THE TRUTH ABOUT STUDENT DEBT

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IT’S BAD. But that’s no reason not to borrow. Here’s why.

The facts seem stark: about 45 million americans now owe a stunning $1.6 trillion in student debt. That’s roughly one in every four adults, nearly double the number who had higher education loans 15 years ago. Among millennials, the number is one in three, often cited as a reason why so many young adults can’t afford to buy a home, get married, have a family or move out of their parents’ basements.

Meanwhile, the average amount that undergraduates borrow has shot up 60 percent over the same period, and defaults on loans have jumped as well. More than one-quarter of students can’t keep up with their payments 12 years after borrowing, vs. 18 percent just a few years ago, and that number is projected to hit 40 percent by 2023. With default can come heartache: It can ruin people’s credit scores, wreck their ability to borrow or rent an apartment and, in some areas, cause their professional licenses to be revoked.

Given all that, it’s not exactly shocking that a lot of people are using the word “crisis” to describe student debt these days. Or that college loans and the pain they can cause have become a hot topic in the 2020 presidential campaign. Nearly every candidate is turning up the hyperbole and offering a proposal for debt relief, from the modest (hello, Kamala Harris, Beto O’Rourke) to the sweeping (nice to see you, Bernie Sanders, Elizabeth Warren).

But while there’s definitely no denying that some people with student debt are having serious problems, the notion that the entire system is completely broken is just plain wrong, many experts say. Moreover, the prevalence of this total-disaster narrative obscures some key facts about borrowing—like for instance, that $100,000-plus balances are actually rare and that it is the students with the smallest amount of debt who tend to be the ones who struggle the most.

“Calling it a crisis misrepresents the situation,” says Sandy Baum, senior fellow for the Center on Education Data and Policy at the Urban Institute. “Not everyone with student debt is having his or her life ruined. The truth is that access to student loans increases educational opportunities for lots of people, and for many it’s an investment that pays off well. It’s also true that some people have severe problems because of the loans they’ve taken out.” “It’s not,” she adds, “monolithic.” A soon-to-be released survey by the Washington think tank New America shows that misperceptions abound. Respondents overwhelmingly believed that college loans were the largest source of consumer debt in the U.S. (it’s actually mortgage debt, by a land-slide) and dramatically overestimated how much students typically borrow and the percentage of people who default on their loans.

“I worry that we’re giving students the message that borrowing is bad and that you should never borrow a cent for higher education,” says Rachel Fishman, deputy director for research of the education policy program at New America. “Given how much college costs, for most families, that’s simply not realistic.” Here are six key facts about student debt in the U.S. that often slip beneath the radar but are critical to informing the national discussion about how to reform the system.

PerhaPs the most eye-PoPPing figure commonly quoted about student loans is $1.6 trillion. That’s the total amount of outstanding higher education debt in the U.S., and it’s been growing exponentially since 2006, when it weighed in at a mere $480 billion.

As a result, student loan balances today are bigger than outstanding credit card debt, bigger than what people owe on auto loans, and second only to mortgages and home equity borrowing—collectively, $9.7 trillion—as the country’s largest source of consumer debt.

Yes, $1.6 trillion is a troubling number. But it masks an equally important counter trend that not many people are aware of: In recent years, students collectively have been borrowing less, not more, for college. In fact, new borrowing—and new is the critical word here—has fallen in each of the past seven years.

The numbers tell the tale: According to the College Board, the amount undergraduates borrowed in federal loans dropped last year to $4,510 per student from $5,830 in the 2010–2011 academic year. Loans taken out annually by students and parents for all higher education institutions also fell, from a peak of $127.7 billion in 2010–11 to $105.5 billion last year.

What’s behind the drop? Well, for one thing, there are fewer people going to college and grad school these days to take out loans. Attendance tends to climb during a recession when people can’t find jobs and fall when the economy recovers and that pattern played out as usual after the 2008 financial crisis, explains the Urban Institute’s Baum. In better economic times parents may also be able to pay more toward college costs, decreasing the need for dependent students to borrow. And, over the past few years, a decline in the number of for-profit schools, where borrowing tends to be heaviest, could also be a contributing factor, Baum adds.

Economic recovery has also enabled states and schools to do more to rein in costs and borrowing. According to The Institute for College Access & Success (TICAS), state spending on higher education following the Great Recession increased an average of 23 percent over the four years ending in 2016. In addition, TICAS found that undergraduates at four-year public or private colleges are more likely to get grants from their school these days, and the grants are typically about $1,000 higher.

What is not yet clear from the data: whether the decline in loans is also partly a reaction to the increasingly negative storyline around borrowing. New America’s Fishman is seeing that shift in attitude in focus groups. “A few years ago, people were saying things like, ‘Borrowing is a means to an end, it’s just what I have to do to go to college,’” she says. “Now people are saying, ‘I’m going to do everything I can to avoid borrowing at all costs.’” Although the decline in student loans may seem at odds with everything you’ve heard lately, it actually isn’t. It’s simply that two different things are being measured—total debt versus new borrowing. What’s largely driving the big growth in total student debt is the build-up of interest on older loans, particularly as more borrowers enroll in income-based repayment plans. The income-based plans, which have been expanded several times over the past decade, allow borrowers to stretch payments over 20 or 25 years, instead of the standard 10, to lower their monthly bills. But interest continues to accrue and adds to the amount owed. Today, roughly half of loan dollars being repaid are enrolled in income-driven plans, compared with 27 percent just four years ago.

Also contributing to the build-up of total debt: A surge in big-balance borrowing by graduate students and parents (more on that in a moment). Although the number of people involved is small, they have an outsized impact on outstanding balances. in absolute numbers, PeoPle with six-figure debt really are rare—what Fishman calls “unicorns in borrowing land.” Overall, just 6 percent of the balances on student loans are $100,000 or more. But in dollar terms, they’re huge, accounting for one-third of total debt, the College Board reports.

It’s mostly graduate students who belong to the $100,000 club, and membership is growing fast. Among borrowers with a graduate degree who started paying off loans in 2014, 20 percent owed more than $100,00, up from 8 percent in 2000, says Adam Looney, an economist at the Brookings Institute. And half of borrowers with professional degrees—think doctors, lawyers, dentists—owe $100,000 or more; 20 percent owe $200,000 and up, the College Board reports. That doesn’t include their undergraduate debt.

The borrowing spree began around a decade ago with the establishment of the graduate PLUS loan program, which allows students to borrow up to the full cost of attendance, minus other aid, and only a cursory credit check required. The government also raised annual limits for traditional Stafford loans for graduate students to $20,500, up from $18,500 previously, and made it easier to borrow to attend online and for-profit programs.

In a labor market that tends to reward more credentials with higher salaries, students were quick to take advantage of the new ways to finance a graduate degree. And for many, the investment paid off. Borrowers with student loans of $50,000 or more (a proxy for graduate borrowers) earned about twice as much as those with smaller loans in 2014 and had far lower default rates,.

But cracks are starting to show. A growing number of graduate borrowers are going to for-profit schools, which typically don’t lead to good jobs—17 percent attended for-profits in 2014, vs. just 1 percent in 1990. An even larger number are opting for income-driven repayment plans to keep initial payments low, though interest keeps building. The upshot: For the first time starting a few years ago, large-balance borrowers collectively owe more than they did when they first graduated, even though they’ve been making loan payments for a few years.

“A lot more of these big borrowers are struggling,” Looney says. “I’m not so concerned about the doctors and lawyers and MBAs, who’ll be okay in the end. But the people who are borrowing heavily to attend programs that offer no real labor market value—that is troubling.” Another worrisome trend: a recent surge in parent borrowing. Although fewer than a million of the nation’s 45 million higher education borrowers are parents, those who do take out loans tend to go big. The typical parent loan last year was $16,452—an increase of 42 percent over a decade—and many borrow every year their son or daughter is in school, and for multiple children. As a result, in dollar terms, parents now account for 23 percent of the outstanding $1.6 trillion in student loans, up from 14 percent five years ago, the Urban Institute reports.

Middle-class and affluent parents are the most likely to borrow, but a sizeable number of lower-income households use PLUS loans too, including 16 percent of families with incomes below $20,000. Default rates are generally low but for some groups, such as families whose child attended a for-profit school—schools like Strayer University, American Intercontinental University or Walden University—the risks are much higher.

Even short of default, these loans can be problematic for parents nearing retirement, a time when income will likely fall and it’s important to be debt-free. One-quarter of parent PLUS borrowers are 60 or older, according to the Urban Institute, and nearly half of them have less than $50,000 in savings.

“I’m worried about the parents who really want to give their kids this opportunity and don’t see another way,” says Baum, who co-authored the report.

IT’S A STATISTIC THAT GETS BANDIED ABOUT ALMOST AS MUCH AS the total debt figure: The average senior graduating from a four-year college today leaves school owing close to $30,000—$29,650, to be precise, according to TICAS. And while that number has basically held steady for the past five years, it’s still more than double the amount students borrowed to get a B.A. in 1996..

Here’s the thing, though: That “average” is heavily skewed by large balances held by a minority of students—most likely, older, independent students who are allowed to borrow more—and probably doesn’t reflect the typical college student’s experience. In fact, three-quarters of students at four-year public colleges and two-thirds of students at private schools graduate with less than $30,000 in debt; about half have borrowed less than $20,000 and four in 10 come in under $10,000. Three in 10 undergraduates have no debt at all.

Of course, any amount of college debt can be a drag on a young person just starting out. But other factors may have as big a role, or bigger, in holding millennials back from things like buying a home or starting a family. Like how expensive housing has gotten: In 70 percent of U.S. counties, the average annual salary isn’t high enough for residents to afford a median-priced home. Or the high price of childcare: A new Care.com survey found that 70 percent of families pay more than 10 percent of their income on childcare; nearly half pay 15 percent or more.

But since a college degree typically leads to better job opportunities and higher pay, borrowing to get a B.A. is an investment that pays off for many and can help with the cost of housing and childcare. The typical graduate of a four-year college earns about 70 percent more than someone with only a high school diploma, while those with advanced degrees make about 120 percent more. but what haPPens to students who don’t make it to the finish line—the ones who take out loans but leave college before earning their degree? These students end up borrowing relatively small amounts but don’t get the same payoff as those who get their B.A. And it turns out that the payoff, not the size of the loan, is the critical factor to the outcome.

Consider: About half of all people who default on their loans never earned a college degree, and nearly two-thirds of them owe less than $10,000, according to a recent analysis by Ben Miller, vice president for postsecondary education at the Center for American Progress. Some 35 percent of them owe less than $5,000. Federal Reserve Bank of New York data also show that people with more than $100,000 in student loan debt are about half as likely to default as those with less than $5,000 in student loans.

“While the exact reason these [small-balance] borrowers struggle unknown,” Miller wrote, “a likely explanation is that they did not receive a sufficient earning boost to pay off their debt, meaning they have all of the expense and none of the reward of attending college.” It’s a problem that has been falling underneath the radar for a long time, says Judith Scott-Clayton, associate professor of economand education at Teachers College of Columbia University. “So much coverage is given to students with over $100,000 in debt and the burden that puts on their ability to live and buy a house and raise kids and do all the things that constitute adulthood,” she says.

don’t want to minimize the depths of their challenge, but when you look at the problem from 30,000 feet up, it’s the borrowers with the least debt who are suffering the most, who face the most severe consequences and long-term implications for their finances, and they are the ones who need help the most.” That recognition has serious policy implications, says Scott-Clayton, who has testified before the Senate three times as an expert financial aid research and policy. She notes, “Thinking that the urgent problem is the amount students have borrowed leads to a different set of responses than if we think the issue is more about how borrowers navigate repayment.” Students who attend for-profit colleges also default on their loans at a much higher-than-average rate: 30 percent of bachelor’s degree holders who started at a for-profit college defaulted on their loans within 12 years of starting school vs. 5 percent of B.A.s who began at private nonprofit or public schools, TICAS reports. Othgroups that have a higher-than-average risk of default include students from low-income households, those who are the first in their family to go to college and black students.

IN FACT, IF THERE IS ANY SINGLE GROUP FOR WHOM THE WORD “crisis” most accurately describes their experience with student loans, it is African American students and their families. Black students are far more likely to take out loans (17 percentage points more), borrow larger amounts (twice as much, on average) and default at a higher rate (38 percent default within 12 years of starting school, vs. 12 percent of white college entrants).

Says Scott-Clayton, whose recent research has focused on alarming patterns of student loan default, particularly among African Americans, “What’s most shocking is not that these disparities exist but the sheer magnitude of them.” Even graduating and getting a degree does not insulate African American borrowers from bad outcomes, as it commonly does for other students. In fact, a black person with a bachelor’s degree is more likely to default than a white dropout.

Nor does having that degree provide the same help paying off college loans: Twelve years after starting school, black graduates, on average, owed 114 percent of what they’d originally borrowed—that is, more than their original loan—compared with 47 percent for white students and 79 percent for Latino students. Projecting default rates out 20 years, Scott-Clayton concluded that 70 percent of black student borrowers may ultimately default on their loans.

Looking for answers that explain the wide disparities, not only between black and white students, but between black borrowers and other students of color, Scott-Clayton’s research identified some fairly predictable contributing factors. But even after accounting for things like family income, parental education, amounts borrowed, grades, degree attained and post-college employment and salary, she found that an unexplained 11-point disparity in default rates between black and white student borrowers still remained.

In a letter to Senators Elizabeth Warren and Kamala Harris, among others who had solicited input on how best to address racial disparities in student loan debt, Scott-Clayton shared her findings, pointing out the unexplained 11-point gap and noting the results might not “fully capture differences in students’ economic circumstances post-college, in their family support and information networks, and/or in the quality of service they receive from their institutions and loan servicers as they naviagte repayment.” Another likely contributing factor, she added: “A longstanding, pernicious legacy of bias and discrimination can help explain why the patterns observed for non-Hispanic Blacks are distinct relative to persons of color or low-income students generally.”

New America’s Fishman agrees. “In America, we think education will solve everything and the sad truth is, it doesn’t,” she says. “Research shows that higher education actually has very little impact on the racial wealth gap because there are so many other economic factors involved, such as labor market discrimination and institutional racism within our economy.”

Hundreds of years of systemic racism won’t be fixed any time soon but Scott-Clayton suggests a few practical steps that would be helpful in the meantime. Among them: Simplifying and automating the current income-based repayment program to encourage more financially strapped borrowers to take advantage of them and a more targeted loan forgiveness program than is currently under discussion, for borrowers with up to $6,125 in undergraduate loans. Almost 40 percent of borrowers in this group, and 70 percent of black borrowers, default within 12 years. The cost would be relatively modest, she says—a best bang for the buck approach.

IN FACT, NEARLY ALL OF THE DEMOCRATIC PRESIDENTIAL candidates have come out with some kind of proposal to help reduce student debt and even President Donald Trump favors modifying repayment plans to make them less complicated for borrowers.

No plan has captured the public imagination more, though, than the sweeping proposals from Senators Elizabeth Warren and Bernie Sanders to wipe out existing debt for all college borrowers (Sanders) or a large portion of loans for all but the wealthiest taxpayers (Warren). Debt forgiveness, as Fishman says, is “the sexy new thing, the shiny object.” But if you need evidence that erasing student debt in the U.S. would be a much thornier challenge than the candidates own up to, look no further than what’s happened with the country’s more limited attempt at it: the federal Public Service Loan Forgiveness program. Signed into law by President George W. Bush in 2007, the program promised to forgive student loans

How to Avoid Personal a Student Debt Crisis

NO MATTER WHERE YOUR CHILD IS IN THE COLLEGE PROCESS, YOU CAN TAKE STEPS HELP KEEP BORROWING TO MANAGEABLE FOR BOTH OF YOU—AND POSSIBLY EVEN AVOID LOANS ALTOGETHER. HERE’S WHAT YOU NEED TO KNOW.

WHEN YOU’RE APPLYING

> Check the Scorecard. Uncle Sam’s College Scorecard (collegescorecard. ed.gov) is a treasure trove of info that can help you make informed choices about what particular schools will cost, based on your family’s income. Other key data: how much debt the typical student has at graduation; the percentage of undergrads who get aid; and the average salary of grads who got aid.

> Calculate Your Net Price. Even schools with the same sticker price can vary widely in cost to you, depending on how generous they typically are with aid—and how much of that assistance comes in the form of grants vs. loans. By federal law, most schools are required to post a net price calculator on their website that will give you a personalized estimate of your costs. The College Scorecard also provides links to each school’s calculator.

> Add a Financial Safety. Just as your child’s college list should include an academic safety, so should it include two or more schools likely to be truly affordable for your family. At least one should be a public in-state college. For the second: Identify a private school where your child ranks in the top 25% of applicants, which boosts the chance of a generous aid package that could end up being cheaper than a public college.

> Explore Creative Financing. Determined not to borrow? Look into one of the growing number of schools, such as Clarkson and Purdue, that offer loan alternatives called income sharing agreements: The school gives a certain amount of money toward tuition in exchange for a percentage of the student’s income for a set number of years after graduation.

ONCE YOU’RE ACCEPTED

> Favor Federal Foans. For stu-dents, government loans are almost always the best deal because the rates are low (4.5 percent, as of July 1st); they’re easy to qualify for; part of the interest may be subsidized while in school; and they offer a variety of repayment plans after graduation. Annual limits for dependent students range from $5,500 for freshmen to $7,500 for years three, four and, if needed, five.

> Tap the House. If, after your child has maxed out federal student loans for the year, you still need to borrow, a home equity line of credit may be less expensive than a federal parent PLUS loan. The national average rate recently on HELOCs was around 5.5 % vs.

7% for parent PLUS loans, which also charge a hefty 4.2 % origination fee.

> Stay the Course. One of the top risk factors for defaulting on student loans is not completing a degree. Students should work with an academic advisor from the get-go to make sure they stay on track.

AFTER GRADUATION

> Know the Options. After a six-month grace period, payments will begin for Stafford loans; you’ll be defaulted into a standard 10-year payment plan unless you choose an income-based repayment program.

These stretch payments over a 20 or 25-year period with payments limited to 10 to 15 % of your income.

If you still owe money, the balance will be forgiven, but the amount will be treated as taxable income.

> Ask the Boss for Help. Eight percent of U.S. employers offer their workers help with student loan repayment, including Abbott, Aetna, Fidelity, PwC and Staples. Currently the assistance is treated as taxable income, but bipartisan legislation was introduced in Congress earlier this year to make the benefit tax free.

> Catch a Break. Up to $2,500 in student loan interest a year is fully or partially deductible, if you’re married and have income below $170,000 ($85,000, if you’re single). That’s worth up to $600 off your taxes, if you’re in the 24% bracket. —D.H. for borrowers with a decade of service in government or nonprofit jobs. But since the first borrowers became eligible for forgiveness 18 months ago, nearly 74,000 have applied and more than 99 percent have been rejected—a spectacular failure rate that has prompted widespread derision, anger and a spate of lawsuits, including one by the American Federation of Teachers accusing Education Secretary Betsy DeVos of gross mismanagement.

Many higher education experts applaud the candidates’ desire to help struggling borrowers, but raise serious questions about the cost, effectiveness and fairness of the proposals so far. “For someone like me, who’s worked in the area for a long time, it’s exciting and heartwarming to know this issue is getting attention,” says Scott-Clayton. “But now that we’ve crossed that major hurdle, the question is whether attention is being directed in the most productive way.” Rather than costly broad strokes that offer relief even to borrowers who can comfortably manage their loan payments and that do little or nothing to prevent future student debt problems, many people in the field advocate more targeted initiatives. Devise solutions for what have already been identified as the most egregious problems, such as high default rates at for-profit schools and certificate programs, the overly complicated loan repayment system, and lofty loan limits and scanty credit checks for grad students, parents and others that allow them to borrow beyond their means.

For example, while federal loans for dependent undergraduate students are capped at $31,000, graduate students and parents under the PLUS loan program can borrow as much as it costs to attend. Unlike applying for virtually any other kind of loan, income and assets aren’t considered in the approval process. Borrowers only need to show they don’t have an adverse credit history, such as delinquent debt or a recent foreclosure or bankruptcy. As Looney wrote in a recent Brookings paper, “The simple, obvious mantra of reformers should be: Don’t make loans we know borrowers would suffer to repay.” To focus solutions that effectively, however, policymakers need to pay more attention to the facts than the spin and zero in on where the greatest pain points really are. As it stands now, most of the public debate is still focused on how much students are borrowing and how quickly big-balance loans are growing. But the most serious issues, as the statistics reveal to anyone who looks closely enough, have more to do with repayment, not new borrowing, and with small borrowers rather than large ones. Without that recognition, that aha moment, the “crisis” won’t be resolved.

In the meantime, the clock is ticking. If the current rate of growth continues, outstanding student debt will exceed $2 trillion as soon as 2022. Let the hand wringing begin.

PHOTO (COLOR): CRISIS? New borrowing, particularly among undergraduates, has fallen in each of the past seven years. Pictured: Hats off and up at Wesleyan University in Middletown, Connecticut.

PHOTO (COLOR): THE PAYOFF “The truth is that access to student loans increases opportunities for lots of people,” says education expert Sandy Baum. Pictured left: Tag worn by a student at a University of Southern Maine protest. Above: Graduating ceremony at Stanford University last June.

PHOTO (COLOR): VOICES OF DEBT The truth: Undergrad degrees pay off in jobs. Pictured right: Students complain on Hollywood Boulevard. Top: Looking for work in Riverside, California.

PHOTO (COLOR): TROUBLE Borrowers going to for-profit colleges often struggle the most with debt. Pictured clockwise from left: DeVry College in New York City; Education Secretary Betsy DeVos; and a happy Harvard University graduate.

PHOTO (COLOR): WIPEOUT Senators Warren and Sanders are both proposing some version of loan forgiveness. Below: the ceremonial opening of a recent Democratic party presidential debate in Detroit. Left: A cybersecurity employment event in Long Beach, California.

PHOTO (COLOR): CHALLENGING Erasing student debt would be a bigger task than the candidates are owning up to. Top: Senator Warren speaking to the American Federation of Teachers in Philadelphia.

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