in interest payments when IBR payments do not cover interest due,

3.     Limits on the capitalization of interest for loans in deferment or forbearance, and

4.     Forgiveness of a remaining loan balance 25 years after the student loan enters repayment.

In addition, some student loan borrowers who maintain payments through the IBR program will be able to utilize public loan forgiveness programs

The primary purpose of the IBR program is to prevent borrowers from defaulting on their student loan when their household income is low compared to qualified student loan debt. Only student loan borrowers with chronically low levels of household income can receive some debt forgiveness. Borrowers who receive lower payments through the IBR program will often pay more on their loan than if they remain in the standard 10-year payment plan.

The IBR program is complex and does not offer assistance to many overextended student loan borrowers. First, the IBR program does not cover PLUS loans made to parents, private loans, or consolidated loans that include a parent PLUS loan or a private student loan. The decision to consolidate 10-year loans into a 20-year loan could also make borrowers ineligible for the IBR program. To fully benefit from the IBR program, borrowers need to be aware of IBR rules long before they are aware that they will need IBR, when they are borrowing or consolidating federal student loans.

Second, the IBR program often provides little or no relief to a household that has high levels of both consumer debt and student loans. The IBR program is especially complex for married households.  A single person who qualifies for the reduced IBR loan payment could lose this benefit if he or she marries someone with high levels of consumer debt, even if household debt-to-income ratios increased after marriage. Married individuals could choose to file separate tax returns to take advantage of the IBR program, but that decision usually results in a larger tax obligation.

It is impossible to modify the IBR program to account for consumer debt without creating an incentive for additional borrowing.  Borrowers with high levels of student debt and consumer loans might seek relief in bankruptcy courts.  However, current bankruptcy laws and procedures offer little relief for borrowers with student loan debt.

There are two ways debtors can seek student loan debt relief in bankruptcy. First, the debtor could petition the court for a complete or partial discharge of student debt. Second, in a Chapter 13 bankruptcy the debtor could petition the court for a payment plan that favors the repayment of student loans over the repayment of other unsecured loans. Neither remedy is easily obtained.

To discharge student debt in bankruptcy, the borrower must prove that he or she has an “undue hardship.” Most courts require that the borrower show a “certainty of hopelessness” for his or her financial situation over the repayment term of the loan. A certainty for hopelessness is extremely difficult to demonstrate because there is some probability circumstances will improve, even for individuals in extremely dire circumstances. An August 31, 2012, New York Times article describing the petition of a legally blind, unemployed man illustrated the hurdles a student loan borrower must clear in order to have student debt discharged in bankruptcy.

Any proposal that makes it easy to discharge government guaranteed student loans in bankruptcy entails some additional cost to the taxpayer. However, it is easy to envision a less stringent student loan discharge rule that does not significantly increase taxpayer costs. Such a rule would rely on objective criteria rather than the subjective “undue hardship” concept. For example, student loan discharge could be limited to individuals with incomes near poverty level, contingent on participation in the IBR program, favor individuals with medical problems, and allow for partial, rather than full, loan cancellation.

Two other aspects of the bankruptcy code have a substantial impact on financial outcomes for student loan borrowers in bankruptcy and for the government agencies that hold or guarantee student debt.  First, financial outcomes are affected by the rules governing whether a debtor can obtain a Chapter 7 bankruptcy or a Chapter 13 bankruptcy.  Second, financial outcomes are affected by the rules governing repayment of student debt and other unsecured consumer loans under a Chapter 13 repayment plan.

Under a Chapter 7 bankruptcy, the bankruptcy court will immediately discharge most unsecured consumer loans. In a Chapter 13 bankruptcy plan, debtors must file repayment plans with the bankruptcy court. The repayment plan determines how much debtors can repay creditors and the amount received by each creditor. Prior to the 2005 bankruptcy law, debtors could choose to either file under Chapter 7 or Chapter 13. The 2005 bankruptcy law created a means test that required many individuals with incomes over the household median to file Chapter 13 rather than Chapter 7.

When student loans are dismissed under Chapter 7 bankruptcy, the borrower gets an immediate fresh start and can use all the newly available funds for the repayment of student debt. A borrower who obtained a deferment prior to bankruptcy can immediately renew payments on his or her student loan. By contrast, when borrowers are placed into a Chapter 13 repayment plan, the amount allocated to the payment of student loans might not even cover interest and, in many circumstances, the debtor will leave bankruptcy with a substantial student debt intact.

Student loan borrowers in Chapter 13 can petition the bankruptcy court to allocate a greater amount of their payment plan to the repayment of student loans and a lower amount to the repayment of other unsecured credit card debt. However, most courts tend to favor a payment plan that does not discriminate against any class of unsecured creditors. As a result, many student loan debtors emerge from the bankruptcy process five years older with a substantial amount of unpaid student loans. Many individuals experience decreases in income and have fewer job prospects after age 50. A delay in repayment of student loans caused by a forced entry into a Chapter 7 bankruptcy plan will increase financial exposure to taxpayers, increase student loan default rates, and decrease collection rates.

A revision of Chapter 13 bankruptcy rules that gives priority to student debt payments over other unsecured debt payments in bankruptcy would provide student loan debtors with a fresh financial start and would ultimately reduce taxpayer losses. Unsecured creditors would still enjoy greater collection rights than existed prior to the 2005 bankruptcy law.

Under current law, very little debt relief is offered to overextended student loan borrowers experiencing substantial economic hardship. Several policy changes might provide modest debt relief to these borrowers, maintain strong incentives against default, and protect taxpayer interests.  These policies include:

·      Allowing married couples to obtain IBR debt reduction without having to actually file separate tax returns,

·      Making PLUS loans to parents and consolidated student loans with a PLUS loan eligible for the IBR loan program,

·      Allowing private student loans to be discharged in bankruptcy,

·      Basing the decision to discharge student loans in bankruptcy on objective criteria pertaining to the economic status of the bankruptcy applicant rather than the subjective “undue hardship”  concept,

·      Allowing for quicker loan forgiveness under the IBR program for individuals in dire economic circumstances,

·      Repealing or modify the Chapter 13 means test, 

·      Providing priority to student debt over other unsecured loans in Chapter 13.

The goal of debt forgiveness policies inside and outside of bankruptcy is to balance two competing objectives: providing overextended borrowers a fresh start, and fair treatment towards creditors. The pendulum may have swung too close to the creditor, especially with regard to the treatment of student debt.

The author is a retired economist who worked in the Office of Economic Policy of the U.S. Treasury from 1988 to 2012. He publishes a blog

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