Q: America’s student-loan debt is:
A. An out-of-control juggernaut.
B. A large sum to be sure, but one that is manageable for most people.
C. Both of the above.
The answer is — well, read on and decide for yourself.
On the one hand, the number is colossal — $1.5 trillion. On the other hand, the debt is shared by some 45 million people, each with their own stories, some messier than others.
For noncompleters, those who dropped out of college, or even people who graduated but then suffered unexpected medical or financial calamity, even a small amount of debt can be paralyzing. But for borrowers who can afford the monthly payments, education debt is just another part of the price of admission to the middle class — even if they never entirely pay it off.
“The new herpes,” is how The Daily Show host Trevor Noah famously described college debt last year: “Almost everybody has it. It stays with you your whole life. And eventually, you’re gonna have to tell your fiancé about it.”
Like taking out a loan to buy a solid house or a dependable mode of transportation, not all debt is bad, of course.
Megan Coval, vice president for policy and federal relations at the National Association of Student Financial Aid Administrators, said student loans can be seen as an investment. The question that arises, she said, is how much debt is too much?
“It depends on family circumstance, and what you’re studying, and what your salary is when you come out,” Coval said. “All of those different layers are what makes it so complex.”
Debt without a degree that enables you access to high earnings is something that can get you in trouble.
Beth Akers, a senior fellow at the Manhattan Institute who focuses on the economics of higher education, put it this way: “The data actually tell us that people who have very large student loan balances are actually doing pretty well. That’s because they have high income that they have access to because of their educational spending.” But there’s also a flip side: “Debt without a degree that enables you access to high earnings is something that can get you in trouble.”
Indeed, nearly half of college debt is held by people who report family income of $30,000 or less. And the less debt someone has, the more likely they are to default on their payments. The default rate on student loans stands at just over 10 percent.
When college degrees don’t live up to their lofty promises, or when students don’t finish their education, they face significant barriers to paying off even a small loan, said Robert Shireman, a senior fellow at the Century Foundation.
“One of the biggest things that people misunderstand is they assume that it is all about people taking on too much debt,” Shireman said. “In many cases people who are having trouble repaying are people who took on relatively small amounts of debt and either attended a school that did not provide them with the training they really needed, or they did not finish the education and so they were not able to earn the money that they needed to repay the debt.”
Loan defaults also correlate with race, according to a recent report by the liberal Center for American Progress. About one in three black borrowers who began college during the 2011-12 academic year defaulted on their student loans within six years, a rate two and a half times that of their white peers.
Rachel Fishman, deputy director of education policy research at New America, said that black borrowers’ problems are compounded by the systematic racism they face in the labor market.
“For black students, we see even when they get their bachelors degree, they still have a fairly high likelihood of default compared to other racial and ethnic groups who have their bachelor’s degree,” Fishman said. “For them, borrowing tends to be a riskier proposition. But it’s even more important that they get a higher education in the first place because they need, all the research has shown, more credentials to help with labor or discrimination.”
The Role of the Recession
Between 2009 and 2019, the decade following the Great Recession, America’s student debt grew from $720 billion to $1.5 trillion, according to the Federal Reserve Bank of New York.
In last fall’s edition of its annual student-debt report, the Institute for College Access and Success attributed much of that growth to a sharp decline in state support for public colleges and a corresponding rise in tuition. State spending per student dropped by 24 percent from 2008 to 2012. And the share of per-student funding that came from tuition rose to 47 percent in 2012 from 36 percent in 2008.
Unsurprisingly, student-loan-default rates also increased in the recession’s wake. Researchers from the Urban Institute found that borrowers from low-income families experienced the steepest decline in repayments.
Income-driven repayment plans were supposed to help those borrowers, and in many cases, they have. The plans, which cap monthly payments at as little as 10 percent of discretionary income, have grown more popular in recent years as an alternative to fixed-payment plans.
But complicated rules surrounding application and annual recertification have posed barriers to borrowers seeking to pay their education loans through one of the five income-driven plans.
The plans were a key focus of a report issued last month by the Congressional Budget Office.
By the end of 2017, the budget office reported, nearly half the volume of direct student loans in repayment was being repaid through income-driven plans. Borrowers in those plans are less likely to default on their payments than those in fixed-payment plans. At the same time, the budget office found, the median balance owed by borrowers in fixed-payment plans has decreased steadily.
For those with low income, the monthly payments often don’t cover the accruing interest, so the borrowers see their debt balances rise. People who still have debt at the end of the specified repayment period, typically 20 or 25 years, will see the remainder of their debt forgiven.
A January report by Moody’s Investors Service found that while the growth rate of America’s total student debt has slowed, individual borrower balances aren’t dropping. One reason, in addition to the high default rate on student loans, is the growing popularity of income-driven repayment plans.
The report by the Congressional Budget Office estimates that, unless the rules are changed, the government will forgive more than $207 billion in loans taken out between now and 2029 and handled through income-driven plans. The bulk of that sum — more than $167 billion — would benefit people who borrow to attend graduate or professional school. Just over $40 billion would go to undergraduate borrowers.
Proposed Policy Changes
President Trump last month released a fiscal year 2021 budget proposal that would end federally subsidized student loans, eliminate the beleaguered Public Service Loan Forgiveness program, place yearly and lifetime limits on Graduate PLUS and Parent PLUS loans, and fold the federal government’s array of income-driven repayment plans into a single one.
Trump’s plan would raise the percentage of discretionary income that borrowers on income-driven plans must pay each month to 12.5 percent from the 10 percent most of the current plans require. It would shorten the payment term for undergraduates to 15 years, but it would lengthen that stretch to 30 years for graduate students.
Candidates for the Democratic presidential nomination have proposed their own range of solutions for dealing with America’s college debt, from Joe Biden’s modest adjustments to the existing system to Bernie Sanders’s once-fringe idea of canceling it for everyone — rich and poor alike.
Akers, of the conservative Manhattan Institute, said she has been disappointed so far in the Democratic candidates’ focus on debt forgiveness and free college. Incremental changes to the existing student-loan repayment programs, she said, would do more to help students repay their debt.
“We need to make the safety net work better by making it easier for students,” she said. “The big problem is with the infrastructure.”
A survey reported last fall by the Pew Charitable Trusts suggests that Americans feel similarly about easing the process of loan repayment.
Eight in 10 respondents think that the government should make it easier for people to repay their student loans. Yet nearly the same share say that borrowers should make repaying their loans a greater priority.
“Importantly, views on these two questions are not held independently of one another,” the survey report states. “Among those who believe that borrowers need to do more to prioritize their loans, 83 percent also say that there is a role for government action.”
More evidence of Americans’ internal conflict.
