Barking up the wrong tree with the student debt crisis

For years, politicians across the spectrum have decried rising debt levels among college students. And it’s true: A new report from the Institute for College Access and Success finds that more students are relying on loans to pay for college, and they’re borrowing more. In politicians’ narratives, high debt amounts are dangerous because they lead students to default on their loans. But if what we’re really concerned about is the effects of student debt, we’re barking up the wrong tree by looking at the most deeply indebted students.

In fact, data from a survey conducted by the National Center for Education Statistics (NCES), which follows students who started college in the 2003-04 academic year and checks in with them three and six years later, show that students who default on their loans are much more likely to have lower amounts of debt than the average borrower. While students in the survey who graduated with a bachelor’s degree and borrowed federal student loans took out more than $16,000, the average defaulter holds far less — around $6,000.

{mosads}While defaulters having lower debt balances may seem counterintuitive to our narratives about the dangers of student loans, it makes sense when you consider what those lesser balances represent. A defaulter with a lower balance probably ended up that way because he either never graduated from college, or earned only a certificate. He simply did not attend school long enough to rack up the same amount of debt as a four-year degree-holder. At that point, the lower debt level is an indicator of less time spent in college, more than anything else.

All of that is evident in the same survey, which also found defaulters were disproportionately concentrated among students with less than $10,000 in student loans. Those low-debt students were almost four times likelier to default on their federal loans than borrowers with more than $10,000 in debt. (One caution is that the survey may understate default rates among bachelor’s degree completers, given that it only tracks students for six years after entering school; but other surveys confirm instances of default among those students are relatively rare even later.)

Though low-balance borrowers make up 52 percent of those with debt, they accounted for 84 percent of those in default. In fact, more than half of the low-debt defaulters borrowed less than $5,000 in federal student loans. Fewer than 5 percent of students had as much debt as the typical bachelor’s degree-completer with loans in the survey.

High-debt borrowers, meanwhile, tend to be college graduates. And almost none of them defaulted on their loans. There’s no doubt that the high monthly payments owed can make it hard for college graduates to afford other bills, like rent. But that’s a problem distinct from loan default.

For defaulters, other circumstances may be contributing to their inability to repay more so than the particular size of their debt. According to the survey, their household incomes are lower, on average, than among students in repayment, and they are more likely to have children or other dependents living with them. Given their lower-than-average earnings, it’s no surprise that when the rent, car payments and other household bills come due, they tend to take priority over student loans.

All this suggests that the policy prescriptions already in place may not be enough to help students who default on their loans after leaving school. Income-based repayment (IBR) can help lower monthly payments — but the average balance of all direct loan borrowers enrolled in income-based plans is more than $48,000. For the low-balance students who are more likely to default on their loans, just introducing IBR and hoping they enroll won’t be enough.

It’s clear that students, families and policymakers share substantial, and well-deserved, anxiety over student loans. But as we pursue solutions to make financing a college education easier, policymakers need to be clear that there are two separate, sometimes unconnected, issues at hand: struggling to repay, and defaulting on the loans. Given the harsh consequences of default for borrowers, it should be the more urgent priority. That means considering those students’ experiences in college — not just their debt levels.

McCann is a policy analyst with the Education Policy Program at the New America Foundation. Follow her @claremccann.