U.S. student debt burden falling more on top earners, easing bubble fears

Young Americans with big college debts are often portrayed as struggling to pay their bills. The reality is somewhat different - those owing super-sized student loans tend to be higher paid.

A Reuters analysis of Federal Reserve data shows that over the past two decades the young with higher incomes have gone from owing less of the debt than the average household to owing considerably more.

U.S. student loan balances have quadrupled since 2004 to $1.1 trillion (688.84 billion pounds), prompting credit rating agency Standard & Poor's and others to express fears the borrowing could crimp consumer spending, especially home buying, and eventually lead to the painful bursting of a bubble. Worries over high loan levels have also been voiced by President Barack Obama and more recently, Federal Reserve Chair Janet Yellen.

Without doubt, many families struggle to pay the rising costs of college, and high levels of unemployment have only added to the distress. Delinquency rates on student loans remain well above historically average levels.

But the analysis of the Federal Reserve's Survey of Consumer Finances, a triennial survey published in September with 2013 data, makes it clear that heavy borrowing is usually rewarded with big salaries. The increased concentration of debt among the well-paid should ease concerns that the surge in debt is a wider economic threat.

The data show that most of the nation's overall loan balances are held by those earning more than $60,000. Moreover, among households that owed at least $60,000 and were young, defined as those headed by someone between 20 and 40 years of age, average income last year was $82,000.

This includes people like Larry Perrone.

His journey into the legal profession started at the private Florida Coastal School of Law in Jacksonville, Florida. He had been working as a bartender and planned to borrow around $130,000, figuring he could make $80,000 a year as a lawyer at a private practice.

Perrone did well in his studies, and after a year and a half transferred to the more expensive William & Mary School of Law in Williamsburg, Virginia. That meant more borrowing, but potentially a lifetime of higher earnings because his degree would be stamped by a much more prestigious school.

"If you're going to get a tattoo, do you go to a really expensive place or to a cheap guy? It wasn't a really difficult decision for me," Perrone said.

In 2008 after graduating nearly $200,000 in the red, he took a job at a big firm in Washington, making $160,000 a year. "It worked out well." He initially put off buying a home, but finished paying his loans this year and is now eyeing a condo in Florida.

THE WOW FEATURE

Perrone's story is part of a larger trend in which heavy borrowing is increasingly rewarded with big salaries. Seen another way, as the salaries of the well-educated have grown relative to everyone else over the last quarter century, so has the borrowing that has paid for their training.

By last year, the top fifth of total households by income, or those making more than $101,000, was on the hook for roughly a third of student loan balances, nearly twice their share in 1989, according to the Fed survey. At the beginning of the period, student loans were mostly held by middle income families - the next two fifths down the income ladder. But their share fell sharply by 2013 and the share of the bottom two fifths held about steady.

The data does not show the income of students' parents so it is not possible to draw conclusions about the backgrounds of heavy borrowers. The numbers do suggest, however, that worries that America is heading for a debt crisis over student loans are overblown.

"There's no bubble here," said Sandy Baum, a professor of higher education at George Washington University. "People who borrow a lot tend to end up with high paying jobs."

Take Baker Logan, who borrowed about $120,000 to get an engineering degree from the Massachusetts Institute of Technology, which data firm Payscale ranks as a top three school for long-term alumni earnings. The average mid-career MIT grad makes $128,800 a year.

"MIT has that name, so you immediately get that wow feature when you're talking to employers," Logan said. He graduated this year and is working at a consulting company in Woburn, Massachusetts. Logan, who asked that his current income not be disclosed, expects to pay off his 30-year student loan ahead of schedule.

The data also suggests that the more you study, the more you earn, even if it means building up much larger debts.

Last year, a young American household with student debt and a main breadwinner with four years of college owed $32,000 and earned about $61,000 on average.

The income is a third more than the earnings of a family with just a high school diploma.

And the rewards were even higher for young families that have a member who did graduate studies. They owed $55,000 but this came with an income of $99,000 on average.

Jason Delisle, an education policy expert at the New America Foundation in Washington, has analyzed government data and estimates that about 40 percent of current U.S. student loan balances were taken out to finance grad school. This, he says, should temper worries about the debt burden's wider impact.

"It's almost like the problem goes away," said Delisle, who used to be a senior analyst on the Republican staff of the U.S. Senate Budget Committee.

TOO LITTLE OF A GOOD THING

While more Americans go to college and grad school than a generation ago, annual growth in enrolment has slowed since the 1980s and many economists believe this has been a key force in lifting the incomes of the affluent relative to the rest of the country.

The theory is that the supply of well-educated workers is falling short of demand in an increasingly high-tech economy, pushing the wages of college grads higher.

This makes it easier to pay back money borrowed for increasingly pricy educations. New York Fed researchers said in September that even though college tuition has soared in recent decades, higher wages mean a four-year college grad in 2013 will on average break even on their investment in about 10 years, half the time it took for students who graduated in the 1970s.

Rising debt levels nonetheless worry some policymakers, including Yellen. Citing the same Fed survey, she noted in October that for the bottom half of U.S. families by net wealth, student loans balances grew to 58 percent of yearly income in 2013 from 26 percent in 1995.

The Obama administration worries that some colleges, particularly private ones, might be overcharging students for degrees that don't lead to good jobs. The impact of the 2007-09 recession has weighed heavily on this group, as it has on those who borrowed for college but dropped out before graduating.Kris Parker graduated with a law degree from Florida Coastal and about $200,000 in debt but has struggled to make enough money to make loan payments. "My credit has been ripped apart," he said. "I can't buy a car. I have a hard time buying furniture."

Student loan bills at least three months past due rose sharply after the recession to hit nearly 12 percent in 2012. Delinquencies have fallen steadily since late last year and were last pegged at 10.9 percent between April and June, but that is still nearly twice the average rate between 2003 and 2007.

Still, the administration is wary of the view that big student debts are inherently bad.

"Rising debt has paid for an increase in the numbers of people able to receive higher education ... and has therefore raised incomes and increased growth," Deputy Treasury Secretary Sarah Bloom Raskin said in September in a speech on student loans and the economy.

Raskin cited research by Brookings Institution researchers Matt Chingos and Beth Akers, who found monthly student loan payments have held steady relative to income over the last two decades. "There is a great deal of integrity and stability in the student loan market," Raskin said.

For the Brookings researchers - who attribute the stability in debt burdens to lower interest rates, longer payment periods and higher incomes - there are dangers in America's angst over student loans.

"Debt is a tool," said Akers. "If anything, I'd want to encourage lower income people to take more advantage of it."