ECONOMICS PROFESSOR: The Media Has Totally Overblown The Student Debt Crisis

Source: www.businessinsider.com

By: Aimee Groth & Danielle Schlanger

Date: 6/12/12

The student debt crisis is still raging, and economists everywhere are weighing in.

University of Michigan economics professor Susan Dynarski and University of Virginia economics and education professor Sarah Turner recently wrote an article for CNN Money, where they blamed the media for overblowing how many students are actually saddled with debt. They pointed to a report from the New York Federal Reserve Bank that showed fewer than 1 in 30 students have debt loads over $100,000. The average debt load, adjusted for inflation, is $22,000. 

Dynarski and Turner say it's entirely possible to graduate with less than $100,000 in debt if you take out Stafford loans, which cap total debt for both dependent and older students, and that private borrowing is where the problems come in:

In 2005, Congress handed a valuable gift to the private loan industry: loans made to students by private lenders were granted the same bankruptcy protection as federal loans. The survival of private loans in bankruptcy proceedings makes them an unusually safe bet for lenders.

This creates a classic moral hazard problem: Lenders extend too much credit to borrowers likely to struggle in repayment since they know the borrowers can never escape the debt. Congress should repeal the protection from bankruptcy that it extended to private lenders in 2005.

The professors also point out that what sort of debt you take on should be measured against what you plan to major in — for example, if you're going to graduate with an engineering degree, go ahead and invest more in school; but if you plan to go into the fine arts, think twice about attending an expensive school.

Read more: http://www.businessinsider.com/susan-dynarski-and-sarah-turner-on-w...