Is Rising Student Debt Harming the U.S. Economy?

Introduction

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. The Joe Biden administration has introduced several student debt forgiveness plans, but its most sweeping proposal was struck down by the Supreme Court.

How much student debt is there?

Student debt has more than doubled over the last two decades. As of September 2023, forty-three million U.S. borrowers collectively owed more than $1.6 trillion in federal student loans. Adding private loans brings that amount above $1.7 trillion, so that total student debt exceeds debt from auto loans and credit cards. Only home mortgage debt, at more than $12 trillion, is larger.

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 2022, 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 39 percent from 2008 to 2022, according to U.S. News & 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 pulled back funding for public universities and colleges in the wake of the 2008 financial crisis.

Who owes it?

Roughly one in five Americans holds student debt. Most students graduate with around $30,000 in loans, but a small portion of borrowers hold an outsize share of student debt. More than one-third of the total debt is held by the 7 percent of borrowers who owe more than $100,000, according to the Washington Post. 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. About half of outstanding student debt is held by people who went to private schools, which enrolled just 23 percent of higher education students in 2021. 

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.

Why do students take on debt?

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. A 2019 study [PDF] by Federal Reserve economists 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.

Why does the government lend to students?

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 Duke, Harvard, and Stanford, often anchor regional innovation clusters.

What is the history of U.S. student lending programs?

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 provided 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 expiring in October 2023. Since then, only half of borrowers have resumed payments; many of the remainder have defaulted or involuntary entered forbearance.  

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 [PDF] has established a link between aid and rising tuition at public schools as well.

What is the current debate?

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 boost the economy. 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; supporters of targeted relief often advocate for income-driven repayment (IDR) plans. IDRs 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. Policymakers are now increasing their efforts to treat student loans like any other consumer debt, creating pathways to discharge student debt by filing for bankruptcy. 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. Indeed, enrollment in trade programs has increased since 2020, even as enrollment at two- and four-year public institutions is yet to recover from the pandemic.

What has Biden proposed?

In 2022, Biden proposed a landmark executive order to cancel close to one-third of the federal government’s student loan holding, worth $441 billion. His plan would have forgiven up to $20,000 in student debt for Pell Grant recipients and up to $10,000 for non–Pell Grant recipients making less than $125,000 per year. The program was expected to help around forty million borrowers, nearly half of whom would have had their entire debt forgiven. The estimated $400 billion outlay [PDF] drew fierce opposition from critics, who viewed the program as an inflationary burden on taxpayers. In June 2023, the Supreme Court struck down the plan in a 6-3 vote, ruling that the president did not have the statutory authority to cancel student loan debt.  

In response, Biden introduced a new, scaled-down plan to reduce U.S. student loan debt, which launched in August 2023. Under the so-called SAVE plan, borrowers with undergraduate loans could see their monthly payments cut by as much as half, with loan balances forgiven after ten or twenty years of payments, depending on income level. The White House anticipates that the plan will allow borrowers to repay $0.71 per dollar borrowed, though some analysts expect lower repayment rates. Projections of the program’s cost vary, but some place it even higher than that of the initial debt forgiveness plan. (The Biden administration has estimated that it will cost $138 billion over the next ten years.) Biden has also introduced a new process to forgive student loans outright for more than 30 million borrowers, using authority from the HEA. As of April 2024, Biden has canceled a total of $153 billion in student debt for more than four million borrowers.

Opponents raised concerns about the cost of the SAVE plan, though experts say it stands on stronger legal footing than the previous debt forgiveness program. Critics also say that the new plan still burdens taxpayers and does little to reduce rapidly rising tuition costs. Some progressive lawmakers, while applauding the plan, say that it is not radical enough to fight the spiraling debt crisis. Meanwhile, many analysts point out that any plan that aims to broadly cancel debt relief is likely to face legal challenges, regardless of its legislative origin.

To other experts, student loan forgiveness would fail to address systemic issues. CFR’s Roger W. Ferguson Jr. writes that such programs miss “the fundamental weaknesses of higher education, namely an unacceptably low completion rate, overdependence on loans to attend college, and high and rapidly increasing costs.” He also pushes for upgrades to “modernize” the system used to manage student loans, which he says could expedite both loan forgiveness and repayment, saving borrowers up to $100 billion.

Still, proponents say IDRs such as SAVE are among the best options to reduce student debt. They argue that the Biden administration should now focus on reducing administrative hurdles to signing up for the program. A 2022 study by the Government Accountability Office found that thousands of borrowers who were eligible for forgiveness under existing IDRs were still making payments on their loans, and that the Department of Education “hasn’t done enough to ensure that all eligible borrowers receive the forgiveness to which they are entitled.”