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Student loan debt in the United States has grown enormously in recent years and is now one of the largest forms of consumer borrowing in the country. Though the benefits of a college education outweigh the costs in most cases, many graduates are concerned about entering a weak job market and worry that lingering debt could hinder their financial futures.
Most economists see student loan programs as a sound investment in U.S. workers and essential for maintaining the country’s competitive edge, but questions remain about the appropriate level of federal involvement. A debate has also emerged over whether the government should forgive student loan debt and, if so, how much it should forgive. In 2022, President Joe Biden launched a new student debt relief plan that drew both praise and criticism.
Student debt has more than doubled over the last two decades. As of September 2022, about forty-eight million U.S. borrowers collectively owed more than $1.6 trillion in federal student loans. Additional private loans bring that total to above $1.7 trillion, surpassing auto loans and credit card debt. Only home mortgage debt, at about $12 trillion, is larger.
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Student debt is growing as more and more students attend college. In the late 1980s and early 1990s, most high schoolers did not enroll at colleges or universities; of those that did, less than half borrowed money to do so. In 2021, almost two-thirds of recent high school graduates were enrolled, and most took out student loans.
The average student is also taking on more debt: the balance per borrower rose by 25 percent from 2009 to 2021, according to U.S. News and World Report. Students are generally borrowing more because college tuition has grown many times faster than income. The cost of college—and resulting debt—is higher in the United States than in almost all other wealthy countries, where higher education is often free or heavily subsidized. Meanwhile, U.S. states have pulled back funding for public universities and colleges in the wake of the Great Recession.
About half of the outstanding student debt was owed by borrowers who attended two- or four-year colleges or universities, as of May 2022, according to the Washington Post; the rest was from graduate school borrowers. While the majority of college students graduate with less than $20,000 in debt, a small portion of borrowers hold an outsize share of student debt. One-third of the total debt is held by the 7 percent of borrowers who owe more than $100,000. However, borrowers with smaller amounts of debt often have a more difficult time repaying their loans, as higher debt from graduate or professional degrees can pay off with much higher incomes. Students who do not complete their degrees often struggle the most; their default rate is three times higher than those who graduate.
Additionally, the type of institution makes a difference in how much debt is owed. Private school graduates, especially those who attended for-profit schools, generally have larger debts than those who attended public schools.
There is also a racial disparity in student borrowing that many experts say is problematic and the result of decades of systemic discrimination. Black college students generally take on more debt than white students, and they are more likely to struggle with loan repayment after graduating, in part because they typically have lower levels of family wealth. Black, Latinx, and American Indian students are all more likely to default on their loans than white students.
Most U.S. students have an incentive to borrow because higher education is typically required for the highest-paying jobs. A worker with a bachelor’s degree earns 1.8 times the amount a person with a high school diploma does, while those with doctorates or professional degrees earn more than double, according to the U.S. Bureau of Labor Statistics.
However, analysts caution that the return on investment in terms of future income can vary widely, depending on factors including a student’s major and the institution they attended. Some recent research found that although a college education still provides a boost in earnings, the increase in wealth a degree provides has declined significantly over the past fifty years, due to the rising cost of college and the increase in other forms of consumer debt.
The U.S. government invests in higher education for its people—through need-based tuition grants, student loan programs, veterans’ benefits, and research grants—because an educated and highly skilled workforce promotes national prosperity. Highly educated workers provide greater tax revenues, are generally more productive and civically engaged, and are less reliant on social programs. Moreover, postsecondary education is seen by most experts as fundamental to a dynamic, innovative economy. Major U.S. research universities, such as Stanford, Harvard, and Duke, often anchor regional innovation clusters.
The federal government began taking a large role in funding higher education after World War II. The Servicemen’s Readjustment Act of 1944, commonly known as the GI Bill, provided tuition assistance and many other benefits, including low-interest home loans, to nearly eight million returning veterans. The program continues to pay tuition for hundreds of thousands of servicemembers and veterans each year.
However, federal student lending did not begin until the Cold War. In response to the Soviet Union’s launch of Sputnik in 1957, Congress passed the National Defense Education Act, sweeping legislation that created federally funded student loan programs and supported national security–related fields, including science, math, and foreign languages. In 1965, the Lyndon B. Johnson administration expanded federal involvement at all levels of education with the Higher Education Act (HEA), which laid the foundation for the current system of federal student lending. Since then, Congress has passed laws that expand loan eligibility and allow parents to borrow on behalf of their children.
The federal government also provides need-based aid in the form of Pell grants, which were established in 1972 and students do not have to repay. But funding levels for the program have not kept pace with the rising cost of college, resulting in more students turning to loans.
The U.S. government used to guarantee or subsidize private loans through the Federal Family Education Loan (FFEL) program, but critics, including President Barack Obama, argued that this was a handout to commercial lenders, and the program was ended in 2010. All federal student loans have since been issued directly by the Department of Education.
In response to the COVID-19 pandemic, the Donald Trump administration took an extraordinary step by providing tens of millions of student borrowers with temporary relief from making payments on their loans. In one of his first acts in office, President Biden extended the payment moratorium for federal student loan borrowers until October 2021. He also expanded it to include private loans made under the discontinued FFEL program that are in default, closing a loophole that affected more than one million borrowers. The Biden administration extended the freeze multiple times, with the final extension set to run through the end of 2022.
Some education finance experts say the increase in federal student lending is making college less affordable for many by allowing institutions to artificially inflate tuition. William J. Bennett, the secretary of education under President George H.W. Bush, argued in 1987 that federal aid was shielding colleges from market pressures, allowing them to charge ever increasing prices. The so-called Bennett hypothesis continues to be debated by education experts. A 2014 study found that federal aid led to tuition increases only at private, for-profit schools, though other research has established a link between aid and rising tuition at public schools as well.
Many experts and policymakers agree that both the rising cost of college and the existing volume of loans need to be addressed. They acknowledge that surging student debt is harming younger generations of students by preventing them from reaching their financial goals while exacerbating racial inequality. While older generations were generally able to pay their way through school, or find jobs that enabled them to pay off their debts, that no longer holds true for recent cohorts, they argue. The combination of soaring tuition costs and the recessions caused by the 2008 financial crisis and the COVID-19 pandemic have particularly affected the millennial and subsequent generations. Additionally, student loans are more difficult to discharge in bankruptcy than other forms of consumer debt, such as from credit cards, because borrowers are required to prove “undue hardship” from their loans in court.
However, experts and policymakers differ in their proposals for how to address the problem. The most recent debate has centered on the issue of loan cancellation: some have called for universal loan cancellation in varying amounts, while others say only targeted relief is warranted. Still other experts have proposed system-wide reforms beyond canceling existing debt.
Large-scale debt cancellation. Universal debt relief calls for a blanket cancellation of all existing student loans. Other large-scale plans call for forgiving up to $50,000 for all borrowers. Proponents argue that large-scale debt cancellation would help advance racial and socioeconomic equality and provide critical financial assistance amid the COVID-19 pandemic. Without the burden of student loans, they say, more people will be able to buy homes, take entrepreneurial risks, or save for retirement. Opponents counter that broad cancellation would be unfair to those who successfully paid off their student loans or who avoided debt altogether. They also say it would disproportionately benefit high-earning Americans, such as doctors and lawyers, who may have large debts but would likely not struggle with their payments. Another concern is who would bear the cost, since the price tag is estimated to be in the hundreds of billions to trillions of dollars.
Targeted debt relief. These plans would forgive most or all debt for borrowers who make under a certain income, and supporters of targeted relief often advocate for income-driven repayment plans (IRI). IRIs allow borrowers to pay an amount proportional to their income, and have their remaining balance cleared after ten years assuming they’ve made all qualifying payments. While proponents argue that targeting the lowest-income borrowers is the fairest approach, critics say that it would do little to stop universities from raising tuition and other costs.
Systemic reforms. A 2020 report by the Aspen Institute proposed system-wide reforms such as limiting tuition rates at public colleges, increasing aid for low-income students, incentivizing employers to offer tuition assistance, and restricting federal-loan-fund distribution to institutions that have a history of low post-graduation employment rates and other poor outcomes for students. Some policymakers have proposed reforms to treat student loans like any other consumer debt, meaning it would be dischargeable in bankruptcy court. Other experts and lawmakers say public funding should be increased to, for example, make public colleges and universities tuition-free.
Some analysts say the perception that college is the only path to a well-paying job drives up demand and harms students who could be better served by other forms of education. In recent years, politicians from both major parties, including former President Trump, have advocated increasing access to career and technical education (also known as vocational education) as an alternative to college.
The Biden administration’s program falls somewhere between the proposals for large-scale and targeted relief. It forgives up to $20,000 in student debt for Pell grant recipients and up to $10,000 for non–Pell grant recipients who make less than $125,000. The program is expected to help around forty million borrowers, nearly half of whom would have their entire debt forgiven. In total, the program could cancel $441 billion in loans, close to one-third of the federal government’s student loan holdings. According to the Department of Education, nearly eight million Americans can expect debt reduction to be applied automatically, while the rest have until December 31, 2023, to apply for forgiveness. Applications opened in October 2022.
In addition to providing relief, the program hopes to reform the repayment system. It caps minimum monthly payments for undergraduate loans at 5 percent of the borrower’s discretionary income. It also seeks to reform the Public Service Loan Forgiveness program (PSLF), created in 2007 to reward public service by forgiving some loans taken out by those working in nonprofits, in the military, or in federal, state, tribal, or local government. PSLF has come under fire in recent years for what critics say is a confusing application process and an application success rate of just 1 percent. The Biden administration says its plan will allow more payments to qualify and expand eligibility. Meanwhile, the White House has said it will continue to push for legislation that would make community colleges tuition-free for a student’s first two years and double the size of Pell grants for low-income students.
Opponents raise concerns about the cost and feasibility of the plan. The nonpartisan Congressional Budget Office estimated [PDF] that the cancellations will cost over $400 billion over the next thirty years. Other organizations say that the lowered minimum monthly payments alone will cost even more and will harm taxpayers and increase inflation. Some progressive lawmakers, while applauding the move, say that it is not radical enough to effectively fight the spiraling debt crisis. At the same time, the program—which is being implemented by executive order—is already facing legal challenges. The potential for legal complications led the Biden administration to walk back eligibility for many privately issued Federal Family Education Loans (FFEL), which could exclude around eight hundred thousand borrowers from relief.
For some experts, the program fails to address systemic issues. CFR’s Roger W. Ferguson Jr. writes that the program won’t fix “the fundamental weaknesses of the American higher education system—low completion rate, dependence on loans, and rapidly increasing college costs.”
Still, proponents say that any reduction in student debt is good news, especially given the economic consequences of the COVID-19 pandemic. Some economists say that Biden’s program is not likely to raise inflation rates, since it does not create any new money, and many say that it has the potential to raise the standard of living for millions of Americans. Supporters also say debt cancellation improves labor mobility and allows graduates to take lower-paying public interest jobs, such as public defender or non-profit roles.
CFR’s Roger W. Ferguson Jr. discusses Biden’s program and whether it addresses the root issues of student debt.
The Congressional Research Service explains federal student debt relief [PDF] in the context of the COVID-19 pandemic.
Forbes Advisor breaks down current statistics on student debt.
The College Board examines trends and patterns [PDF] in student borrowing.
The Brookings Institution’s Adam Looney, David Wessel, and Kadija Yilla explain who owes student debt and who would benefit from debt forgiveness.
The Aspen Institute lays out proposals to mitigate the student debt crisis without canceling loans.
Jacqueline Jedrych, Anshu Siripurapu, Mia Speier, and Steven J. Markovich contributed to this Backgrounder.
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