The blog of the Urban Institute
October 18, 2019

What Should We Be Doing about Student Loans?

October 18, 2019

The American system of financing college might not be as broken as the headlines make it seem.

For lots of Americans, college is a great investment and the system is working well. But for many others, particularly low-income and African American students, the net gains from college are undermined by the struggle to repay student debt. Experts speaking at the Brookings Institution last week agreed that the solution is not necessarily to blow up the system, but rather to make sure that students are pursuing high-quality degrees and enrolling in repayment plans that meet their needs.

A college degree has long been viewed as a ticket to the middle class, and the evidence supports this view. College graduates are more likely to be employed, have a higher quality of life, and earn an average $500,000 more (PDF) over their lifetimes than their peers who didn’t attend college.

Students who pursue a degree that they never finish are three times more likely than those who graduate to default on their loans. Undergraduate, African American borrowers are more than two times more likely to borrow the lifetime maximum (PDF) than white, Hispanic, or Latino borrowers. Borrowers from low-income families are likely to be earning less (PDF) than their middle- and upper-class peers 10 years after enrolling in college, further limiting their ability to repay student loans.  

“We clearly have too many student loan borrowers who regret their choices, who feel like they were fooled or misled or burdened by the loans they took out,” remarked Adam Looney, Joseph A. Pechman senior fellow of economic studies at the Urban-Brookings Tax Policy Center. “We make them loans that they’ll be unable to repay, and we encourage students to take us up on that offer.”

By reducing (PDF) lending to poorly performing schools—those with high loan default rates, low completion and job placement rates, and weak outcomes for low-income students—policymakers and administrators can eliminate the worst institutions from student loan programs.

However, Dubravka Ritter, a senior research fellow at the Consumer Finance Institute of the Federal Reserve Bank of Philadelphia, reminded colleagues that policymakers must be careful to ensure all who want to pursue college degrees still have the opportunity.

Matthew Chingos, director of Urban's Center on Education Data and Policy, noted that there’s “a balance to provide access, but not access to bad things.”

Experts also agreed that a single, income-driven repayment (IDR) plan could both help borrowers stay on top of their student loan payments and prevent taxpayers from having to bail them out. IDR plans allow borrowers to pay a portion of their discretionary income each month toward their loans, with forgiveness after a certain number of years for students whose incomes have remained too low to support repayment of their debt.

“For students who are early in their careers, or their earnings are lower than they will be, or are temporarily unemployed, it helps them weather a period of their lives when they’re not earning as much as they will later,” Looney said.

Experts discussed the possibility of automating enrollment into IDR plans because the plan is not as successful “if it becomes a program that borrowers only use when they’re in distress,” according to Ritter.

What about making college free and forgiving student debt?

Sandy Baum, nonresident senior fellow for Urban’s Center on Education Data and Policy, shared research demonstrating that undergraduate students paying zero net tuition are still borrowing—and at nearly identical rates as borrowers paying tuition. 

Baum’s research also demonstrates that 6 percent of borrowers owe one-third of the outstanding debt. These borrowers have a lot of debt, but in most cases, this is because they’ve received a lot of education and have earned multiple degrees that will ultimately allow them to repay it.

“The debt is actually very concentrated among upper-income households,” emphasized Baum.

Experts agree that policy solutions should be focused on helping the borrowers who are struggling the most. More research is needed to understand why this student debt disproportionately affects low-income and African American borrowers so that policymakers can implement policies that encourage Americans to continue to invest in a college education.

Photo by Aaron Hawkins via GettyImages.

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As an organization, the Urban Institute does not take positions on issues. Experts are independent and empowered to share their evidence-based views and recommendations shaped by research.