We Can’t Address the Student Debt Crisis until We Understand Its Effects

December 3, 2018

To address the $1.5 trillion in outstanding student debt that is held by American borrowers today, it is vital to have a full debate about the costs and benefits of potential solutions. But this debate must be grounded in a solid understanding of the problem. David Leonhardt’s recent takedown of universal student-debt cancellation flows from an incorrect diagnosis of the effects of student debt. Before taking a deeper dive here, we responded in a letter to the editor.

Leonhardt argues that most of the people struggling to pay off their debts attended college but never earned a degree, and that, by contrast, most graduates of four-year colleges are “doing just fine.” It is true that student loan defaults are much higher among borrowers who left school without a degree—and who consequently have relatively little debt. But Leonhardt overlooks the troubling trends in default among higher-balance borrowers, who presumably obtained a degree. The New York Federal Reserve Board, for instance, reports a 20 percent default rate among younger borrowers with more than $100,000 in debt, suggesting that economic security is out of reach for many high-debt borrowers, too.

Declaring default as the best measure of debt burden, however, is an extreme position. Other measures paint a far more nuanced picture of how Americans struggle with their student debt. We can look to student debt’s negative impact on important financial decisions, such as homeownership, small business formation, and retirement savings, all of which suggest that even borrowers who are successfully repaying their loans are burdened in consequential ways. But our recent report points to two troubling indicators of increasing student-debt burden that are hiding in plain sight.

First, though average monthly loan payments are relatively steady over time, an increasing share of households reports having debt but making no payment at all on that debt. This phenomenon can certainly reflect defaults, but it also reflects other consequences of student debt not captured by a default rate, including delinquency and deferment.

Second, we argue that the implications of increased enrollment in income-driven repayment plans are often overlooked. The growing use of income-based plans is generally thought to be a policy success, as these plans provide a much-needed safety net to help borrowers avoid default. But income-driven repayment should also be viewed as an indicator of a larger policy failure: Individuals’ need to rely on income-based plans to avoid default is a key symptom of the unsustainable burden our student loan system places on borrowers. About 30 percent of borrowers are paying through an income-driven repayment plan, suggesting a widespread proportion of borrowers are feeling strained by their debts.

Understanding the problem of student debt means more than simply evaluating the extent of its burdens. It also means determining how this debt accumulated at such a fast clip and why it is so burdensome. Our work provides insight here, too: Debt has grown both because borrowers are accruing more debt than they would have in previous generations and because more students—particularly lower-income students of color—have to take on debt to go to college. And while this debt has grown, earnings have stagnated or fallen for those with postsecondary credentials, driven by employers’ runaway power to command higher levels of education for a given job without raising wages. In other words, borrowers today have more debt and lower earnings than previous generations. We believe this insight is key to evaluating solutions to the student debt crisis. It enables us to see that this crisis was driven not by individual choices, but by failed policymaking and larger economic forces.

The generalization of college graduates as “doing just fine,” even if they are struggling to avoid default, deferring loan payments, or missing out on the financial benefits that their education should have conferred, is not only wrong, it’s also deeply frustrating and alienating to those whose daily lives are affected by student debt. Surveys show that average Americans believe that student debt is a crisis, yet pundits and policy experts continue to argue otherwise. Instead of ignoring or explaining away these concerns, we must try to better understand them before rejecting potential solutions.