Has Student Loan Debt Reached A Crisis Point?

Federal student loan debt is nearly $1.4 trillion, more than twice as much as it was a decade ago.

Here & Now's Jeremy Hobson talks with Susan Dynarski (@dynarski), professor of public policy, education and economics at the University of Michigan, about whether the situation with student loans is a crisis.

On the current situation with student loans in the U.S.

"I would say that for the vast majority of college students and borrowers there's not a crisis, the loans are manageable. For a minority, a substantial minority, there is a crisis, and my concern is that we make sure we match any solutions that we create to those who are actually in crisis and not the majority who are not."

On the reasons behind student loan debt issues

"The default rates are quite high among those who have gone to for-profit colleges, who went to community colleges, who dropped out of college and have fairly low balances but they also have very low earnings. So, in our country, we have a pretty thin safety net and you can leave college with small debt. Typical debt is less than $5,000. But if you don't have much in the way of earnings, that can quickly snowball into an unmanageable amount once late fees start rolling in. So, students who are actually graduating with a B.A., who are borrowing around $30,000, they're actually paying back at a pretty good rate, as are graduate students."

"Education pays off over your entire lifetime, so it makes sense that you would be able to smooth the payments over a longer period."

Susan Dynarski

On how long it takes to pay off debt

"The standard repayment period is 10 years, but with forbearance, with people taking time out for unemployment or to go to school longer, it takes a little bit longer than that. In other countries, by the way, the standard length of repayment is far longer than it is in the U.S., and therefore it's considerably more forgiving. So, in other countries students are given 25, 30 years to pay off their loans and therefore they pay much less per month, which puts a lot less pressure on their finances when they're right out of college when their earnings are most unstable and lowest.

"I've been trying to persuade lawmakers to make a shift here [in the U.S.], and I think there is some thinking that we should have a shift. A principle of financial economics is that the period over which you pay for an asset should match the period during which the asset has a useful life. So, for a house, we don't pay for a house in 10 years. We pay for it over 25, 30 years. A car, well that's more like five years. Education pays off over your entire lifetime, so it makes sense that you would be able to smooth the payments over a longer period, and I think it's just by accident we ended up in a place where we were paying them over 10 years and now that's just become unsustainable."

On why student debt loan delinquencies and defaults haven't come down like other forms of borrowing

"Honestly I think we have a failure of servicing. While all of the loans pretty much that are put out now are federal loans, we rely on private banks to do the collecting, and the servicing of the loans has been highly variable. There are cases in which borrowers are never even contacted before they go into default. So fixing the servicing seems to be an important step in the road to improving student loans."

On how this outstanding debt could affect the economy

"I don't think it is a major threat to the economy. So sometimes student loans have been compared to mortgages and to the housing crisis. I don't think we're looking at a bubble where there's gonna be some meltdown in the market for college-educated labor. I think that for the people who are going into default, it's a hard hit. When you go into default on a student loan, your credit rating takes a hit. That means it's more expensive or perhaps impossible to borrow to get a car to get to work. There are employers that will do a credit check before they'll hire and won't hire somebody with bad credit. There are landlords that won't rent to somebody who has bad credit. And then there's phone calls that start coming and the psychological pressure of being harassed about your payments. So, I don't want to minimize the financial impact, but I do want to point out the sort of psychological impact on people's real lives when defaults occur."

On how the cost of schools affects student loan debt

"The increase in tuitions at public institutions, I would say, is contributing to the increase in debt, as is the rise in for-profit institutions. The typical student goes to a public school — 80 percent of undergraduates go to public schools. A minority go to for-profit schools and for-profits charge fairly high tuitions, and it is where a lot of the defaults are concentrated. For-profit schools attract students who traditionally had gone to community colleges: low-income, older students, first-generation students. As those community colleges have been under-funded over the years, students have been drawn toward for-profits and ended up with fairly high debts as a result. But the folks who go to Harvard, who go to Yale, who go to even University of Michigan, they're repaying it at very high rates. Their default rates are in the single digits, so they're not where the problem is, in part because it tends to be fairly wealthy students who go to those schools. And if they're not wealthy, many of those schools provide fairly generous scholarships that actually make those schools cheaper than going to, say, the local for-profit. So, this is a case where I think the headlines about the highest tuitions don't match up with where the problems actually exist in terms of student loan defaults."

"I don't want to minimize the financial impact, but I do want to point out the sort of psychological impact on people's real lives when defaults occur."

Susan Dynarski

On income-driven repayment

"There's a passel of income-based repayment programs right now, I think there's five or six. But the basic idea is that the payments you make for your loan are set as a proportion of your earnings. So instead of there just being a flat payment that's due every month, you instead pay as a percentage of your earnings. And this is a model that's been followed successfully in Australia, in England. It matters how you set it up. I mean, is it a reasonable percentage? In those countries, for example, a fairly generous set-aside in your income isn't used for payments, so once you get above about 50,000 in Australia, that's when you start paying, for example. Because the payment flexes with your income, that means if your income drops because your hours get cut, you lose your job — automatically you stop paying. So there basically isn't the concept of default. ... It's set up such that it's understood. That's the rule. You're not in default because the contract was if your earnings were too low, you weren't gonna be paying at all."