How much is too much? Evidence on financial well-being and student loan debt

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Article Highlights

  • The highest rates of late bill payments on student loans are observed among households with outstanding debts less than $5,000.

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  • As of 2010, almost 40 percent of adults under the age of 40 had some outstanding student loan debt.

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  • Households with higher educational attainment are less likely to face financial hardship, regardless of their debts.

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Executive Summary

The media have paid a tremendous amount of attention to the plight of graduates who struggle to make payments on their student loans. The message is that young people are taking on too much debt. But how much debt is too much?

To answer that question, we need to understand how previous generations of student borrowers are faring financially. This paper examines the incidence of financial hardship among households in the United States that have taken on debt to pay for college. The findings indicate that there is not a strong positive relationship between student debt and financial hardship; high-debt borrowers face financial hardship at only slightly higher rates than comparable households with less debt. Additionally, the highest rates of financial hardship are seen among households with relatively little outstanding student loan debt.

This pattern suggests that discouraging borrowing through restrictive limits on federal borrowing or other means may not be the most effective way to prevent overborrowing and the financial hardship that it can lead to. Rationing federal credit through a more complex system involving individual loan underwriting that assesses the likelihood that a given borrower will be able to repay the debt, rather than through the flat borrowing caps that are in place today, could be a more effective way to protect consumers.

Beth Akers is a fellow in the Brown Center on Education Policy at the Brookings Institution.

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