CREDIT: Wall Street Journal
Total student debt has nearly tripled in recent years, according to new research.
Using a new dataset on various types of household debt, including student loans, research from the Federal Reserve Bank of New York found that total outstanding educational debt nearly tripled from 2004 to 2012, growing from $364 billion to $966 billion. The total rose by 14 percent each year on average. The researchers’ chart of the growth in the average loan balance per borrower shows a smooth rise from just over $15,000 to nearly $25,000 over the nine years covered by their data.
And many of those debtors are struggling to pay the money back. The official rate of delinquency — defined as being more than three months behind on loan payments but less than nine months behind — was 17 percent in 2012. But the official rate doesn’t offer as clear a picture of borrowers’ repayment struggles as it might, the researchers say, because the way it is calculated includes many people who are not yet attempting to pay down their debt. The effective rate of delinquency among those who have begun paying down their loans is up over 30 percent.
Given these rising numbers, heavily indebted college graduates are flocking to programs that link their payments to their income and eventually forgive outstanding debt, the Wall Street Journal reported Tuesday. The programs, known as Income-Based Repayment (IBR) and Pay As You Earn (PAYE), allow borrowers to make smaller payments than the standard plan would require. IBR is the less generous of the two, requiring enrollees to pay 15 percent of their discretionary income each month for 25 years before forgiving the remaining debt. PAYE uses a 10 percent cap and a 20 year timeline. If graduates work in the public or non-profit sectors rather than the private sector, debt forgiveness kicks in at 10 years instead.
IBR and PAYE have existed in their current form since 2007 and 2011, respectively. But relatively few borrowers were taking advantage of them as of last summer. As of the third quarter of 2013, when there were 50.8 million people with outstanding federal student loans, just 40,000 people were enrolled in PAYE and 910,000 were using IBR.
But the second half of last year saw an uptick in participation, rising nearly 40 percent in six months. The two programs now serve 1.3 million people, who owe a combined $72 billion. Those numbers represent just 3.2 percent of all borrowers who are out of school and in a position to benefit immediately from these programs, according to Department of Education data compiled by the Consumer Financial Protection Bureau, but 8.9 percent of the raw dollar total of outstanding loans from such borrowers.
Still, the 40 percent jump in enrollment is enough to push the cost of the programs far above previous projections. The most recent White House budget calls for capping debt forgiveness at $57,500 per student in order to keep PAYE and IBR expenses manageable. Others, such as Sen. Lamar Alexander (R-TN), the New America Foundation, and the Brookings Institution worry that the programs will just end up raising tuition costs.
But the New York Fed research finds that it is uncommon for borrowers to exceed that proposed cap. About 87 percent of the borrowers in its 2012 data had less than $50,000 in student loans to repay, and less than 4 percent had debts of more than $100,000.
IBR and PAYE are very effective at avoiding student loan defaults, which benefits the economy as a whole. Student loans can’t be discharged in bankruptcy like other debts can, so someone who defaults on educational debt is still going to have to spend money on their loans rather than on buying things that would grow the economy. Default rates are near record highs, and many of the almost 7 million people in default on student debt today could have avoided that fate had they enrolled in IBR or PAYE. Instead, the persistent student debt overhang is costing the country hundreds of billions of dollars in economic activity per year.
There are a number of other policy proposals for curbing the student loan crisis. Two of the more radical — rewriting bankruptcy laws and making public college free for all who wish to attend — would benefit the economy by more than enough to outweigh their costs.