Good News On Student Loans ... For Some

A new White House report on student loan debt reveals that how people repay student loans has changed dramatically in a short time.

The report comes as the Democratic Party moves this week to nominate Hillary Clinton, who has called for a path to debt-free public college, interest rate cuts, help for delinquent borrowers and a three-month moratorium on all student loan payments. Such campaign promises are a nod to big-picture debt trends that have loomed ever larger over the middle class for a while now.

The overall outstanding student loan balance is $1.3 trillion and growing — as are average individual balances, as is tuition. The average return to a higher education has also never been higher, even when loans are taken into account.

What's new is how those loans are getting paid back. According to the new report, the share of borrowers enrolled in affordable payment plans has quadrupled in just four years, to 20 percent in 2016.

Still, several experts we talked with have suggestions for tweaking the program to better serve the goal of expanding access to college to those who need it most, even as costs rise.

First a little background. It used to be that student loan repayment functioned more or less like a mortgage. The standard repayment term was 10 years; extended plans went up to 25 years. Falling more than 90 days behind on a payment meant "delinquency," and nine months usually meant "default."

Default triggered interest rate jumps and penalties. And — unlike mortgages — permanent relief through bankruptcy was usually not an option.

The Obama administration has taken repeated steps to allow more people to make loan payments affordable.

Today, anybody with a federally subsidized direct loan has the right to cap their monthly payments at 10 percent of discretionary income. ("Discretionary" is calculated as your full income minus 150 percent of the poverty level for your household size.)

In addition, people who work for the government or for nonprofits may be eligible for "Public Service Loan Forgiveness," which not only limits monthly payments but forgives the outstanding balance after 10 years.

There are some indications in the report that income-driven repayment is specifically helping grads who would otherwise be having trouble repaying their loans. For example, more than 40 percent of borrowers who enrolled in income-driven repayment in one year had previously either defaulted or postponed some payments.

So is this a good-news story? More access to more affordable payments sounds good, right? Well, like everything in the world of higher ed, it's complicated.

"The good news is that people are taking up income-based repayment," says Robert Kelchen, who researches higher education finance at Seton Hall University. "But the challenge is getting to the students with fairly little debt and no degree to show for it."

Kelchen is referring to a lesser-known fact about student loans. You might call it the high-low paradox.

Those with low balances, less than $10,000, account for two-thirds of all defaulters. These typically belong to students who attend only a few semesters of college and never graduate. They are more likely to be unemployed and low-income.

On the other hand, students with high balances, close to or over six figures, are far more likely to be enrolled in, and to have earned degrees from, graduate programs that typically provide substantial returns on investment over a lifetime. Lawyers. Doctors. MBAs.

For "low-balance" students, access to affordable payments at the right time can save them from a long-running financial nightmare.

For "high-balance" students, it's little more than a convenience.

For taxpayers, meanwhile, it's a lot more expensive to help each high-balance student than it is to bail out a low-balance student.

And yet the numbers in this new report indicate that income-based repayment as currently implemented is a bit upside down. That is, it's the highs, not the lows, who are more likely to take advantage of income-driven plans. Sixty-four percent of those in income-based repayment have their college diploma, compared with 48 percent of borrowers in the standard plan. One in three have graduate student loans; just one in 10 of standard borrowers do.

Meanwhile, the Consumer Finance Protection Bureau said last week that 70 percent of borrowers who are in default on a federal student loan actually are eligible for lower monthly payments.

So the question in the minds of researchers like Kelchen is whether income-based payment is best targeted, or even designed, to help the students who need it most.

"My biggest concern with income-based repayment is that grad and professional students seem more likely to know about it," he says. And the danger there is, "so much of the subsidy will go to these grad students that the program will end up collapsing under its own weight."

Lauren Asher at The Institute for College Access and Success, a nonprofit that focuses on college affordability, is exploring how the Education Department, and private loan servicers, can do a better job informing borrowers of their options and cutting red tape.

"We can see that outreach has made a big difference, but there's definitely more to do in reaching the most vulnerable borrowers," she says.

This week, Education Secretary John King Jr. and the director of the Consumer Finance Protection Bureau called on servicers to step up and provide clear, personalized and timely information.

Nicholas Hillman, who researches higher education finance at the University of Wisconsin, Madison, is thinking a little bigger. He'd like to see a completely different process in place for targeting who gets access to help with their loans.

For example, one of the big risk factors for default is unemployment. What if, he asks, states went through their unemployment rolls and automatically enrolled borrowers who are out of work into affordable payment plans?

Income-based repayment, Hillman points out, is based on an idea first proposed by Chicago economist Milton Friedman back in the 1950s. Hillman says changing conditions and changing data should drive new ideas: "It's a lack of policy creativity."