America’s mountain of student-loan debt keeps growing ever higher. But the factors driving the increase have changed, as detailed in a fascinating new report from Moody’s.
It used to be that we could blame colleges for failing to control their costs. But for the past decade or so, college costs have actually grown in line with the median household income, and the “origination” of new student loans has slowed down a little. The reason we haven’t seen a similar slowdown in overall student debt is that borrowers are making less progress on their loans. And a lot of the time they’re doing it on purpose — because they participate in programs that were dramatically expanded during the Obama years, and that forgive debt entirely so long as the borrower first makes small payments for a set period of time.
Among students who graduated between 2006 and 2008, 60 percent made at least some progress on reducing their loan balances during their first five years post-graduation, despite the recession precipitated by the 2008 financial crisis. Students who left school between 2010 and 2012 faced a better job market as the economy slowly began to recover, but only 51 percent of them reduced their balances. In the aggregate, borrowers today are repaying only 3 percent of their loans each year, despite the “baseline” student loan being one that is paid back in ten years.
When someone doesn’t manage to reduce his loan balance, there can be several reasons. One is that he’s not earning enough money to make significant payments. This is especially likely when a student either failed to graduate or attended a program that doesn’t lead to real job opportunities — both of which are especially likely at for-profit and two-year schools, enrollment in which was high in the aftermath of the recession. (It has fallen off since). Some borrowers also opt for longer repayment terms, meaning they pay off their loans more slowly than they otherwise would.
But the report also points to another factor that would seem to have a lot of explanatory power, especially when it comes to those with the highest debts: the still-growing popularity of “income-based repayment” (IBR) and similar programs, which were overhauled and dramatically expanded during the Obama years. Under these programs, students can make small payments for a decade or two, often not even covering the interest on their loans, and have the entire debt forgiven at the end.
This is not necessarily a bad idea in principle, but — as Jason Delisle has noted previously in this space — the programs were structured in a way that encouraged their abuse by people with incredibly high debt levels, especially from graduate studies rather than two- or four-year degrees. As Delisle wrote,
Under current law, anyone who takes out a federal student loan today can enroll in IBR and have his payments fixed at 10 percent of his income, less an exemption of $18,700 (which increases with household size). . . . Then, after 20 years of payments (or only ten years for those working in any government or non-profit job), all of the remaining balance is forgiven, no matter how high it is.
He further points out, that, using the Department of Education’s own debt calculator, someone with $80,000 in debt and an income of $60,000 could receive $62,000 in debt forgiveness if he works for the government. Someone with $150,000 in debt and a $75,000 salary could pay for 20 years and still receive $82,000, more than half the initial balance. Meanwhile, as noted in the Moody’s report, the median amount borrowed is just about $17–18,000.
Income-based repayment is a giveaway to people who choose to spend abnormally large sums on higher education, often earning graduate degrees, but go on to make unremarkable middle-to-upper-middle-class salaries. It’s far less generous to someone with a modest debt, even if that person also earns a modest income. It’s simply not possible to wring $62,000 or $82,000 in debt forgiveness out of the system if you’re a normal borrower and didn’t take out anywhere near that much in loans to begin with.
The Moody’s report further demonstrates that income-based programs are, indeed, highly attractive to people with big debts: “Only 5% of the total balances of borrowers who owe less than $5,000 are covered by [income-driven repayment programs]. Meanwhile, 53% of the balances of borrowers who owe more than $200,000 are in IDR programs.” And unsurprisingly, heavy borrowers have a disproportionate impact on student loans in general: Folks who borrow $20,000 or less represent 55 percent of borrowers but only 14 percent of the overall debt.
All of this needs to be kept in mind as we ponder proposals to shovel even more money at people who carry student debt. College really does cost too much, but the costs seem to have finally stabilized. And those with incredibly high debt already have options for getting rid of it — overly generous options that many of them are enthusiastically taking advantage of, at taxpayer expense.
The concept of income-based repayment is not a bad one. Indeed, I think it would be an enormous improvement for more colleges to base the amounts they get repaid on the amounts students earn after graduating. But there’s no justification for structuring such a program as a transfer of wealth from taxpayers to people with graduate degrees.