The unconventional first month of the Trump Administration has diverted attention from the issue of student debt, which received more than its share of press during the campaign. But it’s not going to go away, and there is reason to believe that this is an area where there might actually be bipartisan agreement on some policy changes that need not have a major impact on the federal budget.
Democrats are worried about former students’ struggle to repay their education loans, the complexity of the student-aid system, fraud and abuse by for-profit colleges, loan servicers’ harassing and misleading borrowers, and inadequate funding for Pell Grants. Republicans are worried about former students’ struggle to repay their education loans, the complexity of the student-aid system, colleges and universities with large endowments charging students too much, excessive federal student aid, and the private sector being squeezed out of the student-aid business.
So there is some common ground. Congress is unlikely to revive federal guarantees for privately financed student loans, which would be very expensive. But it may well redesign the income-driven federal student-loan-repayment system, with an eye toward simplification for borrowers and lower costs for taxpayers. There is consensus on the need for changes, if not on the details of the best loan-repayment policies.
Designing effective student-loan policies, however, requires some understanding of who borrows, how much they borrow, why it makes sense to pay for a portion of college costs through loans, and when it makes sense for the government to relieve borrowers of the responsibility of repayment. Misunderstanding of those issues dominates much of the discussion of student debt and the problems associated with it. Knowing a few facts should help:
- Difficulty in repaying loans is not associated with high debt levels. Among borrowers who began repaying their debt in 2010-11, 35 percent of those who owed less than $5,000 defaulted within three years, compared with just 4 percent of those who owed more than $40,000.
- Despite a number of high-profile examples, few students borrow eye-popping amounts to pay for their undergraduate education. Among 2011-12 graduates, 10 percent of bachelor’s-degree recipients had as much as $50,000 in debt, while 37 percent of graduate-degree recipients had borrowed that much. In other words, much of the borrowing that is adding to the stock of outstanding debt comes from people earning advanced degrees — many of whom will have relatively high incomes.
- The people struggling most with student debt are not the young four-year college graduates working at Starbucks, but older adults who went back to a community college or — at much greater expense — a for-profit institution. Many have left college without a degree and are struggling to make ends meet even without paying off student loans.
- About half of the outstanding student debt is held by households in the top half of the income distribution. This is not surprising, since the students who accumulate the most education debt are those who stay enrolled; higher levels of education lead to higher earnings. Borrowing for college makes sense because higher education is an investment that pays off over a lifetime. Despite the fact that it doesn’t work out well for every individual, for most people, on average, the payoff is high. Most borrowers can repay a reasonable amount of debt and still have a higher standard of living than if they had not borrowed and had not gone to college.
All of this adds up to the reality that while student debt causes problems for some individuals, it is not the crisis commonly portrayed. Colleges and universities should certainly pay attention to borrowing patterns among their students. Even if average debt levels are reasonable, it is important to know if a significant minority of students borrows much more than average.
It is also important to monitor nonfederal borrowing: Federal loans come with legislated interest rates and considerable borrower protections, and income-driven-repayment plans ensure that required loan payments will be affordable. Private lenders don’t make the same promises.
But guarding against those pitfalls doesn’t mean steering students away from borrowing altogether. A few wealthy colleges promise students that their financial need will be met without loans, but there is no compelling reason for other colleges to aspire to such a policy. They should focus on providing the high-quality educational opportunities and support that will lead to satisfying and secure futures for their students. If their students succeed, a moderate amount of student debt will represent a good investment, not a burden that seriously limits life choices.
Still, improvements in federal student-loan policies have the potential to mitigate the very real problems that do exist for some student borrowers. A recent lawsuit against the student-loan servicer Navient highlights the problems faced by many struggling borrowers. Those problems must be fixed, of course, but a stronger repayment system would at least leave fewer vulnerable borrowers.
Perhaps members of Congress will get behind some real improvements in the system. They could automatically enroll borrowers in a clear income-driven-repayment plan that would base required payments on Internal Revenue Service data, withholding estimated amounts from borrowers’ paychecks.
They could devise payment schedules and a loan-forgiveness program that would protect borrowers whose educations don’t pay off as expected without obligating taxpayers to take on the debts of people with strong earnings who borrowed for expensive graduate study.
And they could install reasonable restrictions on borrowing that would minimize the number of students who borrow to attend institutions that won’t serve them well.
Educators should encourage students to borrow cautiously to allow them to invest in themselves and their future. They should honestly assess the relationship between borrowing on their campuses and student outcomes. And they should urge Congress to come up with a rational, fair, and efficient system of student-loan repayment.
