EWA Tip Sheet: Covering the Student Loan Debt Crisis
A leading student debt researcher, the CEO of the nation’s biggest income share agreement company, and a veteran education reporter discuss the biggest concerns, misconceptions and stories to pursue when it comes to the country’s student loan debt crisis.
Participants who contributed to this advice:
- Susan Dynarski, professor of public policy, education and economics at the University of Michigan.
- Josh Mitchell, higher education reporter for The Wall Street Journal and author of a forthcoming book on student loans.
- Tonio DeSorrento, Vemo Education, which “designs, implements, and sustains income share agreement programs for universities and alternative education.”
Main points of the presentation
- Mine the data to show who’s really struggling with student loans. A clear-eyed look at borrowing, repayment and default data show some surprising truths that conflict with stereotypes and commonly repeated myths, Dynarski said. The default rate for alumni of selective (including pricey private) colleges averages around 6 percent. The equivalent rate at for-profit institutions is 28 percent. More than a third — about 40 percent — of all college students don’t borrow a penny. And of those who do, about 25 percent borrow less than $10,000. What’s more, those low-debt students often have more trouble with their payments than do those with the headline-grabbing six-figure debts. The reason: There’s the “lurking characteristic” that most of the biggest borrowers are those who took out funds to pay for graduate school. A lawyer with $100,000 in student debt who has an income of $200,000 is likely not in crisis. Nor is a student who got an MBA and may have to, say, put off buying a house for a year or two. The surprising reality is that the students who seem to be having the most trouble repaying their loans often have comparatively low debt loads: low-income non-traditional students attending for-profit or community colleges. Consider, for example, a student who makes $15,000 a year, and has $5,000 in student loan debt. If that person is not enrolled in an income-driven repayment plan, they’re likely to have difficulty making payments. If they default on their loan, they ruin their credit, and then can’t get an auto loan if they need to buy a car to get to work. That’s how student loans can turn into life crises.
- Free college — done right — can work. Until about the 1970s, many states offered top-notch free public colleges. But many of today’s proposals are very confusing and only offer free access to low-quality courses or programs, Dynarski said. “There is no point in it being free if it is crap,” she added. Dynarski urged reporters to investigate exactly how free college programs could or should work. One important detail: How is a “free college” or “college promise” program being communicated? Dynarski conducted an experiment at the University of Michigan reframing the school’s long-established and comparatively generous need-based financial aid program because many low-income students didn’t realize that their tuition would be covered. She found that telling high schoolers, parents and principals that UM covers tuition for all low-income students, and that the applications process is simple and easy, dramatically increased the number of low-income applicants. Parent debt is a big and undercovered issue. Dynarski noted that the combination of rising tuition and shortages of grants and scholarships has hit minority families especially hard. For many families of color, the only way to get their children through college is for the parents to take out additional loans, often through the federal Parent PLUS program. “It’s a terrible system to make low-income nonwhite parents go into high levels of debts,” she said.
- Financial literacy is not a panacea. There’s a lot of hype promoting financial literacy as a method of limiting student debt. But Dynarski is skeptical about how effective such training efforts can be on a large scale. Research shows that people who take financial literacy courses will likely score better on financial literacy tests, but that such programs don’t have much impact on their real life decisions, Dynarski said. “Everyone is financially illiterate,” people are generally terrible at making decisions, and those who do not have wealth or finances to manage are likely to be less skilled at managing finances, she added.
- Watch the trends. The data show that student debt loads in general are rising and are often higher for some students. Mitchell pointed to data on debt loads by race: black college students typically graduate with more student loan debt than their white counterparts, he noted.
- The bottom line: Not enough money. While there should be more college pricing and student loan transparency, financial literacy or counseling won’t fix the reality that millions of students simply don’t have enough in savings or scholarship aid to pay their college bills, and so have little choice but to borrow if they want to earn a degree.
- Income-shared agreements (ISAs). Income-shared agreements can be alternatives to student loans. These provide up-front funding that students repay as a percentage of their income after they start working. Unlike traditional student loans, ISAs don’t have a debt amount that capitalizes (or increases) if the student only makes small payments. If a student has a low income over the term of the repayment agreement — say 10 years — and pays the agreed-upon percentage of that low income over that time, the obligation is fulfilled even if the student did not fully repay the money that was initially provided. Of course, students who end up earning high incomes may pay much more than they received. ISAs are not a new idea. They were suggested by Nobel Prize-winning economist Milton Friedman in 1955. But they have recently grown in popularity, thanks to experimentation by large schools such as Purdue. The experimental and unregulated nature of ISAs represents a real risk to students, especially those who are young or financially unsophisticated, Dynarski warned. While traditional student loans are regulated by the federal government, and thus have standard promissory notes and interest rates, ISAs are “bespoke arrangements between colleges or foundations and students,” that have not yet been tested by the courts, she noted.
- Student loans: Who is taking them out, how much and why? Investigations into the way student loans are promoted can be revealing. There’s no cap on how much in loans graduate students can take out, and often graduate students are borrowing more and resorting to income-based repayment plans, Dynarski said. Some private colleges and graduate schools have told students not to worry about taking on large debts since the government’s income-driven repayment programs keep monthly payments affordable and can eventually offer some forgiveness of the principal. Mitchell urged journalists to carefully question sources who promote the idea that it’s OK that a student acquired high-levels of student loan debt during graduate school.
The future of free college and student debt.
The relationship between free college proposals and student
debt can spark many important stories, the speakers
- What impact would free college programs have on student loans? Most free college plans only cover tuition. Would students still have to borrow to pay for living expenses? - Dynarski
- How are debt reduction plans (such as more generous grant and scholarship programs) being communicated or marketed to students? – Dynarski
- What are alternatives to free college programs, and how would they affect borrowing? – Mitchell
- How will efforts to reduce borrowing (such as free college proposals) change colleges and the demographics of the student body? – Mitchell and DeSorrento.
- Lists of additional story ideas can be found here and here.
Polls show the public is in favor of free college and income-based repayment, but the views are more mixed on proposals for loan cancellation that have been floated by some political candidates, notes Mitchell. He urged reporters to investigate the details and political palatability of candidates’ higher education proposals and language.
- The federal College Scorecard’s huge downloadable data set provides student loan repayment data. Warning: the Scorecard’s data set is huge and often crashes Excel.
- The Project on Student Debt publishes the annual estimate of the average graduate’s student debt load.
- Brookings published an important analysis showing the differential default rates by race.
- The Federal Reserve Bank of New York publishes data on student debt levels and delinquencies.
- The U.S. Department of Education’s Federal Student Aid office provides data on student and parent loan borrowing by school. It also provides default rates for student loans.
- The College Board’s annual Trends in Student Aid reports provide easy-to-use summaries and Excel sheets on national borrowing data.
- Measure One provides data on private (not federal) student loans.
One way reporters can add value to the public’s understanding of student debt is by taking research and statistics and augmenting them with anecdotes, Mitchell said.
- A fuller description of Dynarski’s student loan research, including her Powerpoint presentation to journalists, can be found here.
- EWA Radio interviewed NPR’s Cory Turner on his investigation into the U.S. Department of Education’s failure to follow through on promises to forgive loans made to teachers and other public servants.