In an article posted on the site of the Brookings Institution, Susan M. Dynarski, a Brookings senior fellow, writes that the national conversation about student loan debt is at odds with the data. It isn’t high-indebtedness that leads to high default rates; it is students who have the lowest indebtedness that are more likely to default on their student loans.
Dynarski points out that borrowing is highest for graduate school students; a fact we have pointed out before. Although black students borrow more than students of other races, and I believe borrowing should be done as mindfully as possible, it is true that graduate degrees increase earnings; though how much is determined by what a student studies in grad school (to boost earnings, it’s almost always better to pursue a STEM field on the graduate level, no matter what you studied in undergrad).
Dynarski points out that workers with graduate degrees have made the greatest income gains: Their inflation-adjusted earnings have nearly doubled since 1964. She also notes that, despite their high indebtedness, only 7% of graduate borrowers default. In other words, they are earning more and can afford to pay off their debt.
The real problem of student debt lies with those students who drop out before graduating. They may have borrowed small amounts, but without the degree they won’t earn high wages, making it much harder for them to pay off even their small debts. According to the post, among students who owe $1,000 to $5,000, 34% went into default; only 18% of students who borrowed more than $100,000 failed to pay back their debt. Dynarski writes that this is where the serious problem with student debt lies; most four-year college graduates are doing well: their unemployment rate is only 2.6%.
The writer concludes that borrowing less isn’t the answer, since it is borrowers of relatively low amounts that are defaulting on their loans. Instead, she mentions making greater use of income-based repayment options that cap repayment at 10% of income and forgive any balance after 20 years of consistent monthly payments.
Unfortunately, Dynarski notes, only 19% of Direct Loan borrowers are enrolled in an IBR option, and suggests that the required annual “round of complicated financial paperwork” may be to blame—comparing it to the Free Application for Federal Student Aid, or FAFSA, the complications of which shut out the neediest students. IBR options may also be too complex to help students who need it most.
College repayment needs its own solution, Dynarski writes, separate from attempts to reduce the price of attending college. Using an IBR option as the default is one solution she suggests, and notes that the Institute for College Access and Success recommends automatically enrolling borrowers who fall behind into an income-based plan.