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Peeling Back the Onion on the Student Debt Crisis

April 20, 2020 BY Mark Haser

At a total of $1.6T (and counting), student loan debt is the second largest type of consumer debt in the US, behind only mortgage debt. Not only that, but the upward trend on student debt may be even more alarming than the debt itself. In 2010, there was $760B in student debt, which was equal to the amount of credit card debt.  For comparison, credit card debt now stands at just over $1T. With college tuition increasing at a rate approximately double that of core inflation, there seems to be no end in sight to this problem. Despite all of this, when you peel back the onion, the problem actually is not as bad as it seems.

 

As a country, we have a total of $1.6T in student debt across 45 million borrowers. This breaks down to an average loan size of $30K. For most people, a $30K debt burden is manageable.

 

Taken a step further, here’s the distribution of borrowers by the size of their outstanding loan balance:

 

Student Loan Balance

Number of Borrowers

Percent of Borrowers

$1 – $5,000     

8.5M

18.9%

$5,000 – $10,000

7.4M

16.4%

$10,000 – $25,000

12.3M 

27.3%

$25,000 – $50,000

8.6M

19.1%

$50,000 – $75,000

3.7M

8.2%

$75,000 – $100,000

1.6M   

3.6%

$100,000 – $150,000

1.3M

2.9%

$150,000 – $200,000

0.6M   

1.3%

$200,000+      

0.6M   

1.3%

 

As you can see above, the majority of borrowers (approximately 28.2M, or 62.6% of all borrowers) have loans of less $25,000. At the other end, there are a little over 2M borrowers (5.5%) with six-figure balances. What’s not shown is that most of these high-dollar loans are for law school, medical school, and other graduate programs that tend to correspond with much higher income trajectories.

 

Of the $1.6T in loan debt, $1.24T is in the form of federal direct loans. These loans are eligible for income-driven repayment programs and loan forgiveness. Income-driven repayment is exactly what it sounds like: loan payments that are based upon your income (and a few other factors like family size). They come in a variety of flavors:

 

Program

Total Loans Outstanding

Income-based Repayment (IBR)

$170B

Income-contingent Repayment (ICR)

$34B

Pay As You Earn (PAYE)

$100B

Revised Pay As You Earn (REPAYE)

$170B

 

In total, these income-driven repayment programs (with the potential for loan forgiveness) account for $474B, or approx. 30%, of all student debt. Not only do these income-driven payment programs make the loan payments manageable for millions of borrowers, but they also enable borrowers to make career choices that they otherwise couldn’t with market-rate loan payments.

 

It’s important not to forget that graduating from college comes with higher expected lifetime earnings—a gap that is widening (…a topic for another article). The average increase in lifetime earnings for college graduates over high school graduates is cited as $500K – $1M, depending upon whether you control for socio-demographic variables. Using the low end, most people would agree that taking on a modest amount in loans to make $500K more over your lifetime is still a worthwhile investment.

 

In this time of increased virtual/distance learning taking place, I can’t help but wonder how students may opt to make different choices for their higher education. For instance, if you can’t attend live classes, do you instead opt to take a year or two of virtual learning through a local community college at a much lower cost? And will schools finally be forced to compete on price for students without the enticement of “on-campus” life? Only time will tell.

 

Summing it all up

While the data and trends on student debt look terrifying at first glance, there are a lot of positive conclusions we can draw.

 

 Key Takeaway #1

Student debt is a BIG problem for a SMALL subset of borrowers. In particular, those who don’t graduate AND take on a large amount of debt while in school. Since these loans are near impossible to discharge in bankruptcy, it remains a serious issue that we need to address to ensure that borrowers don’t end up in this position in the first place.

 

Key Takeaway #2

Should we forgive student loan debt? In fact, we already do! All of the income-driven repayment (IDR) programs cited above come with loan forgiveness. With more and more students opting for such programs, it shouldn’t come as a surprise to anyone that total student debt is increasing; after all, many of the students on these programs make payments that don’t even cover the interest on their debt. After 10, 15, or 20 years (depending on the program), their remaining debt will be forgiven.

 

Key Takeaway #3

I think that if we want to quote a more accurate version of student debt figures, we should subtract all (or at least some!) of the debt that is slated to be forgiven in the future. It’s difficult to say what this figure looks like, only that it would be a lot lower than $1.6T.

 

Mark Haser, M.B.A., is a financial planner at Artemis Advisors. His areas of interest include retirement and education planning, risk management, and cash flow management.