The student debt crisis isn't what you think it is

In 2019, more than 44 million Americans collectively owe $1.5 trillion in student loans. Surpassing credit cards and auto loans, student debt is now the second-highest consumer debt category, behind only home mortgages. What’s more, 11.4 percent of student borrowers are more than 90 days delinquent on their payments; 5.1 million borrowers have defaulted.

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The media is awash in stories about America’s "out-of-control" student loan crisis. Politicians agree that skyrocketing student debt is a serious problem but disagree on solutions. Claiming that federal government loan guarantees encourage colleges and universities to raise tuition, Education Secretary Betsy DeVosElizabeth (Betsy) Dee DeVosTrump aides pushed for states' ability to block migrant kids from enrolling in public schools: report Criminal justice reform should extend to student financial aid Buttigieg to Detroit audience: Don't judge Indiana by Pence and we won't judge Michigan by DeVos MORE wants to limit lending. Sen. Bernie SandersBernie SandersJoe Biden faces an uncertain path Bernie Sanders vows to go to 'war with white nationalism and racism' as president Biden: 'There's an awful lot of really good Republicans out there' MORE (I-Vt.) has proposed the College for All Act to eliminate undergraduate tuition at public universities for students from households making less than $125,000 per year, with the federal government paying two-thirds of the cost and the states picking up the remaining third. Sen. Elizabeth Warren’s (D-Mass.) plan, paid for with a tax on households with an annual income in excess of $50 million, guarantees every student the opportunity to attend a two- or four-year college without paying tuition and fees — and eliminates up to $50,000 in debt for students in households with an annual income of less than $250,000.

These initiatives are almost certain to be debated during the 2020 presidential campaign. A national dialogue, however, should be grounded in a fact-based analysis of student debt. Here are seven things Americans should know.

1) The debt crisis is best understood by dividing borrowers into three groups: students financially dependent on their parents, independent students (who are more likely to be older, attend college part time and work full time), and graduate and professional school students. In “Game of Loans,” Beth Akers and Matthew M. Chingos reveal that for dependent undergraduates, the lifetime limit on borrowing set by the federal government is less than $35,000. For independent undergraduates, it’s less than $60,000. But graduate and professional students can borrow up to the full price of attendance. Not surprisingly, then, about 89 percent of dependents and 71 percent of independents who receive an undergraduate degree accumulate less than $40,000 in debt; almost half of graduate degree recipients have piled up more than $60,000 in debt (with 17 percent taking on $100,000).

2) While acknowledging the profound economic hardship some borrowers face, Akers and Chingos report that the median monthly payment of student loans has remained essentially flat at (a manageable) 3 percent or 4 percent of earnings for about 20 years. Default rates, of course, are higher during recessions and lower during periods of economic growth.

3) Affluent Americans have made extensive use of federal loans, which are available to any student enrolled at least half time in an accredited institution. About a third of education debt is held by the richest 25 percent of households, much of it for degrees in medicine, law and business. 

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4) Although media stories focus on six-figure liabilities, most distressed borrowers — and defaulters — have relatively small debt balances. They have difficulty repaying loans because they did not complete a degree, do not have a high-paying job and cannot get financial assistance from family members. These days, fewer than 60 percent of students who enroll in a four-year college or university earn a bachelor’s degree in six years; completion rates at two-year colleges are less than 30 percent. A recent study found that 34 percent of borrowers who dropped out of school with $1,000 to $5,000 in debt in 2009 defaulted within five years.

5) Much of the increase in defaults over the last decade comes from for-profit institutions. University of Phoenix students, for example, owed $35.5 billion to the federal government in 2014. By then, 45 percent of those who entered repayment in 2009 had defaulted, with only 1 percent of this group’s debt repaid. Four-year public and private undergraduate colleges and graduate schools, by contrast, reported default rates below — and often well below — 10 percent.

6) Higher tuition is, indeed, responsible for some of the increase in student debt. That said, per-student state appropriations to colleges and universities have neither kept up with inflation nor dropped in the 21st century. In 1975, states appropriated 58 percent of the cost of their public universities; in 2019, state support has dropped to 37 percent.

7) In 1981, Akers and Chingos point out, loans passed grants as the dominant form of student aid. These days, the ratio of loan to grant dollars is about 3-to-1. For every Pell dollar granted to a low-income student, the federal government spends about 55 cents on education tax credits, which go to middle-class and affluent families.

This context, in my judgment, should shape the questions we ask about the nature and impact of the student debt "crisis" and options going forward.

Should "college for all" become the law of the land? If not, what is the optimum mix of loans and grants for qualified students from lower-income families? Is $25,550 of student debt, the current average at public colleges, appropriate or too much? Should wealthy students be eligible for low-interest federal loans? Should loan policies for medical, law and business students, who have substantial earning potential, be revisited?

Should loan repayments be set each year as a percentage of current income? Should loans be renewed (or not) each year based on a grade-point average or some other criterion related to progress toward a degree? Should rates of graduation be a significant factor in awarding or withdrawing accreditation from public, private, and for-profit colleges and universities?

Most importantly, student lending policies should be judged by their capacity to achieve a core principle: access to higher education for all talented students, regardless of their ability to pay.

Glenn C. Altschuler is the Thomas and Dorothy Litwin Professor of American Studies at Cornell University, and the co-author (with Stuart Blumin) of Rude Republic: Americans and Their Politics in the Nineteenth Century.