Current Issue

Understanding Student Debt: Who Borrows, the Consequences of Borrowing, and the Implications for Federal Policy

Special Editors: Laura W. Perna , and Nicholas Hillman

Vol. 671, May 2017

Is student debt a policy problem? 41.5 million Americans owe more than $1.2 trillion in outstanding federal loan debt and the debt load carried by American college-goers and their families has tripled over the past decade.  But less than half of all undergraduates take out federal loans annually, and the median loan balance for all borrowers is about $14,000 – a significant sum but not a “crushing” debt for many borrowers, particularly for those who attain degrees and enjoy the significant economic returns that post-secondary education can bring.

There is no “typical” experience of student debt felt by college-goers and their families, and no single problem shared by all borrowers. This makes policymaking in higher education challenging, because it’s hard to know exactly how student aid should be directed and administered in order for it to have the greatest possible public benefit.

This volume of the Annals presents new evidence on who borrows, why they borrow, and the consequences of student loan debt.  We also present new work on federal loan repayment programs, focusing on default and repayment rates, the costs of income-driven repayment and loan forgiveness programs, and strategies for reducing repayment burdens. This collection of papers advances our understanding of a wide range of issues, including debt aversion, financial literacy, simplifying the aid application and loan repayment process, costs of income-driven repayment, debt burdens upon graduation, and federal accountability and consumer protection policies. Some key insights and findings follow.

Who borrows?  An underlying theme is that the complexities of the federal loan system can make the borrowing and repayment process unnecessarily burdensome. Some students may even avoid college altogether because of these complexities and/or an aversion to debt.

  • First-generation students are not only more likely to apply for financial aid, but they also are more likely to borrow and take out larger loans than their peers. But a dollar of grant aid is associated with a $0.62 reduction in debt among these students, suggesting that federal grants could be a tool for reducing debt among first-generation students.
  • For-profit colleges have a unique role in contributing to the growth of student debt. Students attending for-profit schools borrow more, and have poorer educational and labor market outcomes. Worse, these students are disproportionately from underrepresented groups (e.g., minority students, veterans, lower-income).
  • A study on attitudes toward debt in the UK shows that students from working class families are likely to be debt averse and therefore less likely to borrow for college than other students. A U.S.-based study, though, shows that debt aversion might be overcome as students gain knowledge about the loan system.

The consequences of borrowing.

  • We are still unsure of how debt effects progress toward college degrees. Loan debt seems to discourage community college students from earning more credits, thus discouraging them from completing their degrees, but there is wide variation across the states and the measured impact is imprecise.
  • Student loan debt may not be as closely tied to homeownership as some have come to believe. Students who pay off college debt rapidly are not more likely to be homeowners, but they do make higher annual salaries.
  • The financial aid Shopping Sheet – a low-cost intervention designed to reduce reliance on loans for students attending poor-performing community colleges – did little to induce students away from those schools.

Loan Repayment and Implications for Federal Policy

For future federal student loan policy to be successful, it will need to be revamped in ways that are relatively nuanced, encouraging (among other things) enrollment and persistence to degree completion among students who might not otherwise go to college; protections for taxpayers and students against investments in low-performing colleges; efforts to make federal loans programs more understandable to students who need them; and reduction of the risks associated with student loan non-repayment. The volume’s conclusion is a detailed walk through this complicated policy terrain, including a call for the federal government to increase the availability of data for research that can improve our understanding of the optimal policies and practices for achieving these goals.

This work generally supports the argument that America is more burdened by a repayment problem than a debt problem.  For example, evidence here supports the idea that economically disadvantaged college students struggle more with repaying loans than going into default, and that they benefit from longer repayment terms. But Federal efforts to manage the repayment problem may increase the fiscal burden borne by taxpayers.

Theses analyses also show that federal regulators will also face a paradox as they try to increase accountability among higher education institutions: efforts to lower colleges’ loan default rates seem to work against efforts to improve repayment rates.

Income driven repayment options are attractive in theory, but demand technocratic implementation. One chapter here assesses the Australian experience with income-contingent loans (a program that does not include any loan forgiveness) and other alternative loan designs, reviewing the risks associated with loan-based financing and offering a range of policy solutions for ensuring against those risks.  Another study is a comprehensive historical analysis of the U.S.’s experience with income based loans. Another chapter focuses on loan repayment itself, estimating the costs associated with income-driven repayment plans and loan forgiveness programs: these programs do tend to help borrowers repay and pursue careers, but they also shift risks associated with non-repayment from the borrower to taxpayers.

From the Archives

The Crisis of Democracy
Vol. 169, Sept, 1933
Special Editor: Clarence Callender

From the Forward

At a time when political institutions are the subject of such wide-spread interest, when old values are being critically examined and new concepts developed and accepted, it seems appropriate to offer a volume of The ANNALS in which certain basic aspects of government are reconsidered and subjected to new evaluations.  A short time ago the workings of our democracy engaged the active interest of relatively few people; today, for diverse reasons – mostly economic – the policies of the government and the effectiveness with which they are carried on concern and interest a great many.  Engaged as we are in a series of new experiments in political control of economic matters, the instrumentalities for exercising this control assume added importance.  There exists not only the need for combating the age-old evils of waste, extravagance, inefficiency, and corruption, but also the occasion for developing new means of controlling an ever-increasing part of our social life.  The state of contemporary opinion concerning these matters should prove both interesting and instructive.

This volume covers a wide range of subjects.  The aim has been to present points of view on certain broad aspects of government rather than to make an intensive study of any particular field.  The interdependence of each branch of government with the others is so intimate, and all touch us as citizens so constantly, that it seems worthwhile occasionally to survey the operation of the whole structure. While this treatment has the disadvantage of reducing the opportunities for presenting contrasting points of view on particular subjects, it is our hope that it will justify itself on the basis of greater general interest.