$1.1 trillion. That number is big enough to make student debt seem like a national crisis touching every American household.

“Student loans are a total pocketbook issue for our generation,” said Jennifer Wang, the policy director of Young Invincibles, a group formed during the 2009 Obamacare debate to represent millennials.

Politicians haven’t ignored that growing student debt is a top concern for younger voters. Democrats, including President Obama and Sen. Elizabeth Warren of Massachusetts, have made reducing student loan payments one of their top pitches to young voters.

Like any other sum so big, however, $1.1 trillion is difficult to put into perspective.

It has led to alarmist headlines warning that student debt is a bubble that will start a new recession soon, when it bursts. Or that it will slow long-term growth by preventing young people from financing other major life goals, such as buying homes or starting families.

But the real problem with student loans, according to students, experts and loan counselors, is much narrower than the sensationalist reports usually indicate.

The real crisis is one of indebted dropouts. Millions take out loans to pay for a degree that they never obtain and face the burden of repayment without the earning power of a diploma.

Plans submitted by Obama, Warren and others, which would lower payments on debt, do not deal with that reality. Instead, some of the most promising solutions are coming from the states.

 

RUNNING UP DEBT

The Consumer Financial Protection Bureau attracted widespread attention in 2012, shortly after total student debt passed $1 trillion. The agency warned of the “uncanny” similarities between the state of the student loan industry and that of the subprime mortgage market before the housing bubble burst.

The CFPB’s Rohit Chopra, an assistant director who focuses on student issues, testified to Congress in June that “today’s $1.2 trillion can have repercussions that threaten the economic security of young Americans and broader economic growth.” Congress created the CFPB in the wake of the subprime crisis to prevent future meltdowns in consumer finance.

Chopra warned that rising student debt could harm the economy in several ways: It could slow household formation, as graduates use down payment money to pay interest; it could slow business creation by overburdening potential entrepreneurs; and it could lead to postponed or abandoned retirement plans.

Student debt has nearly quintupled since 2004, when it was just over $250 billion, according to Federal Reserve Bank of New York data taken from credit reports. It has eclipsed credit card debt and auto loans to become the largest category of non-housing-related consumer debt. While mortgages make up 69 percent of household debt, student loans account for 10 percent.

Student debt is growing because more people are borrowing and because borrowers are taking out bigger loans. The number of borrowers grew by half between 2005 and 2012, according to the Federal Reserve Bank of St. Louis, and their average student debt grew by a third.

Now, the average student can expect to graduate with just under $30,000 in student loans, according to the Department of Education. The share of borrowers with more than $100,000 in debt has doubled since 2005, from 3 percent to 6 percent.

Meanwhile, it appears students are having more trouble shouldering those balances. In 2004, just 6.3 percent of loan balances were more than 90 days late, but about 11 percent are now. That is higher than the 9 percent delinquency rate for mortgages at the peak of the housing crisis.

As a result, reducing student loan payments topped the list of items voters want from Congress, according to a November Wall Street Journal/NBC poll, beating perennial favorites such as raising the minimum wage.

 

A BUBBLE?

Yet the phenomenon does not match what economists think of as a “bubble.”

A simple definition of a bubble is the price of an asset increasing beyond what is warranted.

For students, the asset of a college degree remains well worth the cost of taking out loans.

“I wouldn’t say that it’s a problem for the typical student, because the average debt for a college education is a perfectly rational amount to take out, and maybe even double that amount,” said Robert Archibald, a professor of economics at the College of William and Mary and one of the authors of the new book Why Does College Cost So Much?

In fact, the evidence suggests that the value of a diploma is outstripping the rising cost of college.

An analysis conducted by researchers at the Hamilton Project, a left-of-center think tank, found that a person who entered college in 1980 could expect to earn about $260,000 more over the course of his life than someone who only earned a high school degree. Adjusted for inflation, that amount has risen to more than $450,000 for someone starting college in 2010.

So while the cost of college is up 50 percent over that period, the lifetime boost to earnings from a college degree is up 75 percent. “In short, the cost of college is growing, but the benefits of college and, by extension, the cost of not going to college, are growing even faster,” the researchers concluded.

The Brookings Institution’s Beth Akers and Matthew Chingos found a similar result when they compared monthly student loan payments to monthly paychecks: The ratio of monthly loan payments to monthly income has been flat. “Despite the widely held belief that circumstances for borrowers with student loan debt are growing worse over time, our findings reveal no evidence in support of this narrative,” they conclude.

How is that possible when debt is mounting so quickly?

Archibald suggests that the past decade’s run-up in student debt represents not an increase in the affordability of higher education, but rather a shift in who pays for it, and when.

Taxpayers, in particular, aren't chipping in as much.

The liberal think tank Center on Budget and Policy Priorities estimated that states spent $2,353, or 28 percent, less per student on higher education last year than they did in 2008. The cuts have come in almost every state, with two states, Arizona and New Hampshire, cutting per-student funding by more than half.

Universities have tried to make up for the lost government revenue by cutting costs. But mostly they compensated by raising tuition, by an average of nearly a third at four-year colleges, according to the think tank.

Student loan balances have a “direct relationship with the skyrocketing cost of college in the states,” Wang said. She noted that nearly three-quarters of all students attend public universities or community colleges, according to the Chronicle of Higher Education.

Even more importantly, though, may be a generational shift in who pays for college.

“What’s happened in the U.S. is that we used to have the idea that it was the parents who sacrificed to put their kids through school, and we’re sort of shifting to a model where it’s the children who sacrifice,” Archibald said.

In the long run, Archibald noted, it doesn’t make a difference that young people shell out for college now, as students, rather than later, as parents aiding their kids.

One point of evidence supporting Archibald's theory is that student debt is up most among wealthier families.

While average debt levels doubled among the two lowest-income quintiles between 1990 and 2012, according to Brookings’ Akers and Chingos, they increased more than sixfold among the top income group. Now students from the bottom and the top rungs of the income distribution take out about the same amount of loans: roughly $2,600 a year. Students from middle-class families take out slightly more.

The trend toward more families taking out loans, including families with disposable income, accelerated during the recession.

When jobs suddenly became scarce, millions of workers tried to weather the recession by going back to school. Applications to law schools and other postgraduate programs soared, and families were left with fewer resources to help their children pay for college. Many parents facing underwater mortgages and uncertain work prospects limited their contribution to their children's tuition.

 

BORROWERS' FUTURES

Another often-cited fear relating to student loans is that bigger debts will limit graduates’ ability to make big-ticket purchases.

"The debt loads certainly are high enough that they may play a role in, for example, making it hard for people to buy first homes, to build a down payment,” Federal Reserve Chairwoman Janet Yellen told Congress in May.

That’s a major concern raised by public- and private-sector housing experts, at a time when home sales are lagging and the homeownership rate, at 64 percent, is at its lowest point since 1995.

Yet the evidence on the relationship between student loans and home ownership is mixed.

In October, researchers with the Fed’s Board of Governors published a note concluding that while student borrowers initially lag behind debt-free college grads in buying a home, they catch up by age 35. It’s the people without college degrees who never catch up, the researchers found.

Homeownership rates for younger Americans have been declining, partly because of long-running demographic and social shifts such as delayed marriage and childrearing. A recent review by mortgage buyer Fannie Mae, however, found that after accounting for those trends, homeownership rates are still dropping for “prime” first-time homebuyers — married, upper-income, early thirtysomethings with college educations and children. That group’s homeownership rate has fallen even faster than the national average, according to Fannie Mae. The same is true for prime candidates with no college education, and accordingly no college debt.

In other words, if young Americans are not buying homes, student loans may not be to blame.

 

THE REAL FEAR

If the evidence suggests that college graduates are not threatened by their indebtedness, why then all the worry about student debt?

The simple answer is that not all student borrowers graduate.

“The people we’re worried about are totally on the other end,” said Alexander Holt, a policy analyst at the New America Foundation. “They have low balances, but they went to a really bad school, they have not graduated, the debt they have is worthless. ... The time they’re spending in college isn’t paying off.”

Students who earn a bachelor’s or associate’s degree rarely default on their loans, according to research by Holt’s colleague Clare McCann. Only 3.5 percent of them do.

Instead, she found, 60 percent of defaulters did not graduate. A closer inspection of the other 40 percent found that nearly all of them had just a certificate, not a degree. Certificates are credentials usually taking a short time to earn that are generally geared toward a specific occupation. They are granted predominantly by for-profit schools and community colleges.

“What’s very interesting is that people who are defaulting on student loans — they sometimes don’t have very high balances,” said the CFPB's Chopra.

The low balances among defaulters suggests two possibilities, Chopra said: Problems with student loans are driven by borrowers dropping out without a degree to help boost their income, or by graduates who suffer some kind of financial shock after graduating, such as job loss. “The current data doesn’t tell us too much about these people,” Chopra noted.

The problem, however, is disproportionately concentrated at for-profit colleges with low completion rates and graduates who face tough employment prospects, Chopra said.

Enrollment at for-profit colleges boomed in the 2000s, increasing by a factor of five to 1.2 million students in 2009.

Students at those schools take out more loans. Department of Education data show that about 75 percent of students at four-year, for-profit schools borrowed money to finance their studies, versus 64 percent at private nonprofit schools and 40 percent at public universities. They borrowed an average of $8,300, which was slightly less than attendees at private nonprofits, but $1,800 more than students at public schools.

For-profit schools were less likely to give students the earning power needed to handle those loans. Within three years of graduating, 19 percent of students who began repaying for-profit college loans in 2011 had defaulted, according to the Department of Education, compared with 13 percent at public schools and 7.2 percent at private nonprofit schools. Default rates are generally highest in the first years out of school as traditional college graduates try to find jobs and manage personal finances, and then fall in later years as they settle in.

There is some evidence that for-profit degrees are no better than credentials from community colleges or no degree at all. But the greater problem is that for-profit colleges have significantly lower graduation rates than other schools. Just under one-third of students in four-year programs at for-profits graduate in six years, according to the Department of Education, about half the graduation rate at other schools.

The federal government has cracked down on some of the for-profit schools with the worst records.

Over the past year, the CFPB has taken regulatory action against several for-profit colleges, including the chains run by Corinthian Colleges and ITT Educational Services, accusing them of predatory lending and taking advantage of students from poor backgrounds.

Corinthian, in particular, has been forced to sell off its campuses, partly because of the regulatory scrutiny it has faced.

The Education Department's new “gainful employment” rule would penalize institutions that failed to meet certain benchmarks for placing their graduates in jobs. Schools would lose eligibility for federal aid if graduates’ average annual loan payments exceed 12 percent of their earnings or 30 percent of their discretionary income.

Stopping abusive practices at for-profits and other schools that saddle students with debt without advancing their careers is a necessary step, said the New America Foundation’s Holt.

 

CHANGING THE REPAYMENT SCHEDULE

But Holt, as well as student loan analysts from across the political spectrum, says there is a simple fix to the immediate problem of rising defaults: Base repayments on borrowers' income.

Federal income-based repayment programs, available for some federal student loans, cap borrowers’ monthly payments at 10-15 percent of their income, with the government forgiving any remaining debt after 20 or 25 years. Obama sweetened the terms available to borrowers in 2012 and again in 2014.

“One of the most common things that we hear from borrowers is how difficult of a time they have repaying their loans,” Young Invicibles' Wang said, including in cases when they could have had their payments capped. “There’s a whole host of stories from young people who’ve had a hard time getting help from their servicers, period."

The one pitfall of the plans is that borrowers are simply not aware of them. Use has grown, but remains low. And they're only available for federal loans, not through private lenders.

With a few other organizations, Young Invincibles and New America in March endorsed making income-based repayment the default for student borrowers, with payments deducted from their paychecks.

Holt compared it to Social Security payments: Default on Social Security contributions would be sky-high if payroll taxes were not collected automatically by employers. With this plan, he says, default on student loans would likely be eliminated.

 

MAKING COLLEGE AFFORDABLE

But even proponents of fixing student financing acknowledge it won’t address the underlying long-term problem, which is that the traditional college experience is expensive and poorly targeted to nontraditional students, who now make up almost half of students.

Nontraditional students are those who do not fit the profile of the typical student at a flagship state university or a prestigious private school: 18 to 21 years old, studying full time, and dependent on family.

Currently, nontraditional students — older people who are working and may have children — rely heavily on community colleges and for-profit schools that may not be serving them well. Three-quarters of students at for-profits and more than one-third of students at community colleges are financially independent, according to the Manhattan Institute.

“Nontraditional students are, at this point, about 40 percent of those that are studying in higher ed,” says Howard Horton, president of the New England College of Business, which charges roughly $40,000 over four years, not including loans or aid.

NECB, as his school is known, has been rated the most affordable private college in New England by the Department of Education for four years.

The school achieved that distinction, Horton says, by going online-only, a move that allowed him to slash expenses and cater to nontraditional students. About 6 million adults are in the workforce studying for bachelor's degrees. “Those folks don’t want the campus experience, they’re voting with their computers,” Horton said.

Many of these nontraditional students are "non-completers." There are 33 million people in the United States who have had some higher education but did not complete a degree, according to the National Student Clearinghouse.

Of those, roughly 4 million are “potential completers” — people who have a significant amount of coursework done and could finish a degree if the price were right.

It’s those people, and future potential dropouts like them, who should be catered to, said Maxwell Love.

Love is president of the U.S. Students Association, a student-run advocacy group. He said he’s grateful for the efforts of Democrats and especially Warren for elevating students’ issues. But he thinks less attention should be paid to graduates’ problems and more to keeping college affordable for the "completers."

“Why don’t we spend money strategically on the 3 or 4 million people who didn’t finish college and incentivize them to finish college rather than refinancing all the debt out there?” Love asked.

 

THE $10,000 DEGREE

In his 2011 State of the State address, Gov. Rick Perry challenged Texas universities to offer a bachelor’s degree for just $10,000.

Perry did not specify how schools were supposed to meet the challenge, but they needed to think creatively to pull it off.

The early indications are that Texas schools have found ways to respond.

Thomas K. Lindsay, a higher-education expert at the Texas Public Policy Foundation and a proponent of affordable degree programs, said that merely by setting out the challenge Perry started a “revolution of rising expectations.” That phrase, usually used in explaining revolts against governments, means that school administrators have begun acting as though there has been a revolution in the economics of higher education to favor non-traditional students, even though Perry changed no laws.

South Texas College and Texas A&M University-Commerce are on track to offer a degree to students with no prior college credit for $13,000-$15,000, Van Davis said.

Davis is director of Innovations in Higher Education for the Texas Higher Education Coordinating Board, which has partnered with the two schools in promoting what they call the Texas Affordable Baccalaureate program. In its first year, 150 students are pursuing a bachelor of applied science degree with an emphasis in organizational leadership. Many of the students are from poor backgrounds and are working. The program has an 80 percent retention rate from term to term, Davis says, and they hope to reach 5,000 students by the fifth year.

Texas, Davis says, has 3.7 million adults with some college but no degree, the demographic he hopes the new program can reach.

Part of the program’s success in driving down its costs comes from students being able to move through the system faster by demonstrating mastery of the material. With competency-based learning, as it’s known, students can test out of requirements and move on to the next step, allowing them to spend less time and money.

Competency-based learning is the secret of another Texas school trying to offer a $10,000 degree: Texas A&M University-San Antonio. The school has 130 students pursuing a bachelor of applied arts and sciences degree with an emphasis on information technology and cybersecurity, a program that was introduced in 2012.

Carolyn Green, a representative for TAMU-SA, said having students gain credits through demonstrating competence or through transferring credits from qualifying high school courses or lower-level courses at community college was crucial in staying within range of $10,000.

But just as important are Texas schools’ embrace of disruptive technologies that other schools have shied away from. They “try to think through what is really necessary,” Green said.

“We want to use technology where it makes most sense to use technology, and use people where it makes most sense to use people,” Davis said, and to use technology to help people work smarter.

That means that nearly all coursework is available online. But it also means that predictive software stays one step ahead of students’ problems, allowing instructors to reach out to them before they begin floundering.

That technology allows each faculty member to reach more students, and each student is assigned an adviser or coach, Davis said.

So far, the program is on track to be able to offer degrees for an almost unthinkable price. “It’s all about finding how we can make college more affordable, and by doing that make it accessible to people who otherwise wouldn’t have a chance to go to college,” Davis said. That includes people from poor families — most students receive federal Pell Grants — veterans and even an elected official who was embarrassed that she had never finished her degree.

It’s those students, and the over-25, full-time workers, not the 18- to 21-year-olds at the flagship universities and elite colleges, who are at risk in taking on student loans, and who most need a revolution in higher education.