University Challenged - Higher Education and Student Debt in America

Education America

Author

Sarah Sattelmeyer

Project Director at New America

University Challenged

The Covid-19 crisis put higher education systems from around the world under great pressure. In the US, the issue of student debt has taken center stage. Many cannot repay their loans, and the issue of students that are disproportionately affected due to their gender or background is flagrant. The pandemic revealed the urgent impetus for funding reform in American colleges. As part of our series University Challenged, Sarah Sattelmeyer, Project Director at New America, delves into the core of the issue and proposes new solutions for the American higher education system.

The American federal student loan system originated in the middle of the last century as a way to expand access to higher education to students who might not have otherwise been able to afford it. At that time, loans were typically a public-private partnership with non-government entities originating the loans and the government subsidizing, insuring, or guaranteeing them to make sure that students had access to funds. While the system has a lengthy and complex history, today, all new federal loans are issued by the US Department of Education and managed and collected by its contractors, including student loan servicers and private collection agencies.

This article briefly outlines key issues, events, and policies along the pathway toward an American higher education system that is heavily dependent on student debt. It also examines barriers to successful repayment and policy reforms proposed by advocates, researchers, and other stakeholders and under consideration by the Biden Administration and the US Congress.

Student debt over time and among different types of borrowers

In 1960, less than 10% of the adult population in the United States-largely white men-had attended 4 or more years of college. Today, close to one-third of Americans over the age of 25 have a bachelor’s degree (also known as a four-year degree), and many more hold associate degrees (also known as two-year degrees). But this expansion in higher education attainment has not occurred equitably: while women now earn more degrees than men, a larger percentage of white students than Black, Hispanic, and Native students do so.

College remains an important pathway toward upward economic mobility for the average student, but the percentage of students who borrow to attend college, and the debt among borrowers, has increased over the last several decades. As of March 2021, almost 43 million Americans - one in five adults - collectively hold approximately $1.6 trillion in federal student loans. This is especially true among women and people of color-groups that have long faced discrimination, racism, and economic insecurity, which were exacerbated by the pandemic. For example, Black students borrow more often, borrow more, earn less in the labor market after leaving school, and are more likely to default on their loans than their white peers.

Much of the higher education policy dialogue in the United States is currently focused on student debt.

In addition, increases in tuition, state disinvestment in public higher education institutions, increases in attendance and borrowing for graduate school and at expensive and often predatory for-profit institutions, and changes in eligibility, loan limits, and interest rates over time have also contributed to rising aggregate debt levels.

As one researcher noted, "The extent to which people should be relying on loans, and the extent to which they should be subsidized by the government, is something that we’ve come to not by design so much as by accident and political dictates and the dictates of the federal budget."

As a result, much of the higher education policy dialogue in the United States is currently focused on student debt. But, even beyond race and gender, as noted above, not all borrowers are the same. While the typical borrower holds close to $20,000 in student debt, the average is higher, signaling a growing number of borrowers, especially those with graduate degrees, with large balances. (Undergraduates are limited in the amount of federal loans they can borrow, whereas graduate students can borrow up to their full cost of attendance, including living expenses.) Close to 20% of borrowers are in default on their loans, meaning they have missed at least nine months’ worth of payments. Counterintuitively, defaulters tend to hold less student debt than the typical borrower-approximately half owe less than $10,000-potentially as a result of not completing a degree.

Navigating Repayment: A multi-pronged approach for reform

Solutions are needed to improve college affordability, help students complete a degree or credential, and ensure they are attending high-quality programs that lead to a return on their higher education investments. But as more students have taken on debt and as debt has grown, attention has also increasingly been paid to "back end" solutions to help borrowers who are struggling to repay their loans.

Typically, when borrowers leave school or drop below half-time enrollment, after a grace period, they must begin repaying their loans. If borrowers do not choose another plan, they are automatically placed in the Standard Repayment Plan in which they pay the same amount each month for up to ten years, based on their debt size, such that they will fully repay their loans. Borrowers also have the option to enter one of five income-driven repayment plans. These plans allow borrowers to tie their monthly payments to their incomes and family sizes (although each program has slightly different rules and provisions) and result in lower payments for many.

As more students have taken on debt and as debt has grown, attention has also increasingly been paid to "back end" solutions to help borrowers who are struggling to repay their loans.

Borrowers must recertify their information annually, and after 20 to 25 years’ worth of qualifying payments, they are eligible to have their remaining balances forgiven. (Some borrowers are eligible for forgiveness sooner if they work in public service.) As part of these plans, borrowers with incomes below a certain threshold can "pay" as little as $0 per month.

In general, income-driven repayment plans have helped borrowers avoid delinquency and default by making payments more affordable. But for many, they also extend the amount of time borrowers spend in repayment and can increase the total amount repaid. In fact, growing participation in income-driven repayment plans has contributed to slower repayment, and thus aggregate balance growth over time. In 2017, 27% of borrowers and 45% of loan dollars were enrolled in such plans.

While an important protection for struggling borrowers, these plans, and the student loan repayment system in which they operate, are deeply in need of reform. For example:

Some borrowers, especially those with high expenses, may not be able to afford their payments, even while enrolled in an income-driven plan.
Many borrowers’ balances are growing each month, even when they are making payments, which can be frustrating and overwhelming.
Borrowers can face a host of administrative barriers to enrolling in income-driven plans - including confusing paperwork - which can prevent those who otherwise might benefit from enrolling. (Importantly, a 2019 law would reduce some of these barriers, but it has yet to be fully implemented.)
The default system is complex and overly punitive. Defaulting on a loan triggers severe consequences, including wage garnishment, withholding of federal benefits, and damage to credit scores, among others. And because interest continues to accrue while a borrower is in default - and exiting default can involve high fees - borrowers can return to good standing owing far more than they did before defaulting.
The system is in need of clear standards for and strong oversight of its contractors, as well as an assessment of which metrics and compensation structures produce positive borrower outcomes.
And a lack of data and transparency around who is in various repayment plans and their outcomes makes evidence-based policy making a challenge.

American higher education policy is at an inflection point. It is clear that no single policy or focus can solve all the issues causing challenges within and caused by the student loan system. Stakeholders from across the political spectrum, and including policymakers, advocates, researchers, and practitioners, have proposed a range of policies-and we will need a suite of reforms-to set current and future students and borrowers up for success. As I note in this recent essay for the Brookings institution, proposals include:

A focus on debt cancellation, including making existing programs that forgive loans - such as those for public servants, disabled borrowers, and those who were defrauded by their schools - work better and cancelling some or all student debt.
A focus on "fixing the income-driven repayment system...including lowering payments for struggling borrowers, addressing interest accrual and growing balances, reducing the length of time borrowers carry debt, removing administrative hurdles to enrollment and reenrollment, [and] improving oversight of programs and contractors."
A focus on the less often discussed problem of student loan default, including creating a "simpler pathway out of default, creating consistent terms for all borrowers who exit, forgiving debt for those who have been in default for an extended period of time, limiting collections, and eliminating the default system by allowing existing loan servicers to manage defaulted loans."

While these solutions are not mutually exclusive - in fact, we need multiple to begin moving toward a more equitable system - they have largely moved forward in fits and starts over the last decade. As President Biden’s administration and the 117^th US Congress get to work, questions remain about their priorities and whether these reforms will all be tackled through an ambitious legislative and regulatory agenda.

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