Investing In Higher Education: Benefits, Challenges, And The State Of Student Debt by The White House – Presenting with little comment besides for the fact that Obama is leaving having doubled student debt – he wants a legacy so now that he cannot reduce that number anytime soon (or maybe he can find creative accountants who can and/or forgive it via executive action) he is now saying student debt is a GOOD thing – we kid you not – below is an “academic study” on the topic. With obesity rates continuing to soar will the next study “prove” that eating lots of chocolate every day and not exercising at all is good for your health? In this world of Trump mania and student debt is good anything is possible.
Higher education is one of the most important investments individuals can make for themselves and for our country. Many students access student loans to help finance their education, and last year federal student loans helped 9 million Americans to make that investment in their futures. Typically, that investment pays off, with bachelor’s degree recipients earning $1 million more in their lifetime and associate’s degree recipients earning $360,000 more, compared to high school graduates. Society also benefits from these investments through such mechanisms as higher tax revenues, improvements in health, higher rates of volunteering and voting, and lower levels of criminal behavior.
At the same time too many Americans feel that college may be financially out of reach and are concerned about rising student loan debt. Student loan debt can be especially burdensome for those who do not graduate or who attend schools that do not deliver a quality education. However, unmanageable debt is not the only issue facing current and former students. Some individuals who could benefit from a high quality postsecondary education do not apply and enroll in college, under-investing in education and shortchanging their future.
Multiple factors have contributed to the challenge of ensuring that all students who could benefit from a college degree are able to attend a quality school, graduate, and then repay their loans on manageable terms after they graduate. These include rising tuitions; hardship caused by the Great Recession; complexities of the labor market; variations in program quality across the college landscape; and lack of information to help students make good college choices.
The Obama Administration has taken several steps to address these challenges. To help expand college opportunity, the President has doubled investments in grant and scholarship aid through Pell grants and tax credits, provided students and their families better and more accessible information about college costs and quality through the College Scorecard, simplified the application for federal student aid, and protected students from low-quality schools. To help borrowers manage debt after college, the Administration has also created better debt repayment options like the President’s Pay as You Earn (PAYE) plan, which caps monthly student loan payments at 10 percent of discretionary income.
While more work remains, we are starting to see these efforts pay off. Today, more than four out of five Direct Loan recipients with loans in repayment are current on their loans. Delinquencies, defaults, and hardship deferments are all trending downward, and nearly three million borrowers since 2010 have successfully accessed a pathway out of default through loan rehabilitation. To ensure student loans are manageable, the Administration has cut student loan interest rates, saving a typical student $1,000 over the life of loans borrowed this year. Additionally, more borrowers are making use of flexible income driven repayment plans that make it easier to successfully manage student debt after college, with nearly 5 million Direct Loan borrowers now enrolled in repayment options like the PAYE plan.
New data offer insights into the recent trends in student borrowing and repayment outcomes that build on our understanding of the overall health of the student loan portfolio, highlight areas of the student loan portfolio where Americans have benefitted from the Administration’s efforts thus far, and identify key areas where there is still work to be done.
Investments in higher education—roughly 50 percent of which are at least in part financed by federal student loans—typically yield large returns. However, the return to college varies substantially across individuals, institutions, and programs.
- Over the course of a career, the median worker with a bachelor’s degree earns nearly $1 million more than the same type of worker with just a high school diploma, when both work full-time, full-year from age 25. The same type of worker with an associate’s degree earns a premium of about $360,000. Individuals with college degrees also see lower unemployment rates and have increased odds of moving up the economic ladder.
- While data suggest that the overall return to a college education is near historic levels, there is substantial variation across individuals. Much of this variation is related to the schools students attend and the programs they select. In particular, evidence suggests that the relatively low returns at for-profit colleges are increasingly becoming a cause for concern, especially given the high rates of borrowing by students at those schools.
As of 2015, outstanding student debt had grown to $1.3 trillion, due in large part to rising enrollments and a larger share of students borrowing. While the average loan size has also increased, the average undergraduate borrower owes $17,900 in debt.
- During the Great Recession, enrollment and federal student loan borrowing increased as more individuals, facing weak labor market prospects, decided to go to school to upgrade their skills. The largest increases occurred among lower income and older, independent students who largely attended for-profit and community colleges.
- Increases in per-borrower debt have also contributed to the expanding student loan portfolio, with average outstanding balances adjusted for inflation increasing by roughly 25 to 30 percent between fiscal years 2009 and 2015 alone. The precise causes of this increase are not yet well understood, but rising tuition and expenses, in part due to reductions in state funding for public colleges, is one factor known to be playing a role.
- Despite the increase in per-borrower debt, 59 percent of borrowers continue to owe less than $20,000 in debt; the average amount of undergraduate loans that borrowers held in 2015 was $17,900, and large-volume debt was more prevalent among graduate loans.
Many students who entered college during the recession did not receive an education that resulted in employment outcomes that allowed them to pay off the debt they incurred.
- Repayment outcomes tend to be worse among borrowers who attend for-profit or community colleges; those who are low-income or independent; those who attend part time; and, especially, those who do not complete their degrees. Many of these types of borrowers accounted for a disproportionate share of the increase in student borrowing during the Great Recession.
- Defaults are concentrated among borrowers with small-volume loans, in large part because these borrowers are less likely to have completed their degrees. Loans of less than $10,000 accounted for nearly two-thirds of all defaults for the 2011 cohort three years after entering repayment. Loans of less than $5,000 accounted for 35 percent of all defaults. Thus while there is significant public attention on high debt burdens among traditional students attending four-year institutions, default is concentrated among a different group of borrowers.
- While borrower distress has traditionally been measured using the default rate, alternative measures of loan repayment used in this report can offer advantages over traditional, default-based measures for providing information to students about a school’s repayment outcomes or building loan accountability measures. For example, income based repayment plans can shield borrowers from default when their earnings are too low to make payments on their loans. This is a positive element of such repayment plans, but means that policymakers and analysts should look beyond just default measures to assess whether there are institutions where borrowers are systematically unable to repay their loans.
Income driven repayment plans like the President’s PAYE plan, which caps monthly student loan payments at 10 percent of discretionary income, are benefiting nearly 5 million borrowers.
- The share of borrowers with federally managed debt who are enrolled in income driven repayment has quadrupled over the last four years from 5 percent in the first quarter of fiscal year 2012 to 20 percent in the first quarter of fiscal year 2016.
- Income driven repayment plans recognize that most students see significant income gains from their higher education, but that those gains often are small shortly after leaving school and grow significantly larger over time. Thus, these plans allow borrowers to make smaller, or even zero, payments early in their careers and adjust their payments as their earnings grow.
- Data show that income driven repayment borrowers tend to come from more disadvantaged backgrounds than borrowers on the standard repayment plan. Among borrowers with undergraduate loans enrolled in income driven repayment as of the third quarter of fiscal year 2015, the average family income was $45,000, compared to $57,000 for those on the standard repayment plan, based on the first Free Application for Federal Student Aid (FAFSA) the borrower filed.
- Income driven repayment is helping many borrowers who showed signs of distress prior to enrolling. Among borrowers who entered repayment in fiscal year 2011 and enrolled in income driven repayment, over 40 percent had defaulted, had an economic hardship deferment, or had a single forbearance of more than 2 months in length before entering their first income driven repayment plan.
- For the 2011 cohort, borrowers across all sectors had lower monthly payments in income driven repayment, despite having accumulated, on average, larger amounts of debt.
The rise in student loan debt has created challenges for some borrowers with lower earnings, but has not been a major factor in the macroeconomy.
- Despite its steady rise over the past decade, aggregate student loan debt remains small relative to aggregate income. In 2015, total student loan debt was 9 percent of aggregate income, up from 3 percent in 2003. By itself this is considerably smaller than the rise in mortgage debt prior to the crisis and it has also been accompanied by a reduction in other forms of consumer debt.
- Additional student debt, as an investment in education, is associated with additional income, putting many households in a better position to buy homes or start businesses. By age 26, households with student debt are more likely to buy a house than those that did not attend college. By age 34, college attendees with and without student debt are equally likely to buy a home, and both much more likely than those without a college education. Research studies have found that conditional on a given education, higher student debt explains, at most, a small fraction of the decline in homeownership among younger households.
- At the same time, the increase in defaults on student loans as well as the increase in high-loan balances for low earners can be real concerns at the individual level, potentially leading to compromised credit and reduced home buying for some individuals.
Investing In Higher Education: Benefits, Challenges, And The State Of Student Debt – Introduction
The college earnings premium has reached historical levels in recent years, reflecting a trend over several decades of increasing demand for skilled workers. In 2014, the median full-time, full-year worker over age 25 with a bachelor’s degree (but no higher degree) earned roughly 70 percent more than a worker with just a high school degree (CPS ASEC, CEA calculations). Moreover, people with a college degree are more likely to be employed—facing both lower unemployment rates and higher rates of labor force participation. In a global marketplace that increasingly rewards advanced skills and knowledge, higher education may be the single most important investment young people can make in their futures. For a growing number of Americans, federal student loans are an essential means to realizing the benefits of higher education. In the fall of 2013, over 20 million students enrolled in a Title IV institution (or an institution eligible for federal aid). Roughly half of these students used federal student loans to help finance their education.
The current student loan system allows millions of individuals to make investments that typically yield large private and social returns. However, evidence suggests that some individuals invest too little in their education, while others struggle to repay the debt they incur. Rising tuitions, uncertainties of future labor market opportunities, economic hardship caused by the Great Recession, and the complexity of both the college landscape and the student aid system itself have all contributed to the challenge of ensuring that all students who could benefit from a college degree can afford to do so. The Obama Administration has taken several important steps to help address these obstacles, though more work remains.
Leveraging new data provided by the Department of Education, this report provides one of the first comprehensive reviews of the student loan portfolio to examine key trends in student debt. It also outlines the economic rationale for investing in higher education and provides a close look at how Administration policies have enhanced students’ investments in their educations.
See full PDF below.