Are South Dakotans Ready for Student Loan Payments to Resume?
In March of 2020, the US government initiated an interest-free payment pause on student loans under the Trump Administration. This sweeping policy action affected over 40 million borrowers who were no longer required to pay their federal student loans for the time being.1 Three and a half years later, this payment pause has ended and payments resume this month. With federal student loan payments resuming, will South Dakota’s student loan borrowers handle the parting of the extra discretionary income they had enjoyed?
This article delves into the macro student loan and aid environment before examining South Dakota and neighboring states. Although South Dakota has the fourth-lowest average student loan balance at $31,613.98, this analysis further explores whether South Dakota is well-positioned to resume student loan payments. To answer this question, this article examines personal income, delinquency rates, unemployment, and repayment plan options with the addition of President Biden’s new Saving on a Valuable Education (SAVE) Plan–formerly known as the REPAYE Plan.
Based on this analysis, as student loan payments resume, discretionary income will decrease within South Dakota and the rest of the country. As discretionary income falls, consumer discretionary industries (i.e., apparel and food service) will likely see lower revenues and decreased hiring. However, South Dakota’s low student loan balance, increasing per capita income relative to loans, low unemployment rate, and access to student loan repayment plans will likely allow South Dakota to endure the resumption of student loan repayments.
An Overview of Student Loans
Before diving into the specifics surrounding South Dakota’s student loan borrowers, it is helpful to step back and look at some of the larger trends around student loans in the United States. Figure 1 shows the total amount of federal and nonfederal student loans from the academic year of 2001-02 to 2021-22. Between 2001 and 2010, the total amount of student loans increased from 67 billion to 142 billion in real terms (i.e. adjusted for inflation), with nonfederal loans being the only category that decreased over the period. Unsubsidized federal loans, which do not have interest subsidized by the government, increased from 33% in 2001 to 42% in 2010. The total amount of student loans began to decrease after the 2010-11 academic year, however, and further declined in the wake of the 2020 COVID-19 pandemic.
Three main variables could have caused the decrease in student loans in Figure 1: decreased enrollment, reduced tuition, or increased aid. Figure 2 explores the first potential explanation by reporting the fall enrollment for public two-year, public four-year, and private nonprofit four-year colleges for select years between 2000 and 2020. After 2010, fall enrollment decreased from 10.1 million in 2010 to 9.2 million in 2020. This decrease is due to fewer students attending public two-year colleges, as 3.3 million students enrolled in public two-year colleges in the Fall of 2010 compared to 2.1 million in the Fall of 2020, a decrease of 36%.
Figure 3 illustrates the average (enrollment-weighted) cost of tuition and fees in the US and shows that costs have continually risen rather than fallen over the last fifty years. Unlike Figures 1 and 2, where loans and enrollment decreased, there was a steady increase in the cost of tuition and fees between 2010-2020. However, there is a sharp decline in tuition and fees between 2020 and 2022 in real terms. There are two likely reasons for the decrease in tuition and fees. First, the growth rate of tuition and fees was less than the high inflation numbers between 2020-2022, causing a decrease in real terms. Second, the pricing power enjoyed by universities may have been mitigated by decreased demand, perhaps due to the uncertainty of the COVID-19 pandemic or the continuation of the trend in Figure 2,
An Overview of Student Aid
The third potential explanation for reduced student borrowing over the last decade was increased student aid. Figure 4 reports the average aid per full-time equivalent (FTE) student and shows that average grant aid has increased since the 2001-02 academic year. Notably, the average grant aid increased while the average federal student loans decreased. Between the 2010-11 and 2021-22 academic years, the average grant aid increased by $2,020 in real terms, an increase of 23.6%.
Figure 5 provides a more granular look into the total aid for undergraduate students between 2001 and 2022. Over the period, grants significantly increased compared to student loans, specifically institutional grants (i.e., grants from college). For example, institutional grants increased by 210% while federal loans increased by only 8.7% between the 2001-02 and 2021-22 academic years. This drastic increase in grants further explains why student loans have decreased, as shown in Figure 1.
Student Loan Balances, Delinquencies, and Unemployment
Turning now to the student loan picture for South Dakota, Figure 6 displays the average student loan debt in each state as of March 2023. South Dakota and selected neighboring states are highlighted. Notably, South Dakota is among the states with the lowest balances, ranking fourth with an average balance of $31,613.98. Furthermore, most neighboring states have average federal loan balances within the bottom ten of the country, affirming the regional trend of lower student loan debt. In contrast, Minnesota has an average balance of $33,925.69 and ranked twentieth among all fifty states.
Next, Figure 7 illustrates the percentage of student loan balances that are 90+ days delinquent or in default for the group of selected Midwest states. As of 2022, South Dakota has the lowest student loan delinquency rate of 0.44%, with Iowa having the highest rate of 1.3%. The 20-year average student loan delinquency rate for South Dakota and Iowa is 6.5% and 7.8%, respectively. This significant deviation from the average results from the federal student loan payment pause.
Furthermore, once federal student loan payments resume in October of 2023 (interest began accumulating as of September 1, 2023), delinquency rates are unlikely to immediately return to their average due to President Biden’s student loan repayment “on ramp.” According to The White House fact sheet, “the Department [of Education] is instituting a 12-month “on-ramp” to repayment, running from October 1, 2023, to September 30, 2024, so that financially vulnerable borrowers who miss monthly payments during this period are not considered delinquent, reported to credit bureaus, placed in default, or referred to debt collection agencies.”2
In addition to low delinquency rates, South Dakota and neighboring states are also experiencing a strong labor environment, better-allowing borrowers to pay their student loans. Figure 8 shows the monthly unemployment rate for the same states as Figures 6 and 7 between January 2018 to July 2023—the most recent data point. Currently, South Dakota, North Dakota, Minnesota, and Nebraska all have lower unemployment rates than before the COVID-19 Pandemic, with Iowa being only ten basis points higher. Specifically, South Dakota’s unemployment rate was 2.5% in February of 2020 and is 1.9% as of July 2023, a decrease of 60 basis points.
South Dakota Student Loan Repayment
In addition to low delinquency rates and unemployment, South Dakota student loan balance per capita as a share of personal income per capita has steadily decreased since 2018, as shown in Figure 9, outpacing the same metric for the United States. This is to say, on a per capita basis, personal income has increased more quickly than student loan balances in South Dakota since 2018. As of 2022, the student loan balance per capita as a share of personal income per capita in South Dakota is 8.1% compared to 8.6% for the United States. Although this metric cannot directly signify whether or not South Dakota will be able to handle the resuming of student loans, the trend does point to a lower share of personal income devoted to repayments of student loans.
Regarding student loan repayments, Figure 10 highlights the distribution of outstanding federal student loan repayment plans for 2016, 2019, and 2022 in the United States. Since 2016, more borrowers have opted for the income-driven repayment plan, which allows monthly payments based on income and household size. Furthermore, under President Biden’s Saving on a Valuable Education (SAVE) Plan–formerly known as the REPAYE Plan–borrowers generally have student loan payments equal to 10 percent of their discretionary income for a 20- to 25-year period, depending on their study.3
Is South Dakota Ready for Student Loan Payments?
So, how will student loan payments impact South Dakota? As payments resume, discretionary income will decrease within South Dakota and the rest of the country. This decrease will likely impact consumer discretionary industries (i.e., apparel and food service). However, South Dakota’s low student loan balance, increasing per capita income relative to loans, low unemployment rate, and access to student loan repayment plans will likely allow South Dakota to endure the resumption of student loan repayments.
For information on how to prepare for student loan repayment resuming in October 2023, please visit https://studentaid.gov/manage-loans/repayment/prepare-payments-restart.