Understanding the Student Loan-Debt Picture
“There’s a lot of talk about the student debt crisis and I’m going to tell you that I don’t think there really is a student debt crisis,” said Debbie Cochrane, vice president at The Institute for College Access and Success. “What there are are multiple student debt crises.”
And though the federal government and the private sector are in various stages of implementing debt-relief programs meant to ease these crises and the strain felt by many people making monthly payments, not all borrowers are created equally, reporters learned at a recent higher-education conference hosted by Education Writers Association.
In fact, for borrowers with the lowest debt loads, relief can be harder to attain than it is for those graduates with debts exceeding $100,000.
To understand this paradox of student debt better, it’s important to address what’s likely not an actual crisis. Despite what you may have heard, the oft-repeated figure of $1.3 trillion – the total debt load of all college-loan borrowers – is the low man on the totem pole of alarm. That number is certainly extraordinary, but it masks the many considerable and counterintuitive risks our nation’s college-goers assume by pursuing a postsecondary degree.
Case in point: A former student with debt of $10,000 is more likely to default on her loans than a student owing $100,000, according to federal data. That’s because the lower debt total signals the student probably dropped out before completing school. And evidence suggests that taking some college courses without ever earning a degree gives workers a paltry wage boost compared to those who actually graduate. The obverse is also telling: Students with heavy debt loads likely earned graduate degrees that often lead to much higher incomes.
The type of school a student attends also can predict her ability to pay down her debt. New federal data about how often students repay their loans show those who attended for-profit colleges, such as the 35,000 students at the recently shuttered ITT technical colleges, have a three-year repayment rate of 46 percent – meaning less than half are able to pay down their debt by at least a dollar. That’s the lowest among all the types of schools TICAS analyzed, well below four-year public schools (81 percent), community colleges (57 percent) and private non-profit schools (78 percent) such as Duke or the University of Southern California.
The story of defaults is about for-profit colleges, too. The most recent available data show eight million borrowers have defaulted on $128 billion in loans issued by the federal government, another way of noting they haven’t made a payment on their debt in 270 days, though in recent years the rate of defaulters has declined. Even though roughly a tenth of college students are in for-profit schools, they account for nearly 40 percent of all college-related defaults.
Relief for students hit hard by debt is available, but that’s no salve for those millions of borrowers who have been swept up by the tide of default. By one calculation, just over half of borrowers under the government’s Direct Lending program – by far the largest source of debt – are successfully paying off their loans, according to data Cochrane of TICAS showed at the seminar. Nearly 10 percent have given up on repayment but haven’t crossed over into dreaded default status; an equal percentage is actually in default.
Which is why former students of for-profit colleges often are handed the short end of the stick. Borrowers in default are ineligible for the federal government’s repayment plans that cap what one owes each month to a percentage of what she or he earns – unless they rehabilitate their loan status. While borrowers can make payments under income-driven repayment plans that are less than what’s necessary to pay down the principal, at least they won’t see their wages garnished and credit scores greatly tarnished.
Some students who were enrolled at for-profit colleges that have shut down are eligible for debt forgiveness, but they must make a choice between having their loans expunged or keeping the credits they earned from these schools in hopes of transferring them to a new college. There have, however, been multiple media reports of community colleges rejecting most of those credits anyway. In a press call with reporters last week, Under Secretary of Education Ted Mitchell said students who were enrolled at ITT on May 6 or later are eligible for debt relief under the education department’s closed-school provision.
But those students can’t recover the Pell grants – federal aid reserved for low-income students – they used to attend the closed colleges. And education benefits used by veterans are also presently irretrievable.
Roughly 7,400 students affected by last year’s collapse of Corinthian Colleges had their debts pardoned via the closed-school rule. Another nearly 3,800 received debt jubilees through a relief program available to students who can show they were defrauded by their schools. As more state attorneys general build cases against the alleged deceptive tactics Corinthian Colleges and ITT used to recruit students, potentially hundreds of thousands of former students could see their debts pardoned – with taxpayers effectively eating the costs. The ITT fallout alone could cost the U.S. Treasury approximately $500 million of revenue if every student who’s eligible for closed-school debt relief applies for it. Should more for-profit colleges fall, which some analysts predict, these sums could mushroom.
Some relief, however, is off limits: Borrowers of public loans are virtually unable to file for bankruptcy, a protection available to other debt holders.
For-profit colleges aren’t the only ones producing students who struggle to repay their debt. A Brookings Institution study last year showed that colleges with comparatively open enrollment standards, like regional four-year state schools and community colleges, have high percentages of students behind on their loans. Cochrane of TICAS thinks the difference between those colleges and for-profits is one of cost – state schools frequently have tuition that’s less than the maximum Pell grant, while for-profit colleges charge average tuitions of two or three times more. “I feel like, as a society, with our lower cost community colleges we made the decision we want to be able to try out college [and] … leave room for them to fail, but we want the risk of failing to be less.”
To be sure, college debt is likely to continue growing. Ten years ago, seniors who had taken out loans left school owing $19,000. This year that figure is up to $29,000 – double the pace of inflation. Whether the increasing debt loads will become a crisis largely depends on the labor market recognizing the value of a degree – and for there to be enough high-paying jobs that allow students to pay off those debts.
For graduate students with large loan obligations who are employed in high-paying fields like law and medicine, the federal government’s debt relief programs may not even be as helpful. While federal income-driven repayment models allow borrowers to cap their monthly payments to 10 or 15 percent of their income, the balances on those debts continue to grow. Private financial companies like SoFi have entered the playing field promising steep discounts to typically high-wage borrowers who refinance their government-backed debt with them. “Basically, you can refinance if you’re already in a pretty good financial position, and you can save a lot of money,” said Brianna McGurran, a consumer reporter focusing on twenty-somethings for media firm NerdWallet.
Jason Delisle, a higher-education analyst with American Enterprise Institute, noted that one reason companies like SoFi are interested in undercutting the federal government on interest rates for high-income borrowers is because they could make more money off these borrowers down the line. Mortgages, investment vehicles, retirement plans – “[getting] as many lines of business under one brand as possible, this is an amazing business model,” said Delisle.
But some folks who study college financing are questioning if the government should even be issuing loans to students attending colleges that are known to have high percentages of graduates entering default? “Yes, we have a bad system,” said Miguel Palacios, a finance scholar at Vanderbilt University. “It’s a system that in some ways seems predatory when it demands payment from students whom it was foreseeable were not going to be able to pay.”
He added: “The only reasonable alternative that I know of is having something that is linked to income. We’re getting there with income-based repayment.”
Palacios is an advocate of a new movement that goes one step further than income-based repayment. Students who sign “income-share agreements” to finance their educations forgo loan debt altogether and instead pay a percentage of their future income to funders who financed their studies.
While similar to income-driven programs the government provides for 5.3 million borrowers, income-share agreements are different in key ways, said Palacios, who’s also a co-founder of income-share agreement company LUMNI. Chief among them: Under income-share agreements, high-wage earners wouldn’t receive the sort of subsidies they enjoy now under government repayment plans like income-driven repayment. Palacios said that under federal repayment practices, “it’s like having a tax in which the wealthy get a break. To make that recovery work, then low-income students or graduates have to pay a little more.”
He said LUMNI tends to finance low-income students for whom the costs of college are a greater burden than well-off students. In an ISA, higher-earning consumers may end up paying more for their loans than they would have under a federal repayment plan because their incomes are so elevated.
While there are legal limits to the approach of income-share agreements, another weak spot of the concept is that some degrees that cost a lot but are of high value to society, such as social work, may not attract private funders because workers in those fields don’t earn much income. Palacios said government subsidies to entice funders to back such students could be one workaround. Others have commented that the private sector will find it difficult to track borrowers’ income accurately once they graduate. That hasn’t stopped Purdue University in Indiana from rolling out an ISA-like repayment plan for its students.
Another reason Palacios supports income-share agreements is because they can paint a complete picture of which degree programs lead to decent wages. “The value that someone is going to be expected to pay in an income-share agreement is going to reflect something about future opportunities, what the labor market for a particular degree or a particular institution looks like,” he said.
A clear picture of which degree programs are worth a student’s investment dovetails well with another movement generating enthusiasm from congressional Democrats and Republicans: holding colleges in part accountable for the success of their graduates.
Colleges “get the money from the federal government regardless of how the students do, said Palacios. “My view is we need institutions to have skin in the game.”