The student debt burden and its impact on racial justice, borrowers, and the economy

On Looney presented this testimony to the U.S. Senate Committee on Banking, Housing, and Urban Affairs’ Subcommittee on Economic Policy.

Executive Director, Marriner S. Eccles Institute, University of Utah

Federal student loans impose a crushing burden on many borrowers, particularly those who enroll in programs where most students don’t finish, programs where most graduates are unable to find a job, or programs where debts incurred are unpayable even with a good-paying job. Because of failures in federal lending programs, millions of Americans are drowning in student debt. The borrowers who struggle are disproportionately from lower-income families, first generation students, and students of color. And many more Americans miss out on the economic opportunities a college education provides out of fear of its cost.

But that is only part of the story. Most borrowers, like college and graduate students in general, earn more, are better educated, live longer, are more likely to own a home, and come from more affluent backgrounds than other Americans. 1 Most student loans finance high-quality investments that boost borrowers’ earnings and economic health. As a result, most debt is owed by well-educated graduates, in higher-income households who have the means to repay their loans.

In short, the economic burden of student loans varies enormously. The white-collar executive with an MBA, for example, is not in the same boat as the for-profit school dropout struggling to find a job. That means that widespread or universal policies to reduce student debt burdens are regressive and disproportionately benefit well-educated, high-income households, expanding inequalities between more and less educated Americans.

The high cost and regressive effects of across-the-board loan forgiveness can be reduced by targeting relief to those in need. For example, income-driven repayment plans reduce or payday loans Desoto bad credit suspend payments to borrowers whose incomes are low or debts too high and offer eventual forgiveness. Today’s income- driven plans are flawed and need fixing. But it is essential to get them right because even under the most expansive free-college plans, many students would continue to need to borrow to cover living costs while enrolled, or to attend private universities, or graduate and professional schools. A sustainable solution to the student loan crisis requires not just addressing the debts of past students, but ensuring that future borrowers don’t wind up in the same circumstances.

The Characteristics of Student Loan Borrowers

For background, more than half of student debt (56 percent) is owed by households with a graduate degree. 2 That’s not because most Americans have a graduate degree-only 13% do. 3 It’s because programs where students borrow large amounts are mostly professional degree programs like MBAs, law school, or medical school. Indeed, a disproportionate amount of student debt is owed by borrowers at a handful of elite colleges with prestigious graduate programs that charge astronomical tuition. 4 While we hear about the struggles of borrowers who owe more than $100,000, the reality is that only 7% of borrowers owe that much, and many of them are white collar professionals who can afford to repay their loans. 5

Most borrowers use student loans to finance high-value investments. In 2019, 56% of BA degree recipients from private nonprofit and public four-year colleges graduated with debt; they had had an average debt of $28,800. 6

After college, the typical bachelor’s degree recipient earns significantly more than a worker with only a high-school diploma-about $1m more over a career. 7 Today, in the midst of this terrible pandemic, while 6.7 percent of high school graduates are unemployed, only 3.7 percent of college graduates are (and the rate is even lower for those with advanced degrees). 8 That helps explain why about 36 percent of all student debt is owed by individuals in the top 20 percent of the income distribution. 9