↳ Non-repayment

November 18th, 2020

↳ Non-repayment

The Student Debt Crisis is a Crisis of Non-Repayment

Think of the student debt crisis as an overflowing bathtub. On the one hand, too much water is pouring in: more borrowers are taking on more debt. That is thanks to increased demand for higher education in the face of rising tuition, stagnant wages, diminishing job opportunities for those with less than a college degree, and the power of employers to dictate that would-be hires have the necessary training in advance. On the other hand, the drain is clogged and too little water is draining out: those who have taken on debt are increasingly unable to pay it off.

The last post in the Millennial Student Debt project used a new database of student debtors and their loan characteristics (matched to demographic and economic data in the American Community Survey) to document the former phenomenon, both in aggregate and particularly as it pertains to disadvantaged communities along multiple dimensions. Specifically, it showed the rapid growth of student debt levels and debt-to-income ratios in the population at large, among people of all income levels. But this growth is concentrated among non-white borrowers, who have higher debt conditional on income and whose increased indebtedness over the past decade-plus is greater than for white borrowers. That racial disparity is particularly pronounced in the middle of the income distribution. It also showed that student-debt-to-income ratios have grown fastest in the poorest communities since 2008. This post uses the same data to document the latter: non-repayment by student loan borrowers is getting worse over time, especially so for non-white debtors.

Over the last ten years, as outstanding student loan debt has mounted and been assumed by a more diverse, less affluent group of students and their families than was the case for prior cohorts, a common policy response has been to wave away its impact on wealth, both individually and in aggregate, by saying that the debt finances its own repayment. First of all, so the claim goes, student debt finances college degrees that in turn pay off in the form of higher earnings, enabling debtors to repay. Second, expanded allowance for income-driven repayment (IDR), by capping debt service as a share of disposable income, eliminates the worst forms of delinquency and default. The first claim says that repayment is inevitable, the second that it need not take place. Both claims together, however, serve to rationalize higher debt, higher tuition, higher attainment, and the forces driving all three.

IDR was designed to address a liquidity crunch: since students are graduating with more debt, they may not earn enough immediately upon entering the workforce to pay it down. That failure of earnings to align with debt service obligations means that a program to defer those obligations until earnings are realized would ameliorate delinquency and default, at the cost of capitalizing unpaid interest into a higher principal balance. The creation and expansion of IDR programs in the early 2010s did indeed serve to stop the growth of delinquency by the mid-2010s and reverse it, to the point that the share of accounts delinquent now is lower than it was before the Great Recession, despite the amount of debt and the number of debtors having increased continuously since then. For that reason, many higher education policy analysts have proposed further expanding the program.

But IDR programs will never be successful as a solution to the student debt crisis, because they’re designed to address a liquidity problem rather than the real problem—solvency. The problem with student debt is a problem of wealth—students and their families are taking on debt because they don’t have enough wealth to afford increasingly-costly, increasingly-mandatory higher education. The debt then itself exacerbates wealth disparities that the higher education it “paid” for doesn’t rectify.

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