Dr. Nicholas Hillman: Student debt relief
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The U.S. Supreme Court is set to rule on the Biden administration’s plan for student debt relief by early summer, and student loan repayments have been paused until 60 days after the lawsuit is resolved. This measure would offer $10,000 of student debt relief to those with qualifying incomes, and twice that much to qualifying Pell Grant recipients.
On Thursday, January 5, 2023, SciLine interviewed: Dr. Nicholas Hillman, a professor in the School of Education at the University of Wisconsin-Madison. He spoke about topics including: which borrowers struggle most to repay their loans and are likeliest to default; how student loans affect individual borrowers and their families; and what impacts would be expected from the implementation of the Biden administration’s plan or resumed student loan repayments.
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Introduction
[00:00:21]
NICHOLAS HILLMAN: My name is Nick Hillman. I’m a professor at the University of Wisconsin-Madison. And I study higher education policy, which includes higher education finance in our financial aid system, such as student loan debt and how students pay for college.
Interview with SciLine
What’s the current status of the student debt relief program proposed by the Biden administration?
[00:00:43]
NICHOLAS HILLMAN: The current status has two big features. The first is that student loans that are held by the federal government are on pause and have been on pause for almost three years now. So, student loans are kind of frozen right now. That’s one piece of the puzzle. But the other status is that they’re going to soon become required to be repaid. And so borrowers are going to be preparing to start to repay their student loan debt sometime this spring or early summer.
What can you tell us about the group of people who have student debt?
[00:01:17]
NICHOLAS HILLMAN: The group of people with student debt is very diverse. We’re talking about 40-some million individuals—that’s about 20% of adults in the U.S.—and about $1.6 trillion in student loan debt that is outstanding. So, you have millions of borrowers, over a trillion dollars in student loan debt, and so there’s a wide array of experiences with the lending system. But one characteristic is that student loan debt is the second largest form of consumer credit next to home mortgages, meaning more than car loans, more than credit cards, student loan debt is a large piece of the financial debt situation in America.
What can research reveal about the range of experiences of people trying to repay student loans?
[00:02:12]
NICHOLAS HILLMAN: Research is really evolving in this space. So, we’ve got a wide range of approaches to studying student loan debt, which could include interviewing people, which could include analyzing their credit histories and just monitoring how well students are repaying their loans. There’s a wide way of approaching research in this space. And there’s growing consensus that student loan borrowers have a wide range of experiences. There are several who are struggling about—one study recently followed a cohort of borrowers for several years and found that one out of five borrowers had defaulted on their loans within about five years of entering repayment. On the other side, about one in five had fully repaid their loans within about five years of entering repayment. And so, the middle three out of five borrowers in that situation were sort of muddling through. And so, research can help understand the patterns and the processes of borrowing and repaying loans. We have a whole lot still to learn.
What signals suggest that a borrower is struggling to repay their loans?
[00:03:23]
NICHOLAS HILLMAN: There’s several indicators that borrowers are struggling. One of the most common indicators is student loan default. And this is when a borrower has not made a payment on their loan for almost a whole year. And in those cases, the borrower not only defaults on their loan but also then can be turned over to collection agencies, their credit scores could be harmed, and so forth. So, student loan default is a big piece of the puzzle in trying to understand who’s struggling with repaying. But that’s not where it should end. There’s also a couple of other indicators of struggle, one being delinquency rates. When borrowers are 30 days behind, 90 days behind on their loans, those are also indicators of struggle. And there are about 15% of borrowers who are in repayment—and this is prior to the pause—were delinquent on their loans. Another 15% were in default. So right there you got a good 30% of borrowers struggling by either of those measures. There are other measures too, in terms of how much debt is being paid down over time. And so, if a borrower owes more now than what they borrowed initially, that could also be an indicator of struggle. We don’t have really good research on the magnitude of that, but we do know that that is happening and could be another indicator of struggle.
Which holders of student debt are most likely to default or struggle to pay?
[00:04:46]
NICHOLAS HILLMAN: Students who attended certain colleges, including community colleges and for-profit colleges, tend to have a higher rate of defaulting. Additionally, students who took out a loan, maybe only enrolled in one year of college or even less then didn’t get their credential, they also have a high probability of defaulting. Even those who are unemployed are also more likely to default than the borrowers who are employed. And all those things kind of go together. Students who don’t finish college oftentimes don’t get that return in the labor market to help them repay their loans. And that happens a lot of time in the for-profit sector, which are colleges that operate as businesses and turning profits, about 10% of students enroll in those kinds of colleges, and the community colleges which enroll about a third of students nationwide. Those are where a lot of the defaults are concentrated.
What impacts would you expect from resumed student loan payments?
[00:05:50]
NICHOLAS HILLMAN: When the repayment begins again, when the system gets turned back on, one thing I can anticipate, and I’m very worried about, frankly, is people falling behind on their loans once again. Prior to the pause, we had about 15% of borrowers were delinquent on their loans, another 15% were in default on their loans—and that’s a very sizable portion of borrowers who are not making payments, not making progress on their loans. So, when the repayment pause ends and repayment resumes, I can anticipate that there’ll be a lot of challenges in kind of getting back up to speed. Now, the federal government has created some programs that they’re going to be rolling out to help in that transition process. And I think that that’s going to go a long way. But I do worry a lot about whether borrowers even have the information they need to know where to send their payments when the pause ends, for example.
What impacts would you expect if the Biden administration’s plan is enacted?
[00:06:50]
NICHOLAS HILLMAN: Two big impacts I could imagine. One being that about 20 million borrowers would have their debts fully canceled. And this is because about 52% of all federal student loans that qualify for this program are less than $20,000. And that’s where most of the cancellation is going to happen. And so a lot of individuals—the Biden administration estimates 20 million—would have their debts fully forgiven. So, that’s one impact. Another impact is that it’s going to give a chance for borrowers to kind of reset their repayment plans. They’re going to maybe get into income-driven repayment plans or different repayment plans for whatever debt remains. And so, we’ll give a chance to kind of refresh the way that that repayment system works. And I think that in that process, borrowers might have a repayment plan that works better for them than what they had prior to the pause.
What is known about how student debt relief would affect marginalized populations?
[00:07:50]
NICHOLAS HILLMAN: Not everybody borrows for college in the first place. And one of the major reasons why people borrow is because they don’t have enough money to pay for college out of pocket. And the reason for that is because we have great racial wealth gaps where white families have eight times greater wealth than Black families and five times greater wealth than Hispanic-Latino families. And that plays out in why students borrow and how much they borrow to pay for college. And so, there are great racial inequalities in terms of who borrowers and how much, and how well they repay their loans. And so, because of that, the implications for forgiveness can play a role in addressing racial wealth gaps and racial inequality and financial resources in America. It certainly won’t close those gaps, but it does something to help address them.
Besides financial issues, what challenges could be involved in resuming student loan repayments?
[00:08:49]
NICHOLAS HILLMAN: A lot of things have changed during the pandemic. People have moved. People have changed their email addresses and their phone numbers. Their lives have changed. And servicers—loan servicers—pre-pandemic, would be in touch with borrowers monthly, but they haven’t been for three years. And so now, servicers are going to have to make sure that they have updated contact information from their borrowers so that their borrowers know not just when their payments are due, but also what options they have available to them to restart their payments. And so, there’s a lot of mundane, proactive customer support that needs to be done. And these servicers play a really important role in making sure that that happens. And that’s part of the repayment mechanism that I don’t think gets a lot of attention but could.
