NY Times: Why Students With The Smallest Debts Have The Larger Problem

New York Times:  Why Students With Smallest Debts Have the Larger Problem, by Susan Dynarski (Michigan):

Politicians who complain about college costs frequently cite two numbers: one trillion and seven million. Student borrowers owe more than $1 trillion, and seven million borrowers are in default, according to the latest Department of Education data.

It’s natural for people listening to the politicians to connect the two facts with a causal arrow: More debt leads to more default. But the reality is surprising: Borrowers who owe the most are least likely to default.

The reason for this strange pattern? The biggest borrowers tend to become the highest earners.

In particular, borrowing is highest for those who go to graduate school. Forty percent of new loans go to graduate students. Among those earning law and medical degrees in 2012, median debt (undergraduate and graduate school) is $141,000 for lawyers and $162,000 for doctors.

Those holding graduate degrees tend to handle higher debt because they earn more. Over the past 50 years, workers with graduate degrees have enjoyed the largest gains of any education group, with their inflation-adjusted earnings nearly doubling since 1964. Some struggle, of course: The Department of Education estimates that 7 percent of graduate borrowers default. But this default rate is far lower than the 22 percent rate for those who borrow only for their undergraduate studies.

This fact about loan defaults is one way in which the national conversation about student debt is at odds with the data. In many people’s minds, the so-called student-debt crisis revolves around graduates of selective colleges or graduate programs who run up six figures in debt.

But such borrowers aren’t the real source of trouble. The vast majority of bachelor’s degree recipients do very well. Only 2 percent of undergraduates borrow more than $50,000, and they also aren’t the ones who tend to have problems with their debt. ...

The approach of some countries, including England and Australia, is to link payments directly to income so that borrowers pay little to nothing during hard times. The United States also has income-based repayment options, but relatively few student borrowers — currently 19 percent of Direct Loan borrowers — are enrolled in them. The people who need these programs the most are not taking them up. ...

There are several proposals circulating around Washington by think tanks and policy advocates that would get more troubled borrowers into an income-based repayment plan. A coalition of student-aid organizations recommends making income-based payment the universal default option, as it is in England and Australia.

I have co-written a similar proposal, which also recommends extending the repayment period to 25 years, as is it in many countries. This allows for smaller monthly payments than the 10-year payment plan that is standard in the United States. The Institute for College Access and Success recommends keeping the standard 10-year repayment plan, but automatically shifting borrowers into an income-based plan if they fall behind on payments.

(Hat Tip:  Michael Simkovic.)