On the outside, the student loan crisis appears to be deserving of its name: About 45 million Americans collectively owe over $1.6 trillion in outstanding student loans. Borrowers currently owe an average of around $29,200 per person, and almost two million of them have defaulted on their student loans in the past six years. Judging by these statistics we can easily see why so many politicians are centering their campaigns around student debt relief: this is a problem which affects millions of Americans. However, these statistics can be misleading.
Earlier this year, Senator Elizabeth Warren published an article on Medium, where she outlined her higher education platform; including a proposal for student debt forgiveness and free college for a large portion of the population. Warren claims “The result [of increasing college tuition costs] is a huge student loan debt burden that’s crushing millions of families and acting as an anchor on our economy.” Other Democratic candidates have made similar assertions, and believe that outstanding student loans are indeed a major economic problem that requires a drastic solution.
However, many of these claims are based on the bold statistics about the state of student debt, and may not account for the reality that the average student borrower faces. Indeed, many claims made by politicians have been ignorant of how student loans are actually affecting the population. These politicians have promised debt forgiveness to relieve these young people from the debt they face, as well as free college to ensure no future debt “crisis” can happen. If we analyze the facts, we get a very different picture of the impact of student loans on the economy.
Very Few People Owe More Than $100,000
Many arguments around student loans include the claim that balances of upward of $100,000 are the norm, rather than the exception. However, people with a balance of six-figures are actually few and far between. Only 6 percent of the outstanding balances on student loans are over $100,000 or more and these loans account for around one-third of total debt.
The majority of students who have these outstanding student loans are those who have pursued graduate school. 20 percent of borrowers with a graduate degree who started paying off loans in 2014 owed more than $100,000, versus 8 percent in 2000. This makes sense given the fact that students spend more time in college to attain a graduate degree, and graduate programs are often more expensive.
This is important to highlight because graduate students benefit from a different type of student loan: the Graduate PLUS loan. This program allows students to borrow up to the cost of attendance, minus any other aid they have been given. If we discount this fact, we end up with a skewed picture of where student loans are actually a problem. To the average student, while debt may be a problem, they are not facing $100,000 student loans. Policy reforms should take this fact into account, and address it directly, as opposed to making bold and sweeping claims about fixing the “crisis.”
A large number of the people who owe more than $100,000 will likely go on to a successful career, and will be able to pay off their student loans with their higher salaries. Of course, not everyone will land a high-paying job, but there are already programs in place to help those borrowers. For example, income-driven repayment plans forgive student loans which are unaffordable after either 10 or 20 years; this means these graduates will not be saddled with debt they cannot afford for the rest of their life. And the payments they make will be based on their income.
Most Students Graduate With Low Balances or No Loans
Another statistic that gets thrown around when people talk about student loans is this: The average student graduating from a four-year college leaves owing close to $30,000 in student debt; which is more than double the amount students borrowed to get a degree in 1996. This statistic, while accurate, is also misleading.
The average amount of student debt is influenced by the large balances held by a small group of students—often graduate students (as mentioned above)—and therefore does not accurately reflect the typical student loan balance of a majority of students. In 2012, thirty percent of all bachelor’s degree recipients graduated with no debt. Another 23 percent of those recipients graduated owing less than $20,000 in loans. Only 30 percent of students owe more than $30,000 per year and the 6 percent that owe over $100,000 really skews this number.
Yes, having any outstanding student loans may impact a young person who is just starting out. And high student loan balances are often attributed to stifling a young person’s ability to reach certain milestones like buying a house or starting a family. However, because a significant portion of students either have no debt, or low debt balances, the extent to which this is a problem is actually limited.
There are arguably bigger factors which influence young people’s inability to buy a house or start a family. For example, in 70 percent of counties, the average salary isn’t high enough for residents to afford a median-priced home.
The Smallest Borrowers Actually Need the Most Help
Students who graduate with a degree and a low student loan balance are more likely to be able to pay that debt off over time, because their degree will allow them to unlock better paying jobs. However, for students who do not graduate—and who have still taken out loans—there are a number of problems to face. These students often end up borrowing smaller amounts of money, but they do not get the economic benefits of having a degree.
According to a study by Ben Miller, vice president for postsecondary education at the Center for American Progress, around two-thirds of all people who default on their loans never completed their degree or earned only a certificate. In addition, nearly two-thirds of those people owe less than $10,000; 35 percent of people in that group owe less than $5,000. To put this into perspective, the Federal Reserve Bank of New York has found that borrowers with more than $100,000 in student loan debt are around half as likely as those with $5,000 in student loans to default.
Why is this the case? There are a couple of potential explanations. The first is that young people who take out loans but do not graduate will not realize the higher salaries associated with having a degree; meaning they have a lot of debt but no additional earnings to pay it off. This key statistic is important to highlight because it demonstrates how different groups of the population have different needs when it comes to student loans. Instead of proposing complete forgiveness, policymakers could create a number of responses to help people with low balances pay off their debt.
Even students who have balances closer to the average of around $30,000 are likely still not in trouble. That amount can be paid back with monthly payments of around $200, which is only a small fraction of the median monthly earnings for most graduates.
African-American Students Need the Most Help
African-Americans have been hit particularly hard by student loan debt. Nearly 85 percent of black bachelor’s degree recipients have outstanding student debt, compared with 69 percent of white bachelor’s degree recipients, according to the Center for Responsible Lending. In addition, while the average white student loan borrower owes around $30,000, the average black borrower owes closer to $34,000.
It’s not just the higher incidence rate of student loans and the higher average balances that make student debt a larger problem for African-Americans. White borrowers are able to pay down their student loans at a rate of around 10 percent per year, whereas African-American borrowers are able to pay down around 4 percent of their loans each year.
African-Americans are also more likely to default on their student loans than other students.
This could be caused by a couple of different factors. Firstly, existing discrimination in the labor market may result in some African-American students commanding lower salaries, thereby affecting their ability to pay down their student loans. But perhaps the main reason African-Americans suffer particularly hard from student loan debt is the racial wealth gap. Indeed, African-Americans, on average, carry substantially less wealth than people in the white racial category. This means that these students will be less likely to have extra funds to tap into when they are at risk of default, and may also explain why they have to take out more loans in the first place. Policymakers need to take this into sharp consideration, when deciding on programs surrounding student loan debt.
Borrowing is Slowing Down
Perhaps the statistic that gets the most attention in the news today is the fact that the value of outstanding student loans has reached $1.6 trillion. Indeed, the value of outstanding loans has been increasing significantly since 2006, when student loans were only at around $480 billion. As a result of this increase, student loans account for the second-largest source of household debt, second only to mortgage debt. However, even though this number is rising, borrowing is slowing down.
According to the College Board, the average amount undergraduates borrowed from federal loans last year was $4,410, which is lower than the average loan in 2013-14: $5,400. What’s causing this decline? Firstly, college attendance has been slowly decreasing for the last eight years, which means fewer people need to take out student loans.
In addition, economic recovery after the Great Recession encouraged schools to focus on figuring out how to rein in the costs of tuition. That said, tuition is still continuing to increase at a number of schools. Another influencing factor may just be that people are becoming more debt-averse: a 2019 survey by PayScale found that 27 percent of college graduates regretted taking out a student loan.
What Does it All Mean?
What do these statistics tell us about the student debt crisis? The main conclusion we can draw is that the term “crisis” may be overblown. And that, while the national balance of student loans is increasing, certain groups are affected more than others. For example, the fact that two-thirds of students who default owe less than $10,000 indicates that more policy efforts need to be targeted toward people with lower balances. While some people do have balances of over $100,000, these people are typically more able to pay off their loans, and usually graduate from their degree programs.
The bottom line is that policymakers should be focusing on specific policies to target the groups who are most affected by student loans, instead of proposing radical student loan forgiveness and free college programs. Politicians and lawmakers should be realistic about how student loans affect the average American. Many existing loan programs are too confusing, which makes students more likely to borrow more money than they need, and there are so many programs that it can be difficult for students to figure out which ones are best suited for their unique situation.
Most young people are not drowning in student debt; but that is not to say this is not a major problem. Policymakers should focus on the people who truly need assistance—dropouts, minority students, and students with lower balances—rather than using skewed statistics to paint a picture that will help them achieve their ambitious goal of complete debt forgiveness. After all, the average American struggling from student loans will likely be more interested in something that can mitigate their problems today, instead of discussions of a debt forgiveness program that has little chance of becoming a reality. Perhaps the real crisis is how politicians have an incomplete view of the impact that student loans have on the average American.