December 27, 2019
Student loan debt is now the second-largest source of household debt after mortgages and more than one-third of US adults under 30 have student loan debt. Figures like these have prompted a host of policy proposals that aim to reduce student debt. However, proposed policies are often based on misconceptions about student debt and the factors actually driving default. In this Research in Focus, author Aaron Hedlund summarizes the data and existing research on student debt and possible policy reforms.
Hedlund begins by analyzing current data to demonstrate key trends in student debt. Contrary to the popular narrative, he finds that most borrowers have relatively small balances and that those who default on their loans also tend to be those with small balances. Specific trends highlighted include:
- One-fifth of borrowers have less than $5,000 in student loan debt, while 37% owe less than $10,000.
- The majority of those who default on student loans have less than $10,000 in student debt and face poor employment options post-graduation.
- Larger loans are typically used to finance graduate degrees that usually lead to higher-paying jobs. These loans have a low risk of default.
Given these facts, Hedlund suggests that blanket loan forgiveness is unlikely to effectively address student debt issues. Broad-based loan forgiveness would be an expensive and poorly targeted solution to debt woes. A more promising path would be to introduce income-contingent repayment coupled with some form of loan forgiveness in the event of college dropout. These targeted reforms would likely limit the burden placed on taxpayers while helping relieve financial distress for borrowers.