To read the full report, click here.
Student debt has quadrupled within the past decade, to more than $1.3 trillion, and the average debt per borrower has risen to $26,900. There are major structural problems in American higher education, but debt is a symptom rather than the cause, and by focusing on the symptom politicians are advancing reforms that would provide the most value to financially secure graduates while doing little to fix a system that’s failing the rest.
Even as the net stock of debt has risen, a Brookings Institution report by Beth Akers and Matthew Chingos has demonstrated that the median student borrower has spent a constant 3 percent to 4 percent of his or her monthly income on debt payments for the last two decades, and the mean payment-to-income ratio has fallen from 15 percent to 7 percent.
If these graduates aren’t facing new hardships, how could five-year cohort default rates have nearly doubled in the past decade, rising from 16 percent of students entering repayment in 2000 to 28 percent entering in 2009? Simply: It’s not the graduates who are in trouble.
A study by Adam Looney of the U.S. Treasury Department and Constantine Yannelis of Stanford University found that during the Great Recession, the number of non-traditional students — who borrowed to attend two-year public and for-profit institutions — swelled, to represent almost half of all new borrowers. Seventy percent of students who left school in 2011 and had fallen into default by 2013 attended these institutions. Looney and Yannelis conclude that “the high rates of default among some borrowers combined with the sheer volume of higher-risk students starting to repay their loans explains most of the increase in default rates.”
At for-profit and two-year public institutions, graduation rates average only 20 percent to 40 percent. Student debt may be the reason some of these students failed to graduate.
But most students who default left school with less than $10,000 in debt, so it seems likely that much of it can be attributed to a lack of academic preparation or inadequate institutional support.
Federal Income-Based Repayment plans allow students to refinance their college debt and keep the monthly payment below 10 percent of their monthly discretionary income. Yet as University of Michigan economist Susan Dynarski points out, those who need an IBR plan the most are the least likely to take advantage of it, perhaps because of the bureaucratic complexity of the process.
While non-graduates are failing to enroll in an IBR plan, the Obama administration has adjusted elements of the program to enable significant debt forgiveness for graduate-student borrowers with lucrative job prospects.
For her part, presidential candidate Hillary Clinton has promised to allow graduates to refinance at current loan rates. This poorly targeted $58 billion proposal would be a boon to the 75 percent of borrowers who aren’t struggling, while providing little help to those who struggle most with student debt.
Bernie Sanders has called for a more radical approach: moving away from a loan-financed public higher-education system and making college free. But free college could prove regressive in practice.
The Urban Institute’s Matthew Chingos found that students from families in the top half of the income spectrum would receive 24 percent more in dollar value than students in the lower half, largely because they generally attend more expensive institutions.
Free college tuition may end up hurting the postsecondary prospects of low-income students. Andrew Kelly of the American Enterprise Institute notes that, barring a significant increase in efficiency, colleges that rely on taxpayer dollars rather than tuition fees may not have the resources to expand access without sacrificing quality. State funding in recent years hasn’t kept pace with demand; a free system would lead to shortages of seats. Middle- and upper-income students who may otherwise attend private universities will likely take up many of the free public seats, leaving low-income students out in the cold.
The Obama administration has cracked down on for-profit colleges through the regulatory process, while calling for further subsidies to make community college free, even though these public colleges often demonstrate similarly poor outcomes.
Real higher-education reform wouldn’t regulate and reward by tax status; it would realign the incentives of all schools to better serve students. Colleges, public or private, nonprofit or for-profit, should have skin in the game on loan repayment; if students can’t pay back their loans, the school should be on the hook for a portion of the unpaid balance.
Even a small amount of risk would give postsecondary institutions a reason to contain their costs and offer a better education. A bonus for colleges that educate low-income students who pay off their loans could offer postsecondary institutions an incentive to expand their offerings with an eye toward equity.
High student debt is not the problem; the dearth of high-quality and low-cost options for low-income and nontraditional students is.
Max Eden is a Senior Fellow at the Manhattan Institute.
Interested in real economic insights? Want to stay ahead of the competition? Each weekday morning, e21 delivers a short email that includes e21 exclusive commentaries and the latest market news and updates from Washington. Sign up for the e21 Morning eBrief.