You May Be Dead Before You Pay Off Your Student Loans

The Wilsons owe $260,000 in student loans for college and a pair of master’s degrees for Vicky. Even worse, though they’re meeting their $1,300 in required monthly payments, their balance has remained roughly the same over the last year because Vicky’s outlay doesn’t cover all of the interest on her loans. For all their education and career success, the Wilsons can’t envision repaying their school debts—ever. And forget about buying a home or opening a college fund for their 3-year-old son. “We don’t even think about it,” Jon says.

It’s no secret that America’s young adults will take a long time to pay off their student loans. But few know that this generation of borrowers is chipping away at their debt so slowly that some may not escape it until they’re dead.

That’s the grim assessment of a new Bloomberg Businessweek analysis, which found that U.S. student loan borrowers as a group are paying down about 1% of their federal debt every year. It’s as if a former student were reducing the balance of a typical $30,000 college loan by only $300 annually. At that rate, it’s almost unthinkable how long it would take to repay the government: a century.

Of course, many borrowers will pay off their loans much faster, especially as wages grow over time. The low annual paydown reflects the significant number who are struggling, as well as a group of borrowers—including Vicky Wilson—in a program that can lower payments and may ultimately result in their debt being forgiven in 25 years or less.

The Bloomberg analysis relies on data from the government and ratings firm DBRS Inc. Bloomberg checked its conclusion with the U.S. Department of Education, as well as with economists who study student loans and with former government officials. All agreed with the magazine’s calculations.

Secretary of Education Betsy DeVos “is very concerned about the ballooning student loan portfolio and the implications for students and taxpayers,” says spokeswoman Elizabeth Hill. The agency is improving servicing and simplifying repayment plans but can’t solve the crisis on its own, she says.

The glacial payback rate alarms experts of all political persuasions. It also helps explain why the burden of the nation’s $1.6 trillion in student loans—almost all of which is owed to the federal government—has become a major issue in the U.S. presidential campaign. Senator Bernie Sanders, an independent from Vermont, and Senator Elizabeth Warren, a Massachusetts Democrat, are both proposing massive student loan forgiveness.

Another Democratic candidate, 37-year-old Pete Buttigieg, the mayor of South Bend, Ind., has spoken of the roughly $130,000 of college debt he and his husband still hold. “Is the only real solution debt forgiveness or death?” asks Michael Pierce, a former regulator who oversaw student loans at the federal Consumer Financial Protection Bureau. “That’s where we are.”

Progressives propose a bailout because tuition has far outpaced inflation while household wages have stagnated. Conservatives say the government has created the crisis by promoting out-of-control spending by colleges fueled by no-holds-barred borrowing by families—a reckoning that’s long been deferred. Payments on student loans “are easy to put off,” says Jason Delisle, a former Republican analyst for the U.S. Senate Budget Committee.

Generation-spanning debt marks a sharp break from the roots of the current student-lending program, part of President Lyndon Johnson’s 1960s Great Society initiative. The plan typically called for 120 monthly payments of the same amount, with about 10% of the borrowed amount paid down every year. Borrowers generally repaid their loans within a dozen years.

The repayment rate began to slow in the mid-1990s, but it wasn’t until 2012 that the student loan program crossed an alarming threshold, according to a 2015 study by Adam Looney, then a Treasury Department economist, and Constantine Yannelis, now a finance professor at the University of Chicago Booth School of Business.

For the first time, a majority of debtors who’d been in repayment for two years ended the second year owing more than they borrowed. Their lack of progress in paying back their loans dragged down the statistics for their entire cohort: For every $1 the class of 2010 had borrowed, members owed $1.02 by 2012. The share of borrowers whose balances rose after two years of bills—53%—was 10 times the proportion of similar borrowers who’d entered repayment in 1980.

In part, the government is encouraging borrowers to stretch out their payments through programs that can lead to loan forgiveness. In 2011, President Barack Obama’s administration began urging more of them to make use of government plans that allow them to make monthly payments based on how much they earn, rather than what they owe. Outlays could be as little as 10% of income—or even zero, for those with especially low incomes. Ultimately, the loans could be forgiven in as few as 20 years. The government could wipe away loans held by teachers, firefighters, and other public-service workers in 10 years.

The promotion of income-based repayment plans led to a surge in participation. About 8 million people are in such arrangements. The average borrower who enrolled in 2017 avoided payments of $327 a month on $50,743 in debt. As more people reduced their monthly payments, delinquencies and defaults fell. These plans have contributed to slower repayments and rising balances. (Many borrowers in these plans may not end up having their debt erased because of paperwork errors that can cause people to drop out of the program. Others may get raises that enable them to pay off their debt.)

Looney, the former Treasury economist, says it’s particularly alarming that former students are stretching out payments now. Although the recovery from the 2008 financial crisis has been slow, unemployment is at a 50-year low and the economy is in its longest expansion in history. What happens if times get tougher? “I find this all terrifying,” says Looney, a senior fellow in economic studies at the Brookings Institution.

So does a thirtysomething Chicago couple, Jena Kehoe and Warren Williams. They’re watching the balance of their $67,000 in federal loans rise by at least $40 every month, even while Kehoe shells out the required $200 she owes.

Williams, an epileptic, can’t make his payments and still afford premiums for health insurance. Kehoe borrowed for a bachelor’s degree in English. Williams dropped out of a now-shuttered for-profit college after transferring from a state university. He works as a film editor, she as an editor at a publishing company. They’d like to start a family, but they’re delaying having kids in part because of their debts. “It’s become such an insurmountable thing,” Kehoe says.

James Kvaal, a senior Obama adviser who helped craft higher education policies, says no one knows how the country will navigate its current level of education borrowing. “We are running a big experiment here: No generation before has carried student debt burdens anything like what today’s students are carrying,” says Kvaal, now president of the Institute for College Access & Success, a nonprofit education research and advocacy group. “There will be substantial amounts of student debt that will never be repaid.” —With David Ingold
 
Read more: “If the Student Loans Don’t Break You, the Rent Will”

©2019 Bloomberg L.P.