Issues 2020: Millennials Aren’t Drowning in Student Debt

The Narrative

“[My plan] forgives all student debt and ends the absurdity of sentencing an entire generation to a lifetime of debt for the ‘crime’ of getting a college education.”[1] — Bernie Sanders   “The result [of rising college costs] is a huge student loan debt burden that’s crushing millions of families and acting as an anchor on our economy.”[2] — Elizabeth Warren

Reality

Sixty-six percent of millennials have no student debt at all.[3] That’s because they haven’t gone to college or because they managed to get through without having to borrow. Those who do have debt tend to have modest burdens relative to their income. Typical four-year-degree graduates who borrow will accumulate $28,500 in debt over the course of their enrollment.[4] That can be paid back with monthly payments of less than $200,[5] which is a relatively small share (4%) of the average monthly earnings for this population ($4,717).[6]

Borrowers who do find their loan payments unaffordable because of low earnings are eligible to make reduced payments without any penalty and to have truly unaffordable balances forgiven. Existing loan repayment safety-net programs cap monthly loan payments at 15% of discretionary income, regardless of how much they’ve borrowed, and borrowers will have any remaining balances forgiven after 20 years (or 10 years for the approximately one-quarter of the workforce employed in the nonprofit sector or in government).[7]

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1. A millennial household with two college-educated earners would earn more than $113,000,[8] on average, and have monthly loan payments of less than $400 (assuming that both earners accrued the typical level of debt in pursuit of their bachelor’s degrees).[9]

• Most millennials (66%) have no student debt, either because they did not attend college or did not acquire debt in the process.
• The typical graduate will have borrowed $28,500 in pursuit of a bachelor’s degree. That can be repaid with monthly payments of $181 on a standard, 20-year repayment plan.

2. Only 6% of borrowers have more than $100,000 in debt.[10] These high-balance borrowers tend to have graduate or professional degrees and often come from higher-income families.

• In 2015–16, students from households in the highest income quartile (those with incomes above $120,000) borrowed about $10,500 more than students from households in the lowest income quartile (those with incomes below $30,000) in pursuit of undergraduate degrees.[11]
• More than one-third of outstanding student debt is held by individuals who are themselves in the highest income quartile (individual income above $97,001).[12] 
• Typically, those in trouble are not the ones with high debt but those who never completed college—default rates are highest for those with less than $5,000 in debt.[13] 

3. The mean annual income for millennials (including those without degrees) is $46,092.[14] Under the existing income-driven repayment programs for all federal student loans (IBR, PAYE, or REPAYE),[15] borrowers with this level of income would never be required to pay more than $173 per month (4.5% of pretax income), regardless of how much they had borrowed.[16]  

• All borrowers are eligible to opt into a repayment plan that caps monthly payments at 10%–20% of discretionary income (income minus 150% of the poverty line).[17]
• Loan-forgiveness programs are expected to spend $74 billion to discharge existing debts deemed unaffordable by current rules.[18] 
• These programs work poorly due to policy design, and many struggling borrowers may be unaware that they even exist.

On the Record “The typical millennial has no student debt. Even among those who pursued higher education and borrowed to fund it, a typical household with two college-educated workers has more than $100,000 in annual income and pays less than $400 monthly on their loans. Federal relief should focus on the small subset of borrowers with unmanageable debt burdens and ensure that they still repay what they can afford. Those programs already exist.” — Beth Akers, Senior Fellow

There are 44.9 million millennials in the U.S. (ages 25–34), but only 15.3 million of them have any student debt.[19] That means that 66% of millennials have no student debt to worry about. That’s because many of them haven’t gone to college. Among this generation, just 49% have an associate degree or higher.[20]  

For those who do borrow, the amount they owe is generally modest relative to the value of their education, and payments are affordable because of the substantial earnings achievable with a college degree or the federal programs designed to keep monthly payments affordable and forgive onerous debts. 

The average millennial with a bachelor’s degree would have $28,500 in debt by taking on the amount typically borrowed for an education.[21]  By repaying those loans over the course of 20 years on a standard repayment plan, the borrower would make monthly payments of $181. 

By contrast, median earnings for that college-educated millennial would be $56,605.[22]  So a median household, with two college-educated earners, would have an annual income of $113,210, putting it above 71% of all other households in the economy.[23]  Student loan payments of $362 per month amount to 4% of this family’s pretax, monthly income ($9,434). For perspective, the typical millennial household (including those without college degrees) is spending almost this much on monthly car payments ($329).[24] 

The largest loan balances are held by people who pursued graduate or professional degrees. Fortunately, this group also benefits from higher earnings. In 2017, the average annual income for millennials with master’s and professional degrees was $74,480 and $89,006, respectively.[25]  That makes larger loan payments feasible—while still leaving much more discretionary income as well. 

But those who take out loans for graduate professional school borrowers and find themselves in financial trouble can also rely on the existing safety net that allows reduced monthly payments and forgiveness of truly unaffordable debts.

A borrower with $75,000 in annual income can opt to reduce his monthly payment to $414 without penalty.[26]  Making reduced payments can cause a large balance to grow, but borrowers in repaying their debt in the programs that allow reduced monthly payments will ultimately have their debt forgiven after making payments for 20 years. These programs are expected to spend over $74 billion to discharge existing debts deemed unaffordable by current rules, and the benefits will disproportionately accrue to people with graduate and professional degrees.[27] 

Many college graduates with the highest levels of debt also have the benefit of another safety net: family wealth. It would be reasonable to think that debt would be utilized most readily by lower-income students who don’t have the cash on hand to pay for college. But it is students from the highest-income families who take on the most debt for undergraduate education. That’s because they attend the highest-cost institutions and stay in school for longer. In 2015–16, students from households in the highest income quartile (those with incomes above $120,000) borrowed about $10,500 more than students from households in the lowest income quartile (those with incomes below $30,000) in pursuit of undergraduate degrees.[28] 

Despite the availability of safety nets for borrowers, 1 million borrowers will default on their student loans each year. It seems that many, especially those who are struggling, are unaware of these safety nets that have been in place for several years. If anyone is drowning in student debt, it’s those borrowers who were encouraged to enroll in college but dropped out before they earned a degree. Studies show that the highest rates of default on student loans are among borrowers with less than a $5,000 balance.[29] The high rate of default among this group also suggests that they are unaware of, or have had trouble navigating, the safety nets available to help them.

Current solutions, including the existing safety-net programs and the loan-forgiveness proposals currently being espoused, deliver the least benefit to the neediest population. The politically convenient rhetoric about crushing student loan debt has strategically neglected to inform struggling borrowers about the generous safety nets already available to them and failed to encourage people to use the programs that were designed to ensure that federal student loans are affordable. Raising awareness of these programs—and simplifying them—could ensure that greater resources get to those who truly need them. Proposals to forgive or “cancel” all student debt would do exactly the opposite. Those who are well positioned to repay what they have borrowed would get most of the benefit. 

There is plenty of room for improving the federal lending program—but starting with the false premise that millennials are drowning in debt will only guide us to the wrong solutions. 

 

1. Amanda Terkel and Gavrielle Jacobovitz, “Bernie Sanders Unveils Sweeping Bill to Cancel All Student Debt,” Huffington Post, June 24, 2019.
2. Team Warren, “I’m Calling for Something Truly Transformational: Universal Free Public College and Cancellation of Student Loan Debt,” Medium, Apr. 22, 2019.
3. Author’s calculation using U.S. Census Bureau, Current Population Survey, 2018, and U.S. Department of Education (ED), Federal Student Loan Portfolio, “Federal Student Loan Portfolio by Borrower Age,” 2019. See also note 8.
4. CollegeBoard, “Average Cumulative Debt Levels in 2017 Dollars: Bachelor’s Degree Recipients at Four-Year Institutions, 2001–02 to 2016–17,” 2017.
5. Author’s calculation based on FinAid.org, “Loan Calculator.”
6. U.S. Census Bureau, “PINC-03, Educational Attainment—People 25 Years Old and Over, by Total Money Earnings, Work Experience, Age, Race, Hispanic Origin, and Sex,” 2018.
7. ED, Federal Student Aid, “Income-Driven Plans”; U.S. Bureau of Labor Statistics (BLS), TED: The Economics Daily, “Nonprofits Account for 12.3 Million Jobs, 10.2 Percent of Private Sector Employment, in 2016,” Aug. 31, 2018; BLS, “Employment by Major Industry Sector,” Oct. 24, 2017.
8. Census Bureau, “PINC-03,” 2018. There is no official definition of “millennials,” though one in common use refers to them as the generation born between 1981and 1996, in other words, ages 23–38. (See Michael Dimock, “Defining Generations: Where Millennials End and Generation Z Begins,” Pew Research Center, Jan. 17, 2019.) For ease in exposition, this paper employs the age group 25–34, which is how U.S. Census Bureau tables divide the population.
9. Author’s calculation based on FinAid.org, “Loan Calculator.”
10. CollegeBoard, “Distribution of Borrowers and Debt by Outstanding Balance, 2018,” 2018.
11. Beth Akers, Kim Dancy, and Jason D. Delisle, “College Affordability Update: Value, Price, and Choice in U.S. Higher Education,” Manhattan Institute, Jan. 8, 2019.
12. Sandy Baum, Victoria Lee, and Alexandra Tilsley, “Which Households Hold the Most Student Debt?” Urban Institute, May 2, 2019.
13. CollegeBoard, “Share of Defaulters and Three-Year Default Rates by Loan Balance,” 2016.
14. Census Bureau, “PINC-03,” 2018.
15. ED, Federal Student Aid, “Income-Driven Plans.”
16. ED, Federal Student Aid, “Repayment Estimator”; assumptions: resident of New York State, single, one child, Income-based Repayment plan.
17. Ibid.
18. U.S. Government Accountability Office, “Federal Student Loans: Education Needs to Improve Its Income Driven Repayment Plan Budget Estimates,” November 2016.
19. U.S. Census Bureau, Current Population Survey, 2018; ED, Federal Student Loan Portfolio, “Federal Student Loan Portfolio by Borrower Age,” 2019. See also note 8.
20. Census Bureau, “PINC-03,” 2018.
21. CollegeBoard, “Average Cumulative Debt Levels in 2017 Dollars: Bachelor's Degree Recipients at Four-Year Institutions, 2001–02 to 2016–17,” 2017.
22. Census Bureau, “PINC-03,” 2018.
23. PK, “2017 Family Household Income Percentile Calculator for the United States,” DQYDJ (Don’t Quit Your Day Job), July 18, 2019.
24. BLS, “Consumer Expenditure Surveys,” Apr. 26, 2019.
25. Census Bureau, “PINC-03,” 2018.
26. ED, Federal Student Aid, “Repayment Estimator”; assumptions: resident of New York State, single, one child, Income-based Repayment.
27. Jason D. Delisle and Lexi West, “The Latest Runaway Entitlement Program: Loan Forgiveness for Graduate Students,” American Enterprise Institute, May 13, 2019.
28. Akers, Dancy, and Delisle, “College Affordability Update.”
29. Kristin Blagg, “Underwater on Student Debt,” Urban Institute, Aug. 13, 2018.