It’s taken as gospel truth by many activists and politicians these days that young Americans are struggling under the yoke of enormous student debt payments, forcing them to delay saving for retirement, starting businesses and buying homes. But according to new research from the Federal Reserve Bank of Cleveland, the situation facing student debtors may be murkier—and not quite as bad—as many assume.
It’s true that student loan balances, which topped $1.2 trillion late last year, are the second largest kind of debt (after mortgages) and are rising faster than debt in any other category, tripling from 2005 to 2015 after factoring in inflation. But researchers found that monthly payments—the way most people interact with their debt in real life—are actually quite low for most borrowers, half of whom pay less than $203.71, or about the cost of a car loan. Three-quarters of debtors in the study had student loan payments of $400 or less, meaning that, all else being equal, getting a degree increased their monthly earnings by at least $401 then going to school was a sound investment.
Student debt payments remain low despite ballooning balances because debt agreements often give borrowers the ability cap monthly payments at a percentage of their discretionary spending and spread out repayment over a long period of time. Longer repayment periods mean borrowers end up paying much more in total than they would otherwise but allow them to keep monthly payments at a manageable level.
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Some borrowers, of course, pay substantially more every month. In the second quarter of 2015 the average payment on student loans for 20 to 30 year olds was $351. The average is well above the median (the point at which half of payments are higher and half are lower) because a smaller subset of borrowers took out much larger loans, typically to pay for graduate school.
All in all, the research makes college look like a sound investment for many students, even considering the mushrooming costs of higher education. But perhaps the worst thing a borrower can do is take money out to seek a degree and then decline to finish it. According to The Wall Street Journal, the most delinquent borrowers—those furthest behind on their payments—tend to be those with relatively low balances, under $9,000. The big problem for them isn’t that they took too much out to pay for school, but that they didn’t finish school — and thus increase their earning potential — in the first place.