There was a time when conventional wisdom said that student debt is not a problem in and of itself—rather, “high” debt of $100,000 or more is the more pressing concern. A recent report from the Federal Reserve Bank of New York highlights just how out of touch that view is. A staggering percentage of Americans do not pay their student debt, no matter how big or small.
Analysis reveals that 34 percent of students with just $5,000 of outstanding debt—hardly “high”—default on their student loans. Student debt imperils far more than just individual borrowers’ monthly budgets. It erodes higher education’s ability to deliver on the promise that those who have similar abilities and work equally hard will achieve similar outcomes. Unfortunately, the prevailing policy response—Income-Based Repayment (IBR) plans—does not address the core of the problem.
Concern about rising default rates has spurred increasing calls for greater access to IBR plans, which set repayment expectations at 15 percent of the federal student-loan borrower’s post-college income. Those who do not pay off their loans within 25 years can have their remaining debt forgiven. These features make IBR schemes less a solution to actual problems and more of a sort of self-soothing device for the American people to feel better about loans. Parents and older Americans don’t want to see young adults default. Student borrowers want some reassurance that they will be able to pay off their student loans and still feed themselves. Policymakers need to say they’re doing something on the issue of student debt. In the meantime, the true threat—student indebtedness itself—continues unabated.