The Volume and Repayment of Federal Student Loans: 1995 to 2017

The Volume and Repayment of Federal Student Loans: 1995 to 2017

Summary

The quantity and variety of federal student loans, which offer financing to make greater schooling extra accessible, have grown over the previous few a long time. In 2017, the latest 12 months for which detailed data was obtainable, $96 billion in new federal student loans was disbursed to eight.6 million students, in contrast with $36 billion (in 2017 {dollars}) disbursed to 4.1 million students in 1995.1 Between 1995 and 2017, the steadiness of excellent federal student loan debt elevated greater than sevenfold, from $187 billion to $1.4 trillion (in 2017 {dollars}).

In this report, the Congressional Budget Office examines the elements that contributed to the expansion within the quantity of student loans and the consequences of modifications to student loan coverage on borrowing and compensation. Because the report focuses on the interval between 1995 and 2017, it doesn’t cowl the consequences of the Coronavirus Aid, Relief, and Economic Security (CARES) Act, which was enacted on March 27, 2020.2

How Do the Federal Student Loan Programs Work?

Between 1995 and 2017, students might borrow via two main federal student loan packages, the Federal Family Education Loan (FFEL) program, which assured loans issued by banks and different lenders via 2010, and the William D. Ford Federal Direct Loan program, via which the federal authorities has issued loans instantly since 1994. The two packages operated in parallel via 2010, both guaranteeing or issuing loans to students beneath practically equivalent phrases and circumstances.

The direct loan program continues to supply numerous kinds of loans and compensation plans. Loans are restricted to a most quantity (which differs by kind of loan) and are prolonged at an rate of interest particular to loan kind and 12 months. After debtors end their education, they repay their loans in keeping with one of many obtainable compensation plans. Required month-to-month funds are decided by the quantity borrowed, the rate of interest, and the compensation plan. Borrowers who persistently fail to make the required funds are thought-about to have defaulted on their loans, at which level the federal government or loan supplier can attempt to get better the owed funds via different means, comparable to by garnishing wages. Under sure compensation plans, certified debtors can obtain forgiveness of their remaining loan steadiness after a selected period of time—10, 20, or 25 years.

Why Has the Volume of Student Loans Grown So Much Over Time?

The quantity of student loans has grown as a result of the variety of debtors elevated, the common quantity they borrowed elevated, and the speed at which they repaid their loans slowed. Certain parameters of the student loans—specifically, borrowing limits, rates of interest, and compensation plans—modified over time, which affected borrowing and compensation, however the largest drivers of that development have been elements outdoors of policymakers’ direct management. For instance, whole enrollment in postsecondary education and the common price of tuition each elevated considerably between 1995 and 2017.

Much of the general improve in borrowing was the results of a disproportionate improve within the variety of students who borrowed to attend for-profit colleges. Total borrowing to attend for-profit colleges elevated considerably, from 9 % of whole student loan disbursements in 1995 to 14 % in 2017. (For undergraduate students who borrowed to attend for-profit colleges, the share grew from 11 % to 16 %; for graduate students, it grew from 2 % to 12 %.) Moreover, students who attended for-profit colleges have been extra prone to go away faculty with out finishing their packages and to fare worse within the job market than students who attended different kinds of colleges; they have been additionally extra prone to default on their loans.

How Have Changes in Student Loan Policies Affected Borrowing and Default?

The parameters of federal student loans obtainable to debtors have modified periodically, and people modifications have affected developments in borrowing and default. Between 1995 and 2017, policymakers launched new kinds of loans and compensation plans (a few of which permit for loan forgiveness after a sure time) and adjusted the parameters of present loan varieties and compensation plans. This report focuses on modifications in loan parameters which might be most related to debtors—borrowing limits, rates of interest, and compensation plans—and the results of these modifications on borrowing and default.

  • Borrowing Limits. Federal student loans are topic to borrowing limits. All loans are restricted by the student’s anticipated price of attending a college, however most loans have extra stringent annual and lifelong borrowing limits. For instance, since 2009, dependent undergraduate students haven’t been allowed to borrow greater than $31,000 in federal student loans for all of their undergraduate education. Borrowers have responded to these loan limits; when the bounds elevated, they tended to borrow extra, which additionally elevated their required month-to-month fee. After accounting for the debtors’ and colleges’ traits, CBO discovered that bigger month-to-month funds have been related to a barely elevated chance of default.
  • Interest Rates. The rates of interest on federal student loans assorted significantly between 1995 and 2017. Until 2006, loans have been issued with variable rates of interest, which have been listed to a market rate of interest and adjusted in keeping with that market price from 12 months to 12 months. After 2006, loans have been issued with mounted rates of interest, which have been set within the 12 months of disbursement after which remained fixed for the lifetime of the loan.

    Interest charges have had a small impact on the quantity borrowed by graduate students, who have been much less restricted by borrowing limits than undergraduates. Higher charges have been related to a slight discount within the quantity of borrowing; decrease charges have been related to a slight improve. For instance, rates of interest on student loans have been decrease throughout tutorial years 2014 to 2017 than they have been from 2007 to 2013, barely boosting graduate borrowing. Undergraduate debtors didn’t seem like delicate to rates of interest. After the debtors’ and colleges’ traits (comparable to the kind or tutorial degree of the college attended) have been accounted for, greater month-to-month funds—which may end result from greater rates of interest—have been related to barely greater charges of default.

  • Repayment Plans. A borrower’s compensation plan, together with the quantity borrowed and the rate of interest, determines the month-to-month fee required on the loan. Under the usual compensation plan, loans are repaid over 10 years. A wide range of various compensation plans can be found. Some of these plans lengthen the compensation interval to 25 or 30 years; others, referred to as income-driven compensation (IDR) plans, tie required funds to debtors’ incomes and supply loan forgiveness after a sure interval. In the primary few years after debtors enter compensation, the required funds beneath IDR plans are sometimes too small to cowl the curiosity that accrues on the loan, which contributed to rising ranges of debt.

    CBO discovered that compensation plans that lowered a borrower’s month-to-month funds tended to lower the incidence of default. Because debtors choose compensation plans after deciding how a lot to borrow, CBO didn’t estimate the consequences of compensation plans on the quantity students borrowed.

Types of Loans and Repayment Plans

There have been two main federal student loan packages. The first was the Federal Family Education Loan program, which assured loans issued by banks and nonprofit lenders from 1965 to 2010. In 1994, the Congress established the William D. Ford Federal Direct Loan program, which issued student loans instantly with funds offered by the Treasury. The two packages operated in parallel via tutorial 12 months 2010, both guaranteeing or issuing loans to students beneath practically equivalent phrases and providing quite a lot of loan varieties and compensation choices. Federal student loans usually have phrases which might be extra favorable to debtors than loans provided by personal lenders.

The Health Care and Education Reconciliation Act of 2010 eradicated new FFEL loans. In its final 12 months, the FFEL program assured 80 % of the brand new loans disbursed and accounted for about 70 % of whole excellent balances. Since then, all new federal student loans have been made via the direct loan program.3 In 2020, direct loans accounted for about 80 % of the excellent loan steadiness.

Types of Loans

The direct loan program affords three kinds of loans: sponsored Stafford loans, unsubsidized Stafford loans, and PLUS loans. The loans fluctuate by eligibility standards, limits on the utmost dimension of the loans, and rates of interest and guidelines about how curiosity accrues:

  • Subsidized Stafford Loans. Available to undergraduate students with demonstrated monetary want, sponsored Stafford loans have typically had decrease rates of interest than different kinds of loans. Most considerably, curiosity doesn’t accrue on these loans in periods of education or when funds are deferred, for instance, in periods of economic hardship or navy service. The limits on how a lot students can borrow every tutorial 12 months and for all their years of education are comparatively low. In 2017, sponsored Stafford loans accounted for 23 % of the full quantity (in {dollars}) of all federal student loans disbursed and 38 % of the full quantity of federal student loans disbursed to undergraduates.
  • Unsubsidized Stafford Loans. Available to each undergraduate and graduate students regardless of their monetary want, unsubsidized Stafford loans accrue curiosity even whereas the borrower is in class. The borrowing limits are greater for unsubsidized loans than for sponsored ones. In 2017, unsubsidized Stafford loans accounted for 53 % of the full quantity (in {dollars}) of federal student loans disbursed.
  • PLUS Loans. These loans can be found to graduate students and the mother and father of dependent undergraduate students. PLUS loans have usually had greater rates of interest than Stafford loans and, like unsubsidized Stafford loans, accrue curiosity whereas the student is in class. Unlike Stafford loans, PLUS loans are restricted solely by the student’s price of attending a college. They accounted for twenty-four % of the full quantity (in {dollars}) of federal student loans disbursed in 2017.

Repayment, Default, and Forgiveness

When debtors end their education, they’re routinely assigned to the usual compensation plan, which amortizes the loan principal and accrued curiosity over a 10-year interval. Other compensation plans, in addition to numerous instruments for pausing or decreasing funds, can be found and have expanded over time. For instance, debtors could choose a graduated compensation plan or an IDR plan. In a graduated compensation plan, the required month-to-month funds improve over time, with the expectation that the borrower’s revenue will even improve over time. In IDR plans, debtors’ funds are based mostly on their incomes and could also be as little as zero if their revenue falls under a sure threshold. After choosing a plan and starting compensation, debtors could apply for fee deferment or forbearance, which briefly reduces or pauses their funds.4

Borrowers who miss a required month-to-month fee and haven’t obtained deferment or forbearance from their loan servicer are thought-about to be 30 days delinquent. Borrowers who proceed to overlook funds and turn into 270 days delinquent are declared by the federal government to have defaulted on their loans. When debtors default, they lose eligibility for additional federal assist till the default is resolved, and the default is reported to shopper credit reporting companies.

Unlike balances on another kinds of loans, the steadiness on a student loan is often not discharged when the borrower declares chapter. The authorities or its contractor is mostly required to aim to get better the loan steadiness via numerous means, comparable to by garnishing wages, withholding tax refunds or Social Security advantages, or pursuing civil litigation. Typically, via these means in addition to via voluntary compensation of defaulted loans, the federal government finally recovers a lot of the remaining steadiness of loans that defaulted.

When debtors don’t pay sufficient to cowl the curiosity on their loan—for instance, when the required fee in an IDR plan is small, once they obtain deferment or forbearance, or once they default—their loan steadiness will increase. (For sponsored loans, deferment briefly pauses curiosity accrual, so the balances of these loans don’t develop in periods of deferment.) Of the debtors who entered compensation within the five-year interval between 2010 and 2014, 56 % had their steadiness improve in some unspecified time in the future between the time they entered compensation and 2017. Of the debtors whose steadiness elevated, 78 % had obtained short-term deferment or forbearance, 44 % had defaulted (together with some who had additionally obtained deferment or forbearance), and 33 % had chosen an IDR plan.

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Under sure circumstances, the federal government forgives some or all of debtors’ excellent loan balances. For instance, debtors who work in native, state, or federal authorities or nonprofit jobs for 10 years or who work as academics in low-income areas for five years could have their loan balances forgiven. Borrowers in IDR plans may additionally qualify for forgiveness after making the required funds for a sure time frame, both 20 or 25 years.

Growth within the Volume of Federal Student Loans Over Time

The quantity of excellent federal student loan debt elevated greater than sevenfold between 1995 and 2017, from $187 billion to $1.4 trillion in 2017 {dollars} (see Figure 1). That development was the results of a rise within the variety of debtors, a rise within the common quantity they borrowed, and a lower within the price at which they repaid excellent loans.

Figure 1.

Outstanding Federal Student Loan Debt

Billions of 2017 Dollars

Source: Congressional Budget Office, utilizing information from the Department of Education’s National Student Loan Data System.

The developments in these variables have been associated to the kind of faculty debtors attended: selective, nonselective, for-profit, or two-year. Among each undergraduate and graduate debtors, borrowing to attend for-profit colleges had the very best share improve. Moreover, after ending their education and coming into compensation, debtors who had attended for-profit colleges have been extra prone to default on their federal student loans than debtors who had attended different four-year colleges, CBO discovered.

Components of Student Loan Debt

The whole quantity of student loan debt could be accounted for by developments in three variables: the variety of debtors, the common quantity every borrowed, and the speed at which they repaid their loans.

Number of Borrowers. More folks took out student loans over time: In 2017, 8.5 million folks borrowed, in contrast with 4.4 million in 1995 (see Figure 2, prime panel). That improve was partially the results of a 36 % development in enrollment in establishments of upper schooling over the interval. Increased enrollment was pushed by elements comparable to inhabitants development, the financial return on a school or graduate diploma, and normal financial circumstances.5 Demand for greater schooling has been cyclical: Enrollment and borrowing each elevated sharply throughout and shortly after the 2007–2009 recession, when the job market was comparatively weak, after which decreased afterward; the variety of new debtors peaked at 11.1 million in 2011.6

Figure 2.

Components of Total Outstanding Federal Student Loan Debt

The quantity of people that took out loans every year grew steadily via 2011.

The common quantity borrowed additionally grew, significantly through the 2007–2009 recession and partly in relation to rising tuition ranges over time.

The share of debtors who defaulted inside three years of first starting compensation grew throughout and after the 2007–2009 recession. That improve in defaults additionally contributed to the rise within the whole excellent steadiness.

Source: Congressional Budget Office, utilizing information from the Department of Education’s National Student Loan Data System.

Although the Department of Education doesn’t present separate default charges for undergraduate and graduate debtors for every year, CBO’s estimate of the common default price is a number of share factors greater than the default charges the Department of Education studies. That might be the results of variations in the best way CBO and the Department of Education outline compensation cohorts.

Average Amount Borrowed. Borrowers, on common, borrowed extra in 2017 than in 1995 (see Figure 2, center panel):

  • Among graduate debtors, the common quantity borrowed every year grew by 47 %, from about $17,400 (in 2017 {dollars}) in 1995 to $25,700 in 2017;
  • For undergraduate debtors, it grew by 10 %, or from $6,500 to $7,200, over the identical interval; and
  • For PLUS loans to oldsters, the common quantity borrowed every year grew extra—by 79 %—from $9,300 in 1995 to $16,600 in 2017.

Much of that development occurred between 2005 and 2009 for graduate debtors and between 2007 and 2009 for undergraduate debtors. Since then, the common quantity borrowed has elevated barely for graduate debtors and has declined for undergraduate debtors; it has continued to rise for PLUS loans.

Tuition elevated considerably between 1995 and 2017, and that improve put upward stress on borrowing.7 (Some analysis signifies that the enlargement of the federal student loan packages has induced faculties and universities to extend tuition. See Box 1.) For instance, the common printed in-state tuition—also called the sticker value—for public, four-year undergraduate establishments elevated by 120 % (adjusted for inflation) over that interval. The common printed tuition for not-for-profit personal establishments elevated by 76 %.8 The efficient tuition—the worth students paid, on common, after accounting for reductions—rose as effectively, although not as a lot because the sticker value. Average borrowing per 12 months additionally elevated however by a lot much less, most likely partially as a result of undergraduate debtors have been constrained by annual loan limits.

Box 1.

Did the Expansion of the Federal Student Loan Programs Lead to Increases in Tuition?

As the amount of student loans elevated between 1995 and 2017, the schooling that faculties charged additionally elevated. Moreover, it was not simply the sticker value of tuition that elevated; the common tuition that students paid after accounting for student assist comparable to grants and tax credit additionally rose, though at a slower price.1

Rising tuition will increase the quantity that students borrow. But the consequences could go within the different route as effectively: The improve in students’ means to borrow could have induced faculties to extend their tuition. The concept that student loan availability causes greater tuition is known as the Bennett speculation, named after former Secretary of Education William Bennett, who publicly formulated the thought in 1987.

Various elements have pushed up tuition over time. The price of the providers that faculties and universities present has elevated, pushed partially by will increase in the price of using college and workers. At the identical time, assist from states and localities has decreased, which has significantly affected public faculties and universities. During and after the 2007–2009 recession, for instance, at these colleges the common funding per student from state and native governments fell and tuition elevated sharply. Later, as that funding elevated, the schooling development price slowed.2

Until just lately, the prevailing empirical proof didn’t clearly present that elevated borrowing via federal student loans contributed to the schooling will increase. However, new analysis signifies that it performed a job in rising tuition for undergraduate packages.3 Economists have estimated the extent to which increasing student loan availability contributed to schools’ and universities’ means to cost greater costs for a similar providers. To try this, economists studied intervals through which students’ or mother and father’ means to borrow for college modified sharply.

For instance, David Lucca and coauthors studied the consequences of will increase in loan limits for sponsored and unsubsidized Stafford loans in tutorial years 2008 and 2009 on tuition for undergraduate packages. They estimated that colleges accepting students with these kinds of loans elevated their sticker value tuition between 20 cents and 60 cents for every greenback the loan limits elevated and that the online value students paid after accounting for reductions additionally elevated.4

Mahyar Kargar and William Mann studied the tightening, in 2011, of eligibility standards for PLUS loans obtainable to oldsters of undergraduate students. Many mother and father who had been eligible earlier than the change have been not eligible. The economists seemed on the colleges’ response to that discount in obtainable credit and located that colleges that have been extra affected by the change raised their tuition lower than different colleges and obtained much less income per student than different colleges. Those findings point out that the elevated availability of economic assist led, at the very least partially, to tuition will increase.5


An improve in borrowing and the ensuing improve within the steadiness of excellent federal student loan debt don’t essentially improve the federal price range deficit or financially imperil the debtors. For instance, in its March 2020 baseline price range projections, CBO projected that, beneath present legislation, student loans issued between 2021 and 2030 would lead to financial savings for the federal government.9 The program is projected to decrease the deficit as a result of the federal government has set the rates of interest on student loans above the charges at which the Treasury borrows to fund the loans. That distinction in rates of interest causes the current worth—or present greenback quantity—of debtors’ funds to be higher than the current worth of the associated fee to the federal government to disburse the loans (though some debtors default).

In CBO’s March 2020 baseline price range projections, two kinds of loans have been estimated to lead to prices to the federal authorities: sponsored loans and PLUS loans to graduate students. For sponsored loans, curiosity doesn’t accrue whereas the borrower is in class, which lowers the quantity that debtors will probably be required to pay again. For PLUS loans to graduate students, repayments are projected to be decrease as a result of most of the debtors of these loans choose IDR plans, through which the fee quantity is decided by the borrower’s revenue reasonably than by the quantity borrowed. Under these plans, unpaid balances are forgiven as soon as the necessities are met, which lowers the quantity that’s anticipated to be paid again.

Many debtors can be higher off financially in the long term, even with the burden of debt repayments, if their loans enabled them to acquire schooling that enhanced their productiveness and elevated their future earnings. The economics literature, which has an extended historical past of learning the return on education, usually finds a considerable profit to acquiring a school diploma.10

Repayment and Default. The prevalence of default has modified over time and is bigger for undergraduate debtors than for graduate debtors (see Figure 2, backside panel). The three-year default price—the share of debtors who default inside three years of first coming into compensation—elevated between the 2005 and 2010 cohorts, from 2 % to 7 % for graduate debtors and from 15 % to twenty-eight % for undergraduate debtors, earlier than beginning to decline to six % for graduate debtors and 21 % for undergraduate debtors within the 2015 cohort.11 The default price on PLUS loans to oldsters was just like that for graduate students however 1.7 share factors greater, on common, over the 1995–2015 interval. (Repayment cohorts are teams of people that started repaying their loans in the identical 12 months; the 2015 cohort is the latest group for which three years of subsequent information have been obtainable.)

Some of the rise within the default price between the 2005 and 2010 cohorts was associated to the elevated share of debtors at for-profit and two-year colleges. Students who attended these kinds of colleges have been about half as prone to full their packages and fewer prone to do effectively within the job market than students at different kinds of colleges. As a end result, they could have had extra issue paying again their loans.12

The 2007–2009 recession and the following sluggish restoration have been additionally elements. During that point, unemployment was comparatively excessive, and lots of debtors had diminished incomes that affected their means to make funds. Moreover, commencement charges are typically decrease throughout and instantly after recessions, and people low charges are additionally related to elevated default.13

Differences in Borrowing and Repayment at Different Types of Schools

The quantity of borrowing and the speed of compensation assorted with the kind of faculty debtors attended. For this report, CBO grouped colleges into 4 classes: public or not-for-profit personal colleges which might be selective; public or not-for-profit personal colleges that aren’t selective; for-profit colleges; and, for undergraduate debtors solely, public or personal not-for-profit two-year colleges. Nonselective colleges are people who have open enrollment, sometimes requiring only a highschool diploma, a GED certificates, or the passage of an admissions take a look at designed to point whether or not potential students may gain advantage from postsecondary education.14

Borrowing grew disproportionately in some kinds of colleges. Although borrowing to attend selective colleges grew essentially the most in whole greenback quantities, borrowing to attend for-profit and two-year colleges elevated essentially the most as a share of whole disbursements (see Figure 3):

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Figure 3.

Total Borrowing, by Academic Level and School Type

For every kind of faculty, whole borrowing usually elevated between 1995 and 2012. Growth was particularly sharp beginning in 2007, primarily for causes associated to the 2007–2009 recession. Starting in 2012, borrowing started to say no again towards its prerecession degree.

As a share of whole borrowing, the expansion in borrowing by students attending for-profit colleges was particularly massive.

Source: Congressional Budget Office, utilizing information from the Department of Education’s National Student Loan Data System.

Selective and nonselective establishments embrace public colleges and not-for-profit personal colleges. For-profit establishments embrace any kind of for-profit faculty. Two-year establishments embrace two-year undergraduate colleges.

School selectivity relies on the 2008 Barron’s Admissions Competitiveness Index, offered by the National Center for Education Statistics.

  • Among undergraduates, borrowing for selective colleges elevated from $19 billion in 1995 to $38 billion in 2017. As a share of whole borrowing by undergraduates, nevertheless, borrowing to attend selective colleges decreased from 73 % to 65 %.
  • Undergraduate borrowing to attend for-profit colleges elevated from $3 billion in 1995 to $9 billion in 2017, or from 11 % to 16 % of the full disbursements to undergraduate debtors.
  • Borrowing for two-year colleges greater than doubled, from $2 billion in 1995 to $5 billion in 2017, rising from 7 % to 9 % of whole disbursements to undergraduate debtors.
  • Among graduate debtors, borrowing for all faculty varieties additionally elevated; essentially the most development occurred in borrowing for selective colleges.
  • Relative development amongst graduate debtors was additionally best for many who borrowed to attend for-profit establishments; that borrowing grew from 2 % of whole annual disbursements to graduate students in 1995 to 12 % in 2017.

On common, debtors who attended sure kinds of colleges have been extra prone to default than debtors who attended different kinds of colleges (see Figure 4). Undergraduates who borrowed to attend for-profit colleges, nonselective colleges, or two-year colleges defaulted at greater charges than graduate debtors. For instance, amongst debtors who entered compensation in 2015, undergraduate debtors who attended for-profit colleges had a three-year default price of 26 %, whereas the charges for undergraduate and graduate debtors who attended selective colleges have been 10 % and 4 %, respectively. The elevated chance of default exhibited by debtors who attended for-profit undergraduate colleges was associated to decrease household revenue earlier than attending faculty in addition to a higher chance of not graduating.15

Figure 4.

Three-Year Default Rates, by Academic Level and School Type

Percent

Students who borrowed to attend for-profit colleges and two-year colleges have been extra prone to cease repaying their loans than different debtors.

Source: Congressional Budget Office, utilizing information from the Department of Education’s National Student Loan Data System.

Three-year default happens when a borrower defaults inside the first three years after the start of the fiscal 12 months through which the borrower enters compensation.

Although the Department of Education doesn’t present separate default charges by kind of faculty for every year, CBO’s estimate of the common default price is a number of share factors greater than the default charges the Department of Education studies. That might be the results of variations in the best way CBO and the Department of Education outline compensation cohorts.

School selectivity relies on the 2008 Barron’s Admissions Competitiveness Index, offered by the National Center for Education Statistics.

Effects of Policy Changes on Borrowing and Repayment

Since 1995, policymakers have modified the parameters of the loans provided beneath the previous Federal Family Education Loan program and the present direct loan program, and people modifications have affected borrowing and compensation to various levels. Loan limits have been elevated, rates of interest considerably modified, and new compensation plans provided. In tutorial years 2008 and 2009, for instance, newly legislated limits allowed students to extend the quantity they borrowed. Between 2009 and 2015, policymakers launched new compensation plans that tied funds to debtors’ incomes and that offered loan forgiveness if sure standards have been met.

Estimating the Effects of Changes in Loan Parameters

It is difficult to establish the exact impact of modifications in loan parameters on borrowing and compensation. That is as a result of when loan parameters change, different elements outdoors of policymakers’ direct management may additionally change, and it’s tough to know which share of the modifications in borrowing or compensation resulted from the change in loan parameters and which resulted from modifications in different elements.

To estimate the impact of modifications in loan parameters, CBO studied loans throughout particular intervals when these parameters modified and different elements have been comparatively steady or when it might use statistical strategies to regulate for modifications in different elements. In that approach, CBO estimated modifications in borrowing and compensation that resulted instantly from modifications in three loan parameters—loan limits, rates of interest, and compensation and loan forgiveness plans—and separated these results from the consequences of modifications in elements outdoors of policymakers’ direct management.

Loan Limits

Federal student loan packages place limits on how a lot students can borrow. There are limits on how a lot a student can borrow for a single semester in addition to limits on the full quantity of all of the loans the student receives. No loan could exceed the price of attendance—minus some other assist the student could have obtained—on the faculty the place the student is enrolled. (The price of attendance is offered by every establishment and relies on the prices of tuition, room and board, textbooks, and different associated supplies and charges.) But most loans for undergraduates are topic to further limits which might be typically effectively under the price of attendance for most colleges. Those different limits depend upon the borrower’s tutorial degree and whether or not the borrower relies or unbiased.16 Over time, policymakers have modified the bounds on how a lot students can borrow.

Borrowers have tended to answer these limits. Many borrowed the complete quantity allowed and elevated their borrowing in keeping with will increase within the limits. That tendency means that debtors worth the flexibility to borrow via federal student loan packages and that greater loan limits facilitate debtors’ means to acquire greater schooling. At the identical time, greater loan limits permit debtors to tackle extra debt and, for some, improve their chance of finally defaulting on their loans. Accordingly, policymakers could face a tradeoff when setting loan limits: Increasing the bounds expands entry to greater schooling but in addition could improve the danger of default for some debtors.17

Historical Limits. Loan limits have usually elevated with tutorial degree. For each sponsored and unsubsidized loans for undergraduate students, the restrict for second-year students has been greater than that for first-year students, and the restrict for more-advanced undergraduate students has been greater nonetheless (see Table 1). PLUS loans, which can be found to graduate students and fogeys of undergraduate students, have been restricted solely by the price of attendance; a few of these loans are effectively over $30,000. A student’s dependency standing additionally impacts loan limits for undergraduates; unbiased students have greater limits.

Table 1.

Limits on the Amount of a Borrower’s Federal Student Loans, 2009 to Present

Dollars

Source: Congressional Budget Office.

n.a. = not relevant.

Loan limits remained the identical from 1995 till policymakers modified them in tutorial years 2008 and 2009. In 2008, the bounds elevated by $875 for first-year students and $1,000 for second-year students. In 2009, the bounds elevated by a further $2,000 for students in any respect ranges. Limits haven’t modified since then.

Effects of Limits on Borrowing and Defaults. Loan limits seem to limit how a lot students borrow. For yearly between 1995 and 2017, roughly half of debtors who took out Stafford loans (which had annual limits at ranges that have been specified by statute) borrowed at or close to the restrict. Moreover, when limits elevated, borrowing elevated. For instance, within the years instantly following the 2 separate will increase in borrowing limits for undergraduates in tutorial years 2008 and 2009—the one two substantial restrict will increase between 1995 and 2017—borrowing for undergraduate research elevated sharply (see Figure 5). Additionally, unbiased debtors, who’ve had greater limits than dependent debtors, tended to borrow extra.

Figure 5.

Average Annual Amount Borrowed for Undergraduate Studies, by School Type

Thousands of 2017 Dollars

Source: Congressional Budget Office, utilizing information from the Department of Education’s National Student Loan Data System.

Average borrowing quantity excludes PLUS loans made to oldsters.

Determining the precise impact of will increase in loan limits on borrowing could be tough as a result of different elements additionally modified when loan limits elevated. For instance, the loan restrict will increase in tutorial years 2008 and 2009 occurred simply earlier than and in the course of the 2007–2009 recession, a time when the job market, faculty enrollment, and tuition modified considerably. Therefore, the extent to which modifications in borrowing resulted from modifications in loan limits versus modifications in different elements will not be instantly clear.

To isolate the impact of loan limits on borrowing from the consequences of different elements, CBO studied undergraduate debtors who have been near age 24, the age at which debtors are thought-about unbiased and due to this fact topic to greater borrowing limits for unsubsidized loans.18 By evaluating debtors who have been approaching their twenty fourth birthday, and due to this fact have been topic to comparatively low borrowing limits, with comparable debtors who had simply handed their twenty fourth birthday, and due to this fact have been topic to comparatively excessive borrowing limits, CBO estimated {that a} $1,000 improve in loan limits for these debtors was related to a rise in borrowing of $400 to $500.

To the extent that greater limits have been linked to extra borrowing, will increase in loan limits have been additionally associated to barely elevated default charges. Under most compensation plans, together with the usual compensation plan to which debtors have been routinely assigned, bigger preliminary loans led to greater month-to-month loan funds. All else being equal, greater month-to-month funds are tougher for debtors to pay, making default extra seemingly. (Under IDR plans, the required month-to-month fee is often decided by the borrower’s revenue, though the full quantity borrowed determines the utmost doable fee for many of these plans. Therefore, beneath IDR plans the hyperlink between greater borrowing limits and better default charges is weaker.)

Much of the change in total default charges is accounted for by different elements that aren’t instantly associated to the rise within the borrowing limits. Indeed, the common default price was rising even earlier than the loan limits elevated (see Figure 4). Other elements that have an effect on default embrace modifications within the kinds of colleges debtors attend and modifications within the job market on the time of the restrict improve.19 For instance, over time, a bigger share of debtors attended for-profit colleges and two-year undergraduate colleges. Those debtors have been much less prone to full their tutorial packages, thereby decreasing the monetary good thing about their attendance. On common, they’d greater default charges than debtors who attended different kinds of colleges.20

CBO assessed the impact on default charges of upper borrowing limits utilizing the identical technique of learning undergraduate debtors who took out unsubsidized loans simply earlier than or simply after their twenty fourth birthday. After adjusting for the debtors’ and colleges’ traits, CBO estimated that the elevated borrowing restrict was related to a barely higher incidence of default: For the studied group of debtors, a $1,000 improve in borrowing led to a 1 percentage-point improve in defaults.

Interest Rates

Along with the quantity borrowed and the compensation plan, rates of interest decided the month-to-month loan fee in mounted compensation plans and so have been associated as to whether students selected to borrow, how a lot they borrowed, and their chance of default. Different rates of interest might have a big impact on the month-to-month fee. Other issues being equal, greater rates of interest elevated the quantity debtors wanted to pay and, in consequence, elevated the chance of default.

Interest Rates Over Time. Interest charges on student loans are set by legislation and have modified over time and assorted by kind of loan (see Table 2).

  • Between tutorial years 1995 and 2006, loans have been issued with variable rates of interest. The rate of interest for these loans modified every year in keeping with a components that listed it to the speed for 3-month Treasury payments.
  • Since the 2007 tutorial 12 months, loans have been issued with mounted rates of interest, which means that the rate of interest stays fixed for the lifetime of the loan. Between tutorial years 2007 and 2013, mounted rates of interest on unsubsidized loans for undergraduates have been set by statute at 6.8 %. Interest charges on sponsored loans have been adjusted yearly.
  • Starting in tutorial 12 months 2014, the charges have been set to equal the speed on 10-year Treasury notes plus a hard and fast premium; the speed for undergraduate Stafford loans was the 10-year price plus 2.05 share factors.21

For unsubsidized Stafford loans for undergraduates between 1995 and 2017, the charges on the time of origination ranged between 3.4 % and eight.25 %; in tutorial 12 months 2017 the rate of interest was 4.45 % (see Figure 6). Accordingly, the month-to-month fee beneath the usual compensation plan for an preliminary loan steadiness of $10,000 ranged between $98 and $123; in 2017 it was about $103.

Figure 6.

Interest Rates and Monthly Payments on a $10,000 Stafford Undergraduate Loan

Source: Congressional Budget Office.

In a few years, the rates of interest for loans for undergraduate debtors have been decrease than these for graduate debtors, though the charges have been the identical in some years. Throughout the interval, debtors had the choice to consolidate a number of excellent loans right into a single loan with a hard and fast rate of interest.

Interest Rate Changes With Consolidation Loans. Consolidation loans gave debtors a technique to probably decrease their future loan funds. However, consolidation usually didn’t scale back the funds debtors have been required to make over the lifetime of their loans.

Consolidation loans allowed debtors with a number of excellent loans to mix their loans right into a single loan with a hard and fast rate of interest and likewise gave them the choice of fixing the period of the compensation interval. The single rate of interest was decided as the common rate of interest on the a number of loans within the 12 months of consolidation, rounded as much as the closest eighth of a share level.

For debtors who had excellent variable-rate loans, consolidation was a method of doubtless reducing future funds by changing their variable funds with a single mounted price that was set on the time of consolidation. For instance, contemplate a hypothetical borrower with $10,000 of variable-rate loans issued in 2006 who entered compensation in 2007. If the borrower consolidated these loans in 2007, when rates of interest have been comparatively excessive, the borrower would have common month-to-month funds of $117. A borrower who consolidated in 2010, nevertheless, when charges have been comparatively low, would have month-to-month funds of solely $94. (The distinction in whole funds between these two situations is $2,750 over the lifetime of the loan.) A well-timed consolidation might set funds at a decrease quantity, decreasing the chance of default.

In apply, most debtors who consolidated didn’t accomplish that at occasions when rates of interest have been lowest. On the opposite, the commonest years to consolidate have been tutorial years 2006 and 2007, earlier than rates of interest declined in response to the 2007–2009 recession. Perhaps debtors valued the flexibility to increase the period of their compensation plan and simplify their loan funds greater than they valued the flexibility to decrease their rate of interest. Or maybe those that consolidated at the moment incorrectly believed that rates of interest would rise.

Effects of Interest Rates on Borrowing and Defaults. As with modifications in loan limits, it’s difficult to isolate the impact of modifications in rates of interest on borrowing and defaults, as a result of when rates of interest change, different elements typically change, too.

CBO estimated the connection between rates of interest on the time of loan origination and the quantity folks borrowed by statistically controlling for variations in debtors’ traits over time. Changes in rates of interest on the time of loan origination had a restricted affiliation with the quantity folks borrowed for undergraduate research however had a small impact on the quantity folks borrowed for graduate research. Using information on loans taken out throughout tutorial years 2000 via 2017, CBO estimated {that a} 1 percentage-point improve in rates of interest on the time of loan origination was related to a negligible lower within the loan quantity for undergraduate debtors.

For graduate debtors, whose common loan quantity between 2000 and 2017 was about $11,000, a 1 percentage-point improve in rates of interest was related to a $150 lower within the loan quantity; a lower in rates of interest had the alternative impact. Interest charges on the time of loan origination on loans to graduate students have fallen in recent times, contributing barely to elevated borrowing: Between tutorial years 2007 and 2013, the common rate of interest on loans to graduate students was 7 %; between 2014 and 2017, the common rate of interest was 5.9 %. Graduate debtors could also be extra delicate to rates of interest than undergraduate debtors as a result of graduate debtors have greater loan limits, giving them extra flexibility to regulate their borrowing.

Interest charges might have an effect on the likelihood of default due to their impact on month-to-month funds. The common rate of interest (the weighted common of the rate of interest on excellent loan balances) and the three-year default price assorted by compensation cohort (see Figure 7). On common, greater rates of interest have been related to barely greater default charges; that relationship was stronger for undergraduates than for graduates. Those associations shouldn’t be interpreted as causal, nevertheless, as a result of different elements along with rates of interest have been altering. The 2009–2015 compensation cohorts had greater default charges as a result of these debtors started repaying their loans after the 2007–2009 recession, when many debtors have been unemployed after commencement. The change to mounted, reasonably than variable, rates of interest on loans disbursed throughout and after 2007 may additionally have contributed to greater default charges. Interest charges on these loans would have been a lot decrease beneath the variable-rate coverage, reducing debtors’ month-to-month funds.

Figure 7.

Average Interest Rates and Three-Year Default Rates, by Repayment Cohort

Percent

Source: Congressional Budget Office, utilizing information from the Department of Education’s National Student Loan Data System.

The dotted strains present the predictions of a regression of the default price on the rate of interest.

Although the Department of Education doesn’t present separate default charges for undergraduate and graduate debtors for every year, CBO’s estimate of the common default price is a number of share factors greater than the default charges the Department of Education studies. That might be the results of variations in the best way CBO and the Department of Education outline compensation cohorts.

Repayment Plans and Loan Forgiveness

The compensation plan is the third parameter that, together with the quantity borrowed and the rate of interest, determines how a lot a borrower should pay every month.

Changes in Repayment Plans Over Time. Four broad kinds of compensation plans have been obtainable to debtors over time: normal, prolonged, graduated, and IDR (see Table 3). Some compensation plans have sure eligibility standards. Borrowers could freely select to alter their compensation plan at any level after coming into compensation.

Table 3.

Selected Types of Federal Student Loan Repayment Plans

Source: Congressional Budget Office.

a. Income-contingent, income-based, pay-as-you-earn, and revised pay-as-you-earn are particular kinds of income-driven compensation plans.

Through 2010, most student loan debtors repaid their loans utilizing the usual compensation plan to which they have been routinely assigned. Under the usual plan, they made mounted month-to-month funds for 10 years.

Since 2010, a rising variety of debtors have elected to repay their loans utilizing IDR plans. Among debtors who took out direct loans for undergraduate examine, the share enrolled in IDR plans grew from 11 % to 24 % between 2010 and 2017; amongst those that took out loans for graduate examine, the share grew from 6 % to 39 %. Required repayments in such plans rely not solely on the loan steadiness and rate of interest but in addition on the borrower’s revenue. On common, debtors in income-driven plans have bigger excellent balances and make smaller month-to-month funds—relative to the dimensions of their loans—than different debtors. IDR plans present loan forgiveness if debtors haven’t paid off their steadiness after making funds for a sure variety of years.

Effects of Repayment Plans. The alternative of compensation plan might have an effect on the quantity borrowed and debtors’ chance of default. That relationship might be clearest for IDR plans, which restrict how a lot debtors should repay on the idea of their revenue. In impact, relative to the usual compensation plan, IDR plans shifted a number of the threat of investing in schooling from the borrower to the federal authorities. Because debtors confronted much less threat with IDR plans, they could have chosen to make riskier academic investments or borrowed greater than they in any other case would have.

Borrowers who chosen IDR plans have been much less prone to default than debtors with different compensation plans. That could also be as a result of IDR plans are structured in order that the required month-to-month funds are reasonably priced to debtors with low or no earnings. For debtors with greater earnings, funds are often not bigger than they’d have been beneath the usual plan. Forgiveness is finally provided after a set time frame for debtors who could not have been capable of absolutely repay their loans, which provides them extra incentive to proceed making their loan funds.22

Lower month-to-month funds beneath IDR plans contributed to the expansion of debt by slowing the speed at which the loans are paid off. Most debtors repaying via an IDR plan have loan balances that develop through the years after they enter compensation as a result of the funds are smaller than the curiosity that accrues on the loan. Eventually, the loan forgiveness that debtors in IDR plans could acquire will scale back the quantity of excellent student loan debt. Much of that forgiveness is not going to happen till after 2030, nevertheless, when some debtors can have made funds for 20 to 25 years and thereby can have certified for forgiveness.

Aside from such IDR plans, the impact of the selection of different compensation plans on borrowing and default was not all the time clear due to probably counteracting forces. A borrower with a given loan steadiness and a hard and fast rate of interest would have smaller funds beneath an extended compensation plan. But the borrower must make the funds for an extended interval, thus rising the full price of the loan to the borrower. Moreover, as a result of debtors had some flexibility in selecting plans, it’s tough to attribute variations amongst debtors in borrowing and default to the variations in compensation plans as a result of these variations might have been pushed by different elements. For instance, if debtors who selected longer compensation plans tended to turn into greater earners than those that selected shorter plans, it isn’t clear if variations within the quantities borrowed or the chance of default have been the results of the compensation plan itself or the results of variations within the debtors’ different traits.

Despite these challenges, some proof indicated that longer compensation plans with decrease month-to-month funds tended to cut back the chance of default. CBO studied the chance of default for debtors with balances just under and simply above $30,000. Borrowers with balances bigger than $30,000 certified for the prolonged compensation plan, thereby reducing their required month-to-month funds, whereas debtors with balances just below $30,000 didn’t qualify for the prolonged compensation plan. Comparing these two teams, CBO discovered that debtors with prolonged compensation plans have been about half as prone to default on their loans or to acquire a deferment for causes of financial hardship.