Student loans hit us when we’re most vulnerable
Millions of Americans — in fact, more than 69 percent of all households — have so little in savings that they cannot withstand a single financial shock without experiencing hardship. Last week I wrote about the proliferation of medical debt and how medical emergencies can become financial emergencies: 1 in 4 Americans experienced an unplanned medical expense last year, at an average cost of $2,500. At the same time, just 15 percent of households save for future medical expenses; perhaps it is unsurprising that 37 percent cannot afford a medical bill greater than $100 without going into debt.
This week I will be shifting the focus from causes of financial shocks — emergency medical expenses, unplanned car and home repairs — to discuss sources of financial precariousness and financial stress. One such source is the rise of education-related debt in our country.
Outstanding Student Loan Debt, 2007–2017
As of the end of 2017, outstanding student loan debt reached $1.5 trillion, a steady increase from the $600 billion owed at the end of 2007. The median debt owed was $17,000, the average $33,000, according to the Federal Reserve Board’s Report on the Economic Well-Being of U.S. Households.
Why the skew between the median and average? The average amount borrowed for higher education doesn’t follow a normal distribution. Among those with less than a bachelor’s degree, the average debt was $10,000; among bachelor’s and graduate degree earners, the average was $25,000 and $45,000 respectively. And although just 7 percent of all student debt holders[1] had more than $100,000 in debt, 23 percent of graduate degree earners carried $100,000 in student debt.
This asymmetry reveals a paradox in student lending. Those students who take out substantially more debt also have a greater ability to pay it back. In fact, the average loan in default has a value of $14,000, whereas the average value of a loan in good standing is $22,000.
Why then, is it that student loan holders who owe the least have the most difficulty with repayment? Modest debt holders face three types of challenges. The first of these hurdles is that students are hit with repayment at the most challenging time in their lives. Right after graduation, most students enter a standard, 10-year repayment program for a degree that will benefit them over the course of their lives. There has been some innovation in the space, with the introduction of income-based repayment, but those courses typically charge higher interest rates and can result in debt holders paying substantially more in interest than the standard-term loan (though for students who qualify for loan forgiveness, this can be a good deal). About 1 in 5 debt holders default on their debt at some point, including 28 percent of debt holders ages 21 and younger.
Modest debt-holders face two other hurdles that lower their earnings ability, thereby making repayment difficult: not finishing their degree and attending low-quality educational institutions. The returns to higher education are well-documented: over the course of their lives, bachelor’s degree holders earn $1.5 million dollars more than associate’s degree holders, and the gap is even wider for those who did not complete a degree at all. Yet for a whole host of reasons that disproportionately affect low-income students, students stop their higher education studies. But that doesn’t take them off the hook for they debt they owe. Owing thousands of dollars without the means to repay it means that only 1 in 3 noncompleters had started repaying their student loans three years after leaving school, compared to 60 percent of all graduates.
Student Loan Repayment Rate by School Type, 2010–11 and 2011–12
Students who attend for-profit institutions have similarly poor outcomes. At these schools, where the quality of education has been called into question, Pell Grant borrowing is higher, repayment is lower, and default rates are substantially higher — three to five times the rate at 4-year and 2-year not-for-profit schools, respectively. Most of the increase in student loan default is driven by borrowing at for-profits, 2-year schools, and other nonselective institutions.
Thus the rise in student debt, particularly among non-graduates and graduates of for-profit schools, is a troubling development for people already living on the edge. Student debt is already the largest source of nonmortgage debt in the United States. Between paying down student loans, rent or mortgage, and other monthly expenses, many people might not have the savings to set aside should they experience an emergency.
At PayShield we are developing a low-interest credit solution to help hard-working people when they experience a major financial shock. Too often people are forced to turn to expensive personal loans or credit cards when they experience a shock, adding to their already significant education-related and other debt. In my next post I’ll explore more sources of these shocks and make the case for our novel approach to reducing the pain of these shocks. Because the last thing a family should worry about when they experience an emergency is how they will pay for it.
[1] You will notice I use the term “debt holder,” which may seem a bit unwieldy. This is a broader term that includes graduates as well as non-completers of higher education degrees, both of whom owe student debt upon termination of schooling, regardless of their graduation status.
