Why Student Loan Debt Harms Low-Income Students the Most

Four years ago, student loan debt in America topped $1 trillion. Today, that number has swelled even further, with some 43 million Americans feeling the enduring gravity of $1.3 trillion in student loan debt.

While student debt may not intuitively register as something that plagues the poor, student debt delinquency and defaults are concentrated in low-income areas, even though lower-income borrowers also tend to have much smaller debts. Defaults and delinquencies among low-income Americans escalated following the Great Recession of 2008, a period when many states disinvested from public colleges and universities. The result was higher costs of college, which has led to larger loans.

Low-income students are often left at a dramatic academic disadvantage in the first place. For example, students who work full-time on top of college classes can't cover the cost of tuition or living expenses, and working while in school can actually shrink the chance of graduating altogether. Moreover, these students are less likely to have access to career counseling or outside financial resources to help them pay for school, making the payoff negligible at best.

The inequity is so crushing that an alarming number of these students--predominantly students of color--are dropping out of school altogether. One-third of low-income student borrowers at public four-year schools drop out, a rate 10 percent higher than the rest of student borrowers overall.

When it comes to for-profit colleges, the story gets even worse. These institutions often target prospective students who are low-income while falsely assuring positive job and economic prospects upon graduating. Many students do end up dropping out, and even those who do graduate do not always receive a quality education that leaves them prepared for success--or with an income that matches up with their monthly loan payments. Their degrees too often cannot compete in the job market, leaving many of these students jobless.

A dream of a higher education shouldn't be a sentence to years--or an entire lifetime--of poverty.

This confluence of factors explains why borrowers who owe the least tend to be lower-income and are the most likely to fall behind or default on their monthly payments. As the Mapping Student Debt project has found, people with more debt are less likely to default on their loan payments because they have the most access to wealth, whether through family money or financial assets or educational degrees. And it's not hard to connect the dots. The biggest borrowers tend to be the biggest earners, so those who take out large loans to pay for graduate or professional school are less likely to default or fall behind because they're in high-earning jobs. The Department of Education estimated that 7 percent of graduate borrowers default versus 22 percent of those who only borrow for undergraduate studies. The default can actually lead to an increase in student loan debt because of late fees and interest, as well as a major decline in credit, ineligibility for additional student aid, and even wage garnishment at the request of the federal government.

Fortunately, there are solutions already in place that can help borrowers get out of default and back on their feet. For borrowers with federal loans, the Department of Education has a number of income-driven repayment programs (IDR) that cap a borrower's monthly payment to as low as 10 percent of their discretionary income. Rather than being saddled with debt and an income that doesn't realistically allow for repayment, borrowers can take advantage of programs such as PAYE, REPAYE, and Income-Based-Repayment to make their monthly loan payments proportional to their income. And some low-income borrowers might even qualify to pay nothing at all if they fall beneath certain income levels.

These plans won't just help borrowers with high debt balances. IDR is especially helpful for borrowers with smaller balances because it reduces the monthly burden while keeping more money in their pockets to cover expenses for food, housing, and other basic needs that borrowers must choose between in the face of overwhelming monthly payments.

Yet woefully few borrowers are aware of these plans, which have the potential to ensure low-income borrowers aren't paying more than they can afford. Fully 51 percent of student loan borrowers nationwide are eligible for these programs, but only 15 percent are enrolled.

A dream of a higher education shouldn't be a sentence to years—or an entire lifetime—of poverty. With federal IDR programs, paying back any amount of student debt can be much less draining of an obligation, especially for our most vulnerable citizens. It's on all of us to ensure those who can benefit the most from IDR are aware of it.