A SOLUTION IN SEARCH OF A PROBLEM:

Proposals involving mass student-loan forgiveness are motivated in part by the belief that student debt has grown to crushing levels in recent decades. Debt-cancellation proponents claim that most borrowers are unable to afford their payments and that their debt acts as a drag on economic growth. They blame student-loan debt for all sorts of economic ills, from lower home-ownership rates to stifled consumer spending to reduced rates of small-business formation.

Given Americans' collective student-loan debt, forecasts of imminent catastrophe are easy to believe. And there's simply no denying that the overall debt burden has increased rapidly over the past 20 years. In 2000, outstanding federal student loans totaled approximately $318 billion in today's dollars. That figure now stands at $1.6 trillion. More recently, student debt has eclipsed credit-card debt and auto loans to become the second-largest form of consumer debt in America -- only home-mortgage debt is larger.

Yet several empirical studies reveal a far less alarming picture than the $1.6 trillion figure suggests. The reason? These studies use data about borrowers themselves rather than summary statistics about the entire stock of debt. This lens helps reveal that rising levels of overall debt do not necessarily translate into larger debt burdens on individuals. It also suggests that rising student debt may not be a categorically negative development.

A recent study by the J. P. Morgan Chase & Co. Institute, for instance, examined checking-account transactions of 4.6 million households to determine how much borrowers were paying monthly on their student loans before pandemic legislation put federal loans into forbearance. In other words, rather than calculating the total outstanding debt students owe as a collective, the study examined students' individual payments. Researchers also compared these payments to borrowers' take-home pay to assess the financial burden they impose.

The authors of the J. P. Morgan study found that the typical borrower examined had a student-loan payment of $179 per month, which was just 5.5% of his monthly take-home pay. It's hard to imagine student debt having a significant impact on household financial decisions when, for the majority of borrowers, payments are less than $200 per month. And at 5.5% of take-home pay, these payments are in line with what experts have argued are reasonable and affordable. Such statistics are hardly consistent with claims that borrowers are being overwhelmed by student-loan debt.

How do those payments compare to what borrowers paid 20 or even 30 years ago, before the more recent run-up in debt? Surprisingly, typical payments weren't any lower back then. A 2002 survey of student-loan borrowers conducted by Nellie Mae -- a financial institution that had a major presence in the market at the time -- found that median monthly payments in today's dollars were about $280 that year. This is considerably higher than the $179 in monthly payments that today's borrowers typically pay.

Like the J. P. Morgan study, the Nellie Mae study also assessed payments relative to borrower earnings. It found that, at the median, monthly student-loan payments were about 8% of a borrower's earnings. Again, this is higher than the 5.5% figure the typical borrower pays today.

Furthermore, a 2014 Brookings Institution study by Beth Akers and Matthew Chingos suggests that student-debt burdens relative to income have not increased over time. Using data from the Federal Reserve's Survey of Consumer Finances, the authors found that student-loan payments relative to income were constant from 1992 to 2010 -- at about 4% of household income.

How could overall student-debt levels increase so dramatically while burdens on individual borrowers remain steady? One possible explanation is that rising incomes can support higher levels of debt. The Akers and Chingos study suggests that earnings among borrowers have increased at rates that have kept pace with rising debt, which is consistent with this theory. Interest rates on debt have also fallen considerably over time, putting downward pressure on payments even as debt levels have increased. In the 1990s and early 2000s, interest rates on student loans for undergraduates stood at about 8%. Today, they are less than 5%.

Additionally, two demographic trends have contributed to rising cumulative debt in a way that does not necessarily translate into increasingly burdensome payments. One is that a greater share of the population is attending some form of higher education than in the past. Today, about 41% of young adults enroll in some form of post-secondary education, which is up from about 34% in the 1990s. Enrollment among older non-traditional students has increased at even higher rates. Given that a larger share of the population is pursuing a post-secondary degree, we should expect the outstanding stock of debt to rise, but per-borrower payments need not also increase.

The other demographic trend boosting levels of outstanding debt is more surprising -- and largely missing from the debate over mass loan forgiveness. U.S. Department of Education data show that while students from low-income families are about as likely to borrow money to finance their education today as they were in the mid-1990s, students from upper-income families are almost twice as likely to borrow today than they were 25 years ago. The dynamic of a large new demographic group taking on student-loan debt is likely contributing to the rapid run-up of total outstanding debt -- but again, this would not necessarily translate into larger per-borrower loan burdens than in the past.

New government policies have also played a role in helping keep borrowers' payments low. In 2009, all borrowers in the federal loan program -- through which the vast majority of student loans are issued -- gained access to Income-Driven Repayment (IDR) plans. This change made monthly payments more affordable for low- to middle-income borrowers. Obama-era policies made the programs even more generous in 2012.

Currently, IDR plans allow borrowers to set their payments at 10% of their income over an exemption of $19,000 for a single individual or $40,000 for a family of four. For most of these borrowers, remaining debts are forgiven after 20 years of payments. About half of all outstanding federal student loans are repaid through an IDR plan, and the typical payment for borrowers enrolled in these plans ranges from $91 to $154 per month. If all borrowers in the federal loan program can now make low payments based on their incomes -- and the data show many have opted to do so -- then it stands to reason that payments on the overall stock of debt would not have increased in proportion to the rise in overall debt.

Another body of research casts doubt on the claims that student loans are ineffective at increasing college access and do more harm than good for borrowers. Two separate studies using experimental designs -- one conducted by Benjamin Marx and Lesley Turner, and another by Andrew Barr, Kelli Bird, and Benjamin Castleman -- found that community-college students who took on more debt tended to see better outcomes in their schooling, including better grades, higher completion rates, and fewer loan defaults after leaving school. This suggests that, in the right context, some students are better off for having student debt than they would be if they had not borrowed for school.

A working paper from the National Bureau of Economic Research that focused on students attending four-year institutions reached similar conclusions. After controlling for multiple differences among students, the authors found that those who borrowed at higher levels were more likely to finish their degrees and had higher earnings later in life than those who did not. Moreover, borrowing more heavily to attend school did not result in higher loan defaults and had no effect on home-ownership rates.

Taken together, this evidence challenges the case for mass student-loan forgiveness. As we will discuss later on, there are reasons for concern over other student-debt trends. But these problems hardly suggest mass loan forgiveness as a necessary -- or even a suitable -- response.

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