When any debt (including college debt) is too much

Lower-income students are amassing ever greater debt

There’s no question that recent graduates are leaving college with more student loan debt. More students are taking out loans and they’re borrowing larger amounts. But apocryphal stories about students owing $100,000 or more coming out of college don’t represent the reality for most borrowers.

In 2015, roughly two-thirds of student loan balances were $25,000 or less. Fewer than 5 percent owed more than $100,000. However, this 5 percent of borrowers accounted for 30 percent of total debt.

Compared to other debt—mortgage, credit card, auto—student loan debt has increased at a higher rate in the last several years. More significant is the fact that, during this time, student loan debt has increased at a far faster rate for lower-income borrowers.

Borrowers from areas with average incomes of less than $40,000 had five-year default rates of 35 percent, compared to 13 percent for those with incomes of more than $80,000. In addition, repayment and default rates differ significantly by loan balance amount.

The Federal Reserve Bank of New York (NY Fed) reports that 5-year default rates on balances of up to $5,000 were just over 31 percent. This compares to 17 percent for balances of over $100,000.

Student borrowing also varies significantly by institution type. According to Fortune, students at for-profit colleges accounted for 35 percent of defaults. This is despite the fact that students at for-profit colleges account for just 26 percent of all borrowers.

These students are the most susceptible to unemployment and underemployment, raising their risk of default.

Education more important than debt

The steep growth in college costs, driven largely by reduced state spending, has contributed significantly to increased student loan debt.

But, notes the NY Fed, “reductions in state spending on higher education have resulted not in a decline in schooling but instead on increased student loan debt. As college costs increase, American students do not forego education, but instead amass more debt.”

As noted, the burden of increased debt falls disproportionately on lower-income students. Many colleges and universities are seeing increases in the number of new students with high levels of demonstrated financial need.

Easing the burden

There are a few hopeful signs on the horizon, however. Recent programs designed to ease the student debt burden for new graduates include:

  • Loan repayment assistance as an employee benefit. Some employers are beginning to offer repayment assistance for student loans as a part of their benefits packages. Forbes, Time and other media outlets have recently reported that companies like Fidelity, Penguin Random House and Staples are now offering to pay $2,000 or more per year to help employees pay down their student loan debt.
  • State assistance for mortgage/student loan payment. Last year, Maryland created a program that helps pay down student debt for some first-time home buyers. Rhode Island’s Grad Grant Program provides down payment assistance for first-time home buyers who completed a degree within the last three years. And a similar program has been proposed in the Ohio legislature.
  • Income-based repayment. Student loans with repayment terms that are contingent on income have been around for several years. The Income-Based Repayment (IBR) plan currently available from the federal government requires borrowers to pay 10 percent of their discretionary income each month, with remaining debt forgiven after 20 years.
  • College and university efforts to improve affordability. Ohio State recently announced an initiative to cover the full cost of tuition and fees for Ohio residents who qualify for a Pell Grant by filling whatever gap remains after federal, state and other aid is awarded to the student.

While it’s encouraging that institutions, employers and government agencies are beginning to take action to address increased debt loads, greater attention should be paid to the disproportionate impact the trend has had on low-income borrowers and students who attended for-profit colleges. 

Bill Berg is an enrollment management consultant at Ruffalo Noel Levitz.

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