Untangling the Complexity of US Student Loan Debt


Q: American student debt is:

A. An uncontrollable juggernaut.

B. A large sum, but manageable for most people.

vs. Both above.

The answer is – well, read on and decide for yourself.

On the one hand, the number is colossal – $ 1.5 trillion. In contrast, debt is shared by some 45 million people, each with their own stories, some more messy than others.

For non-completers, those who dropped out of college, or even those who graduated but then suffered an unexpected medical or financial calamity, even a small amount of debt can be crippling. But for borrowers who can afford the monthly payments, student loan debt is just another part of the price of entering the middle class – even if they never pay it off in full.

“The new herpes”, this is how The daily show host Trevor Noah the famous university debt described last year: “Almost everyone has it. It stays with you all your life. And finally, you’re going to have to talk to your fiancé about it.

Like taking out a loan to buy a solid house or reliable transportation, not all debt is bad, of course.

Megan Coval, vice president of policy and federal relations at the National Association of Student Financial Aid Administrators, said student loans can be viewed as an investment. The question, she said, is how much debt is too high?

“It depends on the family situation, what you study and what your salary is when you go out,” Coval said. “All of these different layers are what makes it so complex.”

Debt without a degree that gets you high income can get you in trouble.

Beth Akers, a senior fellow at the Manhattan Institute that focuses on the economics of higher education, puts it this way: “The data actually tells us that people with very large student loan balances are come out pretty well. This is because they have a high income that they have access to because of their education expenses. But there’s also a flip side: “Debt without a degree that gets you into high income can get you in trouble.”

In fact, almost half of college debt is held by people who report a family income of $ 30,000 or less. And the less debt a person has, the more likely they are to default on their payments. The default rate on student loans is just over 10 percent.

When college degrees fail to live up to their lofty promises or when students fail to complete their studies, they face significant hurdles in paying off even a small loan, said Robert Shireman, senior fellow at the Century Foundation.

“One of the biggest things people misunderstand is that they assume these are people who get into too much debt,” Shireman said. “In many cases, the people who have difficulty repaying are people who have incurred relatively low debts and attended a school that did not provide them with the training they really needed, or who did not finished their studies and therefore were not able to earn the money they needed to pay off the debt. “

Defaults are also correlated with race, according to one recent report by the Liberal Center for American Progress. About one in three black borrowers who started college in the 2011-12 academic year defaulted on student loans within six years, a rate two and a half times that of their white peers.

Rachel Fishman, assistant director of education policy research at New America, said the problems of black borrowers are compounded by the systematic racism they face in the workforce.

“For black students, we find that even when they get their bachelor’s degree, they still have a pretty high probability of defaulting 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 skills to help with work or discrimination.

The role of the recession

Between 2009 and 2019, the decade after the Great Recession, U.S. student debt fell from $ 720 billion to $ 1.5 trillion, according to the Federal Reserve Bank of New York.

In last fall’s edition of its annual report on student debt, the Institute for College Access and Success attributed much of this growth has been a sharp decline in state support for public colleges and a corresponding increase in tuition fees. State spending per student fell 24% from 2008 to 2012. And the share of funding per student from tuition fees rose to 47% in 2012, from 36% in 2008.

Unsurprisingly, student loan default rates increases in the wake of the recession. Researchers at the Urban Institute found that borrowers from low-income families greatest drop in refunds.

Income-driven repayment plans were supposed to help these borrowers, and in many cases they have. The plans, which cap monthly payments at as little as 10 percent of discretionary income, have become more popular in recent years as an alternative to fixed payment plans.

But complicated rules the application and annual recertification posed barriers for borrowers seeking to pay off their student loans under one of the five income-tested plans.

The plans were at the heart of a report published last month by the Congressional Budget Office.

At the end of 2017, the budget office reported that almost half of the volume of direct student loans in repayment was being repaid under income-driven plans. Borrowers on these plans are less likely to default on their payments than those on fixed payment plans. At the same time, the budget office has found that the median balance owed by borrowers under fixed payment plans has steadily declined.

For those with low incomes, monthly payments often do not cover accrued interest, so borrowers see their debt balances increase. People who are still in debt at the end of the specified repayment period, typically 20 or 25 years, will have the remainder of their debt written off.

A report released in January by Moody’s Investors Service found that while the rate of growth in total US student debt has slowed, individual borrower balances are not declining. One reason, in addition to the high default rate on student loans, is the growing popularity of income-based repayment plans.

The Congressional Budget Office report estimates that unless the rules are changed, the government will write off more than $ 207 billion in loans taken out by 2029 and managed under income-driven plans. Most of that – over $ 167 billion – would benefit people who borrow to attend college or vocational school. Just over $ 40 billion would go to undergraduate borrowers.

Proposed policy changes

Last month, President Trump released a fiscal year 2021 budget proposal that would end federally subsidized student loans, eliminate the besieged public service loan forgiveness program, impose annual and lifetime limits on PLUS graduate loans and PLUS parents and would narrow the range of federal income repayment plans into one.

Trump’s plan would increase the percentage of discretionary income borrowers on income-based plans must pay each month to 12.5% ​​of the 10% demanded by most current plans. This would reduce the payment period for undergraduates to 15 years, but it would extend that period to 30 years for graduate students.

Candidates for the Democratic presidential nomination have proposed their own range of solutions to deal with American university debt, from Joe Biden’s modest adjustments to the existing system to those of Bernie Sanders idea once marginal to cancel it for everyone – rich and poor alike.

Akers, of the conservative Manhattan Institute, said she had been disappointed so far with the Democratic candidates’ emphasis on debt cancellation and the free university. She said incremental changes to existing student loan repayment programs would do more to help students pay off 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 are similarly interested in making the loan repayment process easier.

Eight in 10 respondents think the government should make it easier to repay their student loans. Yet about the same proportion say borrowers should make paying off their loans a higher priority.

“It is important to note that opinions on these two issues are not independent of each other,” the investigation report said. “Of those who think borrowers need to do more to prioritize their loans, 83% also say government action has a role to play.”

More evidence of the internal American conflict.


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