Why American students are struggling with – and defaulting on – small debts

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• JUDY WOODRUFF:

  Even as the U.S. economy is picking up steam, there's new research finding student loan debt is growing, and its burden lingers even longer than we realized.

  Data from the New York Federal Reserve shows student loan balances climbed to almost $1.2 trillion at the end of last year. In fact, delinquencies are rising on student loans, even as they fall for most other types of debt, including mortgages and credit cards.

  New research also finds that it is borrowers with the lowest balances, of $5,000 dollars or less, who are most likely to default.

  Two experts join me now.

  Megan McClean is director of public policy and advocacy at the National Association of Student Financial Aid Administrators. And William Elliott is an associate professor at the University of Kansas, where he studies asset building and education.

  And we welcome you both.

  MEGAN MCCLEAN, National Association of Student Financial Aid Administrators: Thank you.

• JUDY WOODRUFF:

  So, Megan McClean, first of all, why is this happening?

• MEGAN MCCLEAN:

  Thanks so much for having us this evening.

  I think, generally speaking, what we're seeing with the default situation is the aftermath of the economic downturn in 2008. There are a couple of things there from a broad standpoint. First and foremost, we always see more students going back to school during an economic downturn. So the borrower pool to begin with is broader.

  And then you're seeing I think folks still struggling in a job market, which can also contribute to defaults, and certainly a very troubling problem.

• JUDY WOODRUFF:

  So, William Elliott, give us a profile of the individual with this debt burden.

  WILLIAM ELLIOTT, University of Kansas: Well, it's not really that surprising now, Judy.

  It's black students, minority students tend to be more likely to default. I think the most interesting thing is what you brought up earlier, is that even amounts of $5,000 or less, students still ended up in delinquency or default. And that's the most revealing part of the study is that small amounts of debt can lead to financial hardship in the long run.

• JUDY WOODRUFF:

  And why do you believe that is?

• WILLIAM ELLIOTT:

  Well, I think because really it's the whole idea or premise of debt in the first place is, if we finance education using student debt and we limit the money that kids have available to them as they graduate and enter the job market, it's not surprising that they would have less money and so fall behind on their debt.

  It's one extra thing. They have car loans, house loans, and student debt. And so it's the extra burden that it places on them. And it's really just kind of a failed system in the beginning, thinking that we can finance college with debt.

• JUDY WOODRUFF:

  Megan McClean, what would you add to that? Because it's counterintuitive that even people with the smallest balances would be the most in default.

• MEGAN MCCLEAN:

  It is, and I think that's the general perception, that most people in default have tens and thousands of dollars in student loans, but we know it's about $10,000 or less where we see most of the defaults.

  And I think what we're seeing is, in a lot of cases, those are probably students who go to school, and then stop out or drop out for some reason and either aren't aware that they had a loan, or that the loan needs to be repaid back or aren't aware of the options that are available to them, because there are several safeguards that are available to them to keep them from going into delinquency and default. So I think it is partly an educational issue as well.

• JUDY WOODRUFF:

  What are some of the safeguards?

• MEGAN MCCLEAN:

  Yes.

  One of the biggest things is the federal government offers several versions of income-driven repayment plans, meaning that students who are eligible can enter into these plans and be assured that they won't pay more than a certain percentage of their discretionary income. And what that does is help them ensure that their loan payment won't be a burden to them and that they will be able to do other things, like pay their rent, and save a little bit of money, things like William was talking about.

• JUDY WOODRUFF:

  William, what would you add to this question of why is it that students with the lowest amount of debt seem to be having the biggest problem here?

• WILLIAM ELLIOTT:

  I want to go back to the income-based repayment plan.

  One of those things about that is, one of the findings in the study is that in the long run these students are buying homes less often and everything else. And so if we understand the income-based repayment plan, all that really does is extend the time period that students are paying on loans. If we extend the time period that students are paying on loans, and we understand that even small amounts of money can produce problems, we're really hurting their overall chances of accumulating assets in the long run.

  And so I really question, even though this is a good temporary solution to kind of reducing default rates and delinquency, are we setting ourselves up with bigger problems by not enabling these children to accumulate assets over the long run, particularly if small amounts of money actually can cause negative effects, small amounts of debt actually can cause negative effects.

• JUDY WOODRUFF:

  Megan McClean, he actually brings up something I wanted to ask both of you about, and that is the long-term implications of this, because it's not just these young people owe money, have debt while they're young. You see this goes on for years, even decades into their lives.

• MEGAN MCCLEAN:

  Yes. And I think there are very serious long-term consequences. And we have heard a lot about student borrowers delaying home ownership or starting families because of having serious debt burden.

  And I don't disagree with William, in that there are long-term consequences. But I still do think that the income-based programs are a good option for students right now that can allow them to have a reasonable payment. And what we need to work on is making sure that we get more students get into those programs and making more students who are being delinquent and getting into default status go into those programs instead of getting into that type of dire financial hardship.

• JUDY WOODRUFF:

  But you're not concerned about the point he made about it takes such a long time for them to pay the loans back?

• MEGAN MCCLEAN:

  I think that is a concern for some students, but what I will say about the income-based repayment programs is they do sort of assume that some borrowers, when they're first starting out, don't have jobs that pay a lot, but they are income-based.

  So, as you continue to work and if you make more money, you can make higher payments on your loan amount. And you can always pay more as well.

• JUDY WOODRUFF:

  William Elliott, what else needs to be done to reform the system?

• WILLIAM ELLIOTT:

  I think, in the long run, we have to think about what are the income-based repayment plans doing? Yes, they are a temporary solution to stopping defaults and delinquencies, but if we don't understand fully how much debt is — can be harmful, if it's smaller amounts than we originally thought, then there's really serious concerns about these long-term — for the long-term consequences for these kids.

  I think we need to turn to asset-building programs early on, try to help children build assets. Think about Pell Grants differently, maybe put those into their accounts, into these saving accounts early on, so they can accumulate and build wealth, so they don't end up in as much debt.

  So, my point is, is that we have to find solutions that help us stop kids from getting into debt in the first place.

• JUDY WOODRUFF:

  Are these the kinds of things, Megan McClean, that you think will bring some relief to these young people with these enormous debts?

• MEGAN MCCLEAN:

  Yes.

  I completely agree. Income-based repayment is just one piece of the puzzle, but certainly looking at ways that we can encourage students and families to save earlier and to save often, that is all a big piece of the puzzle. But we also need to call on better partnerships for who is responsible for funding higher education.

  We need to make sure that, yes, students and families have a role, but so do institutions, so do states and so does the federal government, and really kind of taking a better partnership approach to making sure that college is affordable.

• JUDY WOODRUFF:

  Megan McClean and William Elliott, we thank you both.

• MEGAN MCCLEAN:

  Thank you.

• WILLIAM ELLIOTT:

  Thank you, Judy.

  PBS NewsHour coverage of higher education is supported by the Lumina Foundation and American Graduate: Let's Make it Happen, a public media initiative made possible by the Corporation for Public Broadcasting.