The latest student debt statistics are very gloomy, but recent trends show substantial improvement. The situation reminds me of comedian George Carlin’s classic line as Al Sleet, the Hippy Dippy Weatherman, “Weather tonight: dark. Turning partly light by morning.” So, let’s take a closer look at the storm clouds over current college debt levels, before examining the potential silver linings, especially on flexible payment options.
Student Loan Debt Averages $28,950 for Class of 2014
Student debt is still rising for new graduates, according to a report released recently by the Project on Student Debt at The Institute for College Access & Success (TICAS), an independent, nonprofit organization. At public and nonprofit colleges in 2014, seven in 10 graduating seniors (69%) had student loans. Their average debt was $28,950: up two percent compared to the Class of 2013. About one-sixth of 2014 graduates’ debt (17%) was in private loans, which are typically more costly and provide far fewer consumer protections and repayment options than federal student loans. Because hardly any for-profit colleges voluntarily report their graduates’ average debt, the report’s latest debt figures are for public and nonprofit colleges, which award the vast majority of four-year degrees (94%).
Student Debt and the Class of 2014 is TICAS’ tenth annual report on debt at graduation. Using the most recent available data, it finds wide variations in debt levels across states as well as colleges. For the first time, it also includes an analysis of how graduates’ debt changed over the last decade. Nationally, average debt for new bachelor’s degree recipients rose at more than double the rate of inflation from 2004 to 2014, but in some states it grew even faster.
“Borrowers are graduating with a lot more debt than they did 10 years ago, and the Class of 2014’s average debt is the highest yet,” said TICAS president Lauren Asher. “Student debt has rightly become a major policy issue. Students and families need better information and better policies to make college more affordable and debt less burdensome.”
Class of 2014: Debt Varies Widely by State and College
State averages for debt at graduation in 2014 ranged from $18,900 to $33,800, and new graduates’ likelihood of having debt ranged from 46 percent to 76 percent. In six states, average debt was more than $30,000. High-debt states remain concentrated in the Northeast and Midwest, and low-debt states are mainly in the West.
Average debt at the college level varies even more, from a low of $4,750 to a high of $60,750 for the Class of 2014, and the share graduating with loans ranges from two percent to 100 percent. While colleges with higher sticker prices tend to have higher average debt, there are high-cost colleges with low average debt, and vice versa.
Ten-Year Trends: 2004-2014
At the national level, 2014 graduates were a little more likely to have student debt than their peers in 2004 (69% of graduates compared to 65%), and those who borrowed left school with a lot more debt. The average debt at graduation rose 56 percent, from $18,550 to $28,950, more than double the rate of inflation (25%) over this 10-year period.
In the majority of states, the average debt of new graduates with loans rose two to three times faster than inflation over the decade. In five states debt rose even faster–at more than triple the inflation rate, while in four other states the increase was at or below inflation. Because not all colleges report graduates’ debt levels each year, the report indicates the “robustness” of state-level 10-year changes.
Degrees, Jobs, and Loan Repayment
The 2014 unemployment rate for young college graduates was 7.2 percent: a decline from the prior few years but still far higher than what was typical for more than a decade before the recession. However, the unemployment rate for new college graduates remains less than half the rate for young high school graduates (14.7%).
This report focuses on how much new graduates owe, but not all students graduate and many of them also have loans. At the high-debt colleges listed in the report, graduation rates range from 16 to 86 percent; at the low-debt colleges, graduation rates range from 22 to 97 percent. TICAS’ analysis of available federal data for these schools found that their graduates are much more likely to be paying down their loans than those who do not graduate.
“Despite rising debt levels, a college degree is still the best path to a job and decent pay,” said Debbie Cochrane, report coauthor and TICAS research director. “For students who don’t graduate, loans are much harder to repay. Even a small amount of debt can be burdensome if you have limited job options.”
Income-driven repayment plans have been widely available for federal student loan borrowers since 2009. These plans cap payments based on the borrower’s income and family size and forgive any remaining debt after 20 or 25 years of payments. Enrollment is increasing, but given the growing number of borrowers in default, many more could benefit.
Policy Recommendations: Improve Debt Data and Reduce Debt Burdens
This report uses the best available data on debt at graduation, but they have significant limitations. Because colleges are not required to report debt levels for their graduates, only some do, and the quality of reported data varies.
For the Class of 2014, 56% of public and nonprofit bachelor’s degree-granting colleges provided data, representing 81% of graduates in these sectors and 77% of bachelor’s degree recipients in all sectors. For-profit colleges could not be included in the analysis because so few report their graduates’ debt loads, but other data consistently show students in this sector are the most likely to borrow and have the highest debt levels. The problems with voluntarily reported data underscore the need for federal collection of data on debt at graduation by degree level for all schools, including both federal and private loans.
“Even colleges that do report voluntarily may understate what their graduates owe because the data they’re asked to provide excludes transfer students, and there may be private loans the school doesn’t know about,” said Matthew Reed, report coauthor and TICAS program director. “Because our state averages are based on what colleges report, actual state averages may be higher than they look.”
Other policy recommendations focus on ways to reduce the need to borrow, help keep loan payments manageable, improve consumer information, strengthen college accountability, and reduce risky private loan borrowing. While the specific recommendations are focused on federal policy, there are also ways that state policy can help. For instance, a new California law requires colleges to disclose graduates’ debt levels, and to inform students about untapped federal aid eligibility before certifying private loans.
Six Recent Trends in Student Debt
On the other hand, the Council of Economic Advisers (CEA) recently reported that trends in student debt show substantial progress, especially on flexible payment options.
Jason Furman, Chairman of the CEA, said, “Each year, federal student loans help millions of Americans obtain a college education – an investment that, on average, has high returns. The earnings premium from a college education has risen steadily over the past decades, and today the median worker with a bachelor’s degree earns nearly $1 million more over the course of their career than the same type of worker with just a high school diploma, when both work full-time, full-year beginning at age 25.”
He added, “However, these benefits are earned over a lifetime, increasing over time. Traditional 10-year loans have flat repayment schedules, making it difficult for individuals to pay early in their career when their salaries are lower. The recent expansion of the President’s Pay As You Earn (PAYE) repayment plan gives students greater flexibility, enabling them to pay less when they are earning less and more as they earn more.”
Sandra Black, a Member of the CEA, said, “While the average returns to college remain high, substantial variation in outcomes exists, and some students leave College poorly equipped to manage their debt, whether due to limited labor market opportunities or a high debt burden. At the same time, other students still struggle to finance their education, indicating that challenges remain in the higher education sector. As the labor market tumbled during the Great Recession, some acute challenges came to the forefront, particularly in student debt repayment.”
She added, “Over the past seven years, Administration policies and an improving labor market have led to substantial improvement, and recent trends in student loans show signs of progress. The Administration continues to work to improve college quality and reduce costs to ensure that all hardworking students can invest in a high-quality education that prepares them for a career.”
Here are six recent trends in student debt:
Cohort default rates have declined among borrowers who recently left school
Every year, the Department of Education releases a cohort default rate (CDR), which measures the fraction of borrowers in a fiscal year cohort of students that have defaulted on federal student loans in the first three years after entering repayment. After rising for several years due to factors that include labor market challenges during the Great Recession, reforms to student loan benefits, and the growth of for-profit institutions, default rates have fallen among recent cohorts. Among borrowers who began repaying their student loans in fiscal year 2012, the three-year default rate was 11.8 percent, down 2.9 percentage points from the peak two years prior.
Delinquencies have also fallen in recent years
Among recipients with Direct Federal Loans who were scheduled to be making payments, the 31+ day delinquency rate, measuring the proportion of borrowers more than 31 days late on payments, in December 2015 was 2.5 percentage points lower than a year earlier. In addition to an improving labor market, Administration initiatives such as the expansion of more flexible repayment plans may have contributed to this decline.
Unemployment and economic hardship deferments have declined dramatically
Deferments allow students with negative economic outcomes to postpone student loan payments. Among Direct Loan recipients, these types of deferments, which suggest borrowers are facing particular struggles in finding a job and repaying their loans, saw a 31 percent year-over-year decline in the first quarter of fiscal year 2016. This means that compared to the first quarter of fiscal year 2015, 170,000 fewer Direct Loan recipients were in either of these hardship-related deferments. This decline occurred even as the number of Direct Loan borrowers increased.
Increased availability and usage of flexible repayment options
Today, income-driven repayment (IDR) plans allow all student borrowers with federal direct loans to cap their payments at a manageable portion of their income. As of the first quarter of fiscal year 2016, nearly 5 million (roughly 1 in 5) borrowers with federally-managed debt were enrolled in IDR plans. The share of borrowers with federally-managed debt enrolled in IDR has quadrupled over the last four years from 5 percent in the first quarter of fiscal year 2012 to 20 percent at the same point in 2016.
Data on recent cohorts show promising repayment trends and improving outcomes over time
Although borrowers in the fiscal year 2009 cohort entered repayment at the peak of the recession, data show that after five years, loan amounts comprising about 70 percent of the cohort’s amounts borrowed prior to entering repayment had been paid off or were in repayment. Borrower-level data show similar trends. After five years, 17 percent of borrowers in the 2009 cohort had paid off all of their debt, and an additional 51 percent had a loan in repayment.
Shifts have also occurred in the types of schools that first-time student loan borrowers attend
New data show a sharp decline in the number of first-time borrowers enrolled at for-profit colleges. These colleges tend to have higher rates of default and non-repayment than colleges in other sectors, raising potential concerns about the quality of education provided. The Department of Education’s Gainful Employment rule takes steps to help ensure that career programs largely at for-profit colleges are providing a high quality education for their borrowers.
So, what can we say after looking at the latest gloomy student debt statistics as well as recent trends that show substantial progress, especially on flexible payment options? Maybe Al Sleet, the Hippy Dippy Weatherman, was right: “Weather tonight: dark. Turning partly light by morning.”
(Greg Jarboe is the editor of The Advocate of Affordable College blog and the former editor of the Knowledge Transfer blog. He’s also the president and co-founder of SEO-PR, an instructor at the Rutgers Business School, the content marketing faculty chair at Market Motive, as well as the author of YouTube and Video Marketing: An Hour a Day.)