The Student Loan Non-Repayment Puzzle

There is no shortage of statistics about troubles in the student loan market. Total outstanding debt now tops $1 trillion, up from approximately $350 billion just ten years ago; around $100 billion of those loans are in default; of all the loans in repayment, about 31 percent are severely delinquent; “forbearance” is the fastest growing repayment status. Are these all symptoms of a student debt “affordability” crisis? Not so fast.

That is far too simplistic of a diagnosis, and much too narrow. In a good number of cases, it’s probably even flat-out wrong. And it presupposes one set of solutions: more generous repayment terms, lower interest rates, and greater loan forgiveness. The White House made the case for exactly those policies in a recent paper on student loans that uses some variation of the word “affordable” 23 times.

Consider, however, that the federal student loan program already includes many protections designed to assure all borrowers a minimum level of affordability on their loans. Specifically, the program lets them postpone, reduce, defer, and eliminate payments all together. All borrowers can use Income-Based Repayment to avoid default, which caps payments at 15 percent of adjusted gross income and allows an exemption for at least $17,000. For recent borrowers (2007 and later), the cap is set at 10 percent of income. Forbearances can be granted for up to three years over the phone with hardly any eligibility criteria or need for documentation. Graduated repayment options let borrowers make low and interest-only payments for years; and balances over $7,499 qualify for extended terms (between 12 and 30 years, depending on the balance) that lower payments. Borrowers can discharge loans if they become disabled.

There are other points to suggest that affordability isn’t the only explanation for the student loan (non)repayment trends.

There are other points to suggest that affordability isn’t the only explanation for the student loan (non)repayment trends. A recent paper by the Brookings Institution’s Beth Akers shows that delinquency is most frequent when borrowers owe less than $100 a month, and as the amount approaches $0, the tendency for the borrower to make a late payment increases. Conversely, there’s no increase in a borrower’s tendency toward delinquency as the amount owed each month increases from $100 all the way up to $500. A separate Brookings paper out just this week suggests that student loan payments make up no larger a share of household budgets for low- and middle-income families than they have since 1992.

And what should we make of the fact that loan servicing companies indicate a large share of defaulters never make a single payment? Surely the explanation is not simply that they cannot afford it. Then there is the National Consumer Law Center report  from a few years ago which indicates many borrowers who default do so, not necessarily because they cannot afford the payments, but because they feel that they should not have to repay.

Despite these findings, and the federal loan program’s many safety nets, the affordability explanation for the troubling trends in student loan non-payment still dominates the policy debate. In response, New America is working on a project to develop a better understanding of student loan default and delinquency – and to surface what explanations besides affordability may be behind the troubling statistics. As the centerpiece of this work, New America has contracted with a firm to conduct a series of focus groups around the country to interview borrowers on the topic. We will be analyzing and releasing the results later this year with an eye toward what reforms policymakers ought to make to the federal student loan program.

We’ve also been surveying experts, advocates, and market participants for their take on this issue. That and other work has yielded a number of explanations about student loan payment problems that seldom appear in media stories or in policy discussions – although it’s nearly impossible with the information available to know what share of the non-repayment problem they explain. We’ll conclude with a list of these explanations, from the borrower’s perspective, in no particular order. As we explore these alternative explanations, we’d love to hear from you if you think we missed some, or if you have a slightly different take on some of the below statements.

1. My payments seemed high, and when I looked into what options I had to reduce them, the process was too complicated and there was too much paperwork. I just did nothing.
2. My school ripped me off and the degree is worthless, so I am not paying my loan. That school didn’t hold up its end of the bargain so I am not holding up mine.
3. It’s not that I can’t afford the loan per se, I have other more important expenses and bills to pay first. Besides, the consequences for not paying a student loan are less than they are for other bills like my mortgage or car payment.
4. I needed to make lower payments for a while, but I didn’t know there were options that would allow me to do that.
5. I didn’t know I had a loan so I never made payments.
6. I applied for a benefit (deferment, Income-Based Repayment, disability discharge etc.), but I didn’t receive it for some reason, so I stopped making payments anyway.
7. I owe much more than I borrowed and I think that’s unfair; I refuse to pay.
8. I didn’t finish my program, so I assumed I didn’t need to pay, don’t think I should have to, or I figured I could ignore it for a while.
9. My degree or credential didn’t help me find a job in my field. Why should I have to pay back the loan?
10. Sure, I had the money to pay, but I was facing emergencies in my life and repaying my student loans wasn’t a priority.
11.  I enrolled in school just to get the loans so that I could use them for living and other expenses. I wasn’t really pursuing a degree or planning on paying the money back.
12. I figured I’d deal with paying the loan later, but by the time I tried to do something about it, the balance had grown so much, I gave up. I can’t stomach paying that much more than I borrowed, even though, yes, I guess I can afford it.
13. I knew I had a loan, but no one contacted me about repaying it, so I let it go.
14. I was so surprised by what I owed in the end, I felt like I was tricked and felt it unfair that I should repay.
15. I borrowed so little, I figured I could just ignore the loan, or at least put it off for a while.