In light of rising student loan balances and their non-repayment, higher education policy analysts have tended to favor either expanding IDR and streamlining enrollment therein or limiting the reach of IDR and capping loan amounts, in the hope of re-directing students into less expensive institutions and into careers that will, ostensibly, enable them to repay their loans as scheduled. The effect of that is likely to be credit rationing: less advantaged students taking on more expensive private loans or not receiving higher education at all. The effect of expanding IDR is what we’ve already seen: balances mounting over time, with little or no progress toward repayment, even when the economy is as near to full employment as has been achieved in the United States in recent memory. Both of these alternative diagnoses decline to face reality head-on: we already have a great deal of student debt outstanding that isn’t being repaid and isn’t going to be repaid, and that debt resides disproportionately with minority borrowers victimized both by labor ily wealth.
The implications are dire when it comes to household formation and asset accumulation over the life cycle, which is attenuated for millennials and will be for subsequent generations as well. It also likely inhibits marriage and reduces or delays child-bearing, labor market mobility, and entrepreneurship, not to mention retirement security for families who take on student debt on behalf of their children. The grand experiment in shifting the cost of higher education onto individual students and workers, at the same time as we closed off access to the labor market for anyone without postsecondary credentials, driving a broader and more diverse swathe of the population into the increasingly-expensive higher education system, has resulted in greater educational attainment, but not a better-paid payday loans Wrightsville Georgia workforce. Instead the debt is a lifetime drag on social mobility, widening wealth disparities between people whose families could pay for their education, or who needed less education in order to qualify themselves for professional careers, and those who had to finance it themselves and who need education to access opportunities that are rationed on the basis of race and class.
Moreover, we now have experience with steadily-increasing student indebtedness extending over two whole business cycles, through the expansion of the 2000s, the Great Recession, the long, slow recovery of the 2010s, and now, the current Covid recession. Any idea that temporary economic downturns were responsible for the crisis of non-repayment, and progress would be made up during expansions when labor markets are tight, has now been definitively disproved. What we’ve considered to be economic prosperity of the last ten years, prior to the pandemic, was in fact economically punishing to younger cohorts forced through the wringer of increasingly costly higher education and into a labor market characterized by stagnant wages and deteriorating job ladders.
We compute the ratio of the amount of student debt outstanding in each year as a share of that individual’s initial loan balance in 2009. We then compute the quantiles of the distribution of that ratio in each year. Figure 1 plots those quantiles over time. The blue and red lines show progress toward repayment for individuals who were probably already on the path to repayment when they were observed in 2009. Approximately 40% of the individuals with outstanding student debt in 2009 had paid off all of their student debt by 2019, within the standard ten-year repayment window (or sooner, given that they were probably already well into repayment in 2009).
The lack of progress toward repayment means that many student loans increase in balance over their lifetime, the opposite of the standard repayment structure in which, following any deferment, principal is steadily drawn down by uniform loan repayments until the loan reaches a principal balance of zero upon full repayment. Thus, another window on the non-repayment of student loans is the share of loans that have a higher principal balance than they did when they were originated. The loan-level data in our credit reporting dataset enables us to compare the current balance on a loan when observed in the dataset to the balance of that loan at origination.
Instead, we see a much larger share of loans have required payments of zero or near-zero, which likely reflects the advent of IDR between 2009 and 2019. There are also more significant mass points in the 2019 distribution around 7.5% and 12.5%, which may also reflect IDR required payment levels, although without income data it’s hard to be sure of that. Finally, there are, overall, higher payment ratios in the right half of the distribution, so the variance in the whole distribution has increased a good deal. That is probably for the same basic reason as we see rising variance in progress to repayment in Figure 1 and elsewhere in this analysis: as the federal student loan program has grown in size, more borrowers are coming from low-income and minority communities. As borrowers have diversified, more are in a worse position to repay and therefore suffer from rising balances over time.