Student debt 101: dearth of data fuels common misperceptions

As this year’s crop of college graduates don their caps and gowns and listen to inspiring commencement addresses before embarking on uncertain futures, they’ll also hear a lot about the consequences of the large debts most of them amassed attaining a degree.

Such as: student loan debt is a drain on the economy. Debt prevents young adults from buying homes, starting families and saving for retirement. It is so high, recent graduates are discouraged from starting small businesses and gaining financial independence.

While provocative, none of these statements is entirely true. In fact, statements like these create more confusion than clarity about the student debt “crisis.”

Yes, outstanding debt has increased remarkably over the past decade – up threefold since 2005 to more than US$1 trillion. Yes, tuition is rising faster than family income, and more students borrow than ever before. And yes, many students struggle to repay their loans.

However, there is a wide degree of variation in the average student loan experience. And it is difficult to sort out causal claims in student loan research given the data and methodological challenges we face as a field.

Current research on student debt

We have a long way to go before we can say with any degree of certainty that debt alone (and not some other factor) is causing the negative outcomes typically attributed to student borrowing. This is inconvenient because policy debates are ongoing and intensifying around the topic, but we just don’t have solid academic research to guide the conversation. In fact, we don’t even have solid agreement on the nature of the student loan “crisis.”

Some researchers argue students can shoulder even more debt because the financial returns on education are so vast. From this perspective, we do not have a borrowing crisis – we have a repayment crisis, as argued by researchers at the Brookings' Hamilton Project. To fix it, policymakers should make repayment programs that are more responsive to students’ incomes.

Other researchers argue that financing college on credit discourages working-class students and students of color from pursuing higher education. From this perspective, we have a debt crisis that reinforces unequal opportunities to education. The fix? Policymakers should avoid condemning students to debt in the first place.

Of course, these perspectives overlap, but they illustrate the basic differences we see in the literature: studies either focus on “who borrows” or “who repays.”

Who borrows student loans

To understand who are the primary borrowers of student loans and struggling to repay, let’s consider a few facts:

1. Debt disproportionately affects students of color and low-income students. Studies consistentlyshow students of color and low-income students borrow the most and at the highest rates. Only recently have researchers found that debt is problematic for middle-class families. When debt was a problem only among low-income and minority students, it did not grab media or policy headlines like it does now that the middle class is affected.

2. Fewer than half of all undergraduates borrow federal loans. Often missing from debt conversations is the fact that fewer than half of all undergraduates (around 40%) borrow in the first place. This percentage has risen over time and varies depending on where students enroll. Those attending for-profit colleges are most likely to borrow, while community college students are least likely. Researchers at The Institute for College Access & Success report that about 70% of students borrow, but this figure is only for bachelor’s degree recipients and not the entire undergraduate population.

3. Most borrowers owe less than $15,000. While media outlets like to run stories about borrowers with six-figure student loan debts, these are extremely rare cases: less than 4% of all borrowers. The federal government places caps on the amount of debt students can borrow, and students who earn degrees (or attend graduate school) tend to borrow the most. Researchers urge us to think about borrowing in relation to future earnings and take a lifecycle approach to financing, where educational benefits and costs are realized over the course of several years.

Who struggles to repay

1. Most borrowers are not paying down their debts. Half of all borrowers are either delinquent, in default or in a repayment plan that makes their balances rise instead of fall. Due to data limitations, researchers know almost nothing about these borrowers. One policy response has been to expand income-based repayment plans, but we don’t even know who participates in these programs or whether they help borrowers avoid default.

2. “Non-completers” have the toughest time repaying. Leaving college with debt but no degree only increases the chances of defaulting. Without a credential, borrowers struggle in the labor market and struggle paying off even small loans (most defaults occur on relatively small loans). Research often focuses on repayment burdens of degree recipients when it should focus more attention on these non-completers.

3. Default is not a pre-existing condition. Twenty years ago, researchers argued that borrowers would default no matter which college they attended – default was simply a “pre-existing condition.” New research shows the opposite: even after accounting for students’ backgrounds and academics, their college – especially if it’s for-profit – is one of the strongest predictors of default. However, we know very little about the most effective campus practices for preventing default in the first place.

What we still don’t know

Research on the causes and consequences of student loan debt is still in its infancy. This summary is by no means comprehensive but should help illustrate that we simply do not have good enough data or good enough theories to explain how loans affect students’ behaviors.

Until we gain a better understanding of these fundamental issues, we should remain skeptical of headlines on the impact of student loan debt – they often create more confusion than clarity.

Nick Hillman has received funding from the Lumina Foundation and Is associate editor of the Journal of Student Financial Aid.