Imagine a credit card bill that takes a decade or longer to pay off. Now imagine that you can’t get rid of it in a bankruptcy if your personal finances go off-track. Finally, imagine there are millions just like you, enough to attract the attention of presidential candidates.
This is the $1.6 trillion world of federal student loans, next to mortgages the biggest form of household debt in the United States.
Each year, nearly 12 million students borrow $100 billion from the federal government to attend a college or trade school. After graduating or dropping out, they must start paying.
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Millions are struggling to pay those loans, an investigation by the NBC Owned Television Stations found.
The NBC Stations found that from 2013 to 2017, the repayment rate fell across the board, at public, nonprofit and for-profit colleges alike. In 2013, 71 percent of former students were current on their loans seven years after leaving school. By 2017, the latest year available, the rate had fallen to 57 percent, an analysis of U.S. Education Department analysis showed.
And that’s just the percentage of former students who paid at least a dollar of principal and kept up with interest.
Economists who got access to confidential student loan and Treasury data reported in a 2017 paper that at some schools, former students owed more money five years after leaving than the day they graduated.
"People don’t have breathing room after paying living expenses," said Jordan Matsudaira, an economist at Teachers College, Columbia University. He added that many students attend college with unrealistic views about their future earnings.
There’s a "mismatch between too much debt and (low) earnings," said Robin Howarth, a researcher at the nonprofit Center for Responsible Lending in Durham, North Carolina. Students, particularly those at for-profit schools, are "borrowing too much for these degrees."
In the past decade, the number of students borrowing money for college has grown by a third, from 32 million to 43 million. Their combined debt has more than doubled.
One reason: The inflation-adjusted cost of a year at a four-year college with tuition, room and board has grown faster than the cost of living, up 20.5 percent in 10 years and 58 percent in 20 years, according to the National Center for Education Statistics.
Despite its rising cost, college remains a good investment. People with bachelor's degrees on average earn $57,000 per year, $12,000 more than high school graduates, according to the Census Bureau. People with graduate degrees earn tens of thousands more.
But college is not a good investment for everyone: The people who have the most trouble paying college loans paradoxically are those with the smallest debts. Adam Looney, a former Treasury official, and his colleague Constantine Yannelis found that people owing $10,000 or less for college were five times more likely to default than people owing $100,000.
These small debtors typically come from low-income families and attend for-profit colleges or two-year public colleges to learn a trade. If they can’t earn a living quickly, they have few resources to pay the loan.
“They’re financially strapped,” Looney said.
By contrast, people borrowing big sums usually earn a professional degree – think medicine, law or business management.
In general, the bigger the loan balances, the more likely people are to pay.
At private nonprofit universities where tuition and federal loans are the highest, the repayment rate has declined by 9 percentage points since 2013, but it remains relatively high at 72.5 percent. At public universities, the repayment rate has declined by 10 percentage points since 2013, to 64 percent.
And at for-profit schools, where federal loan balances tend to be low, the repayment rate has declined by 13 percentage points since 2013, to 37 percent.
Repayment issues have gotten little attention from either Congress or the Education Department. Their lodestar is the default rate, the percentage of former students who default within three years of leaving school. And that rate is falling.
Congress established the default rate as the primary measure of success for the student loan program in the late 1980s. It was designed to prevent diploma mills from milking student loans. The default rate has remained the standard for three decades despite repeated warnings from in-house watchdogs that schools have learned how to manipulate it.
The most common method of gaming the default rate is for a school to encourage former students to defer their loans for a year by entering a 'forbearance" program. While in forbearance, the student pays no money, the Education Department credits the college as if the loan were current and the student, perhaps unknowingly, racks up interest on the unpaid balance.
As a result, few schools post default rates high enough to risk a potential cutoff of student loans – 30 percent for three consecutive years or 40 percent in one year. In September the Education Department announced sanctions against just 15 of the nearly 6,000 schools that receive federal student loans.
The current 3-year default rate is 10.1 percent, down from 10.3 percent last year.
But people continue to default long after the three years that federal law holds colleges accountable. In its latest budget submission to Congress, the Trump administration estimated that 21.5 percent of the Class of 2020 eventually will default on their student loans.
Those who default on student loans enter a financial wasteland.
"They’ve ruined their credit," Looney said.
People who default on student loans, unlike those who get into trouble with credit cards, auto loans or home mortgages, rarely can seek relief in bankruptcy. Congress and the courts have slammed that door for all but the poor.
Between seized tax refunds and Social Security benefits -- $4 billion in 2019 alone – and proceeds from collection agencies, the Treasury estimates that it eventually gets back 93 percent of unpaid student loans.
For students who know how to work the system, however, default and ruin are a worry of the past. The reason: income-based repayment.
"No one should ever have to default now," said Robert Kelchen, a higher education professor at Seton Hall University in New Jersey.
Traditionally, student borrowers have paid their loans at a flat rate over 10 years. The Obama administration introduced a program allowing borrowers to pay 10 percent of their discretionary income. The remaining balance is forgiven after 20 or 25 years – though they may face a tax bill on the forgiven amount.
That program has quickly grown and today accounts for just over half of loan dollars repaid and a third of borrowers.
Those numbers contain another story: Big borrowers have discovered and latched onto income-based repayment. Small borrowers – those most likely to default – have not.
To qualify for income-based repayment, Looney said, you must fill out paperwork certifying your income. If you don’t have a job, or if you don’t know who your loan servicer is, or if you didn’t get exit counseling when you left school, good luck.
That means, Looney said, that a program designed to help borrowers through a rough patch in their lives will instead offer loan forgiveness in 20 or 25 years to high-earning doctors and lawyers while low-earners continue to struggle.
His answer is to level the playing field by automatically enrolling every student borrower in income-based repayment.
"A large share of students are going to struggle with their loans in the absence of help," Looney said.