Figures never lie, but sometimes mumble

It’s rare to stumble across any good news that might comfort those carrying the burden of six figures’ worth of student loan debt. So when a bit of it dribbles by, it immediately perks up our ears, even if the “good news” turns out to be a statistical illusion.

The Federal Reserve Bank of New York reported data last week that seems paradoxical: The more student loan debt students carry, the less likely they are to default on it.

The Fed looked at borrowers who entered student loan repayments in 2009 – an inopportune time to be seeking work. Among borrowers who’d amassed over $100,000 in student loan debt, 18 percent of them had ever entered into default. That might sound high, but it was actually the lowest figure for any debt bracket. People borrowing less than $5,000 surprisingly had the highest default rate, 34 percent.

The explanation for this apparent contradiction is straightforward – people with very low student loan balances most likely dropped out before completing their degrees, whereas those with very high balances typically finished an advanced degree. Since higher education delivers a much greater financial benefit to those who complete their degrees, the findings are less surprising than they might initially appear.

This might inspire some gallows humor about overburdened young lawyers being lucky to have such massive debts, but those who stayed awake in statistics class will remember this as a Simpson’s paradox. The New York Fed didn’t drill down and look at law school debt specifically, but if they did, the results would probably hew more closely to what you’d expect: A bigger loan balance correlates with a higher rate of default – unless, perhaps, you racked up all that debt getting a degree from Harvard or Yale.

David Donovan