The Brookings Institution has released a new research report by Adam Looney and Constantine Yannelis looking at student borrowers with very high balances. The research provides a good reminder that borrowers with high balances, who often feature prominently in media coverage of student debt, are the exception. Just 14% of all federal student loan borrowers have balances above $50,000, and the majority of those individuals borrowed to pursue expensive graduate degrees.
Despite their relative rarity, high-balance borrowers deserve our attention for the risk they pose to the federal government’s finances. While high-balance borrowers represent just a small share of the individuals with outstanding student loans, they owe over half the outstanding balances. What happens to this relatively small group of individuals, therefore, has outsize implications for taxpayers.
The following chart divides up the eight million borrowers currently in default on their federal student loans into groups based on the amount they owe. Borrowers tend to default on very small balances: over 60% of borrowers in default owe less than $10,000. One reason for this is that students who drop out of college and thus borrow for fewer years are more likely to default on their loans.
But looking at balances rather than borrowers tells the exact opposite story. While just 5% of borrowers in default owe more than $50,000, these borrowers also owe over 25% of the dollars in default. Though high-balance borrowers default at a relatively low rate, the risk they pose to taxpayers is substantial.
Defaults are not the only channel through which high-balance borrowers can hurt government finances. Borrowers with higher balances pay down their loans at a very slow rate. Among students who borrowed more than $50,000, 72% owe more than they borrowed twelve years after beginning school. In addition, Looney and Yannelis find that the rate at which high-balance borrowers repay their loans is slowing down.
As new federal student loan borrowers are eligible for loan forgiveness after twenty years (or even ten years in some circumstances), a slow rate of repayment means taxpayers will be on the hook for more money when those loans eventually get forgiven. This situation—in which a disproportionate amount of taxpayer money flows to a small minority of student borrowers—is a state of affairs that no one, conservative or liberal, should be happy about.
The best way to limit the risk that high-balance borrowers pose to taxpayers is to stop creating so many high-balance borrowers in the first place. Congress could cap or even eliminate federal student loans to graduate students, which represent the bulk of high-balance loans. A proposal by House Republicans would introduce limits on the amount graduate students and parents can borrow from taxpayers. It appears that such a change is long overdue.
