Causes of and Solutions to the Student Debt Crisis
Author: Annie E. Casey Foundation
Foundation, The Annie E. Casey. ‘Causes, History & Solutions to the Student Debt Crisis’. The Annie E. Casey Foundation, 20 Apr. 2020, https://www.aecf.org/blog/solutions-to-the-student-debt-crisis-in-a-time-of-economic-distress.
Student loans are one of the highest sources of debt for Americans, second only to mortgages. Across the country, more than 40 million people carry a total of over $1.7 trillion in student loan debt. Despite the student loan relief enacted by the Biden administration in August 2022, millions of borrowers still suffer the burden of insurmountable debt. The financial insecurity caused by ballooning interest on monthly student loan payments affects individuals and households nationwide and disproportionately harms communities of color.
Read on to understand the history of America’s student debt crisis, who is hurt most and ways public and private entities can take action.
THE HISTORY OF THE STUDENT DEBT PROBLEM
Student loans are a type of financial aid that is designed to help college students afford the costs of attending the university of their choice. Unlike other forms of financial aid, such as scholarships or grants, student loans must be paid back.
There have been two major federal student loan programs:
- The Federal Family Education Loan (FFEL) program guaranteed loans issued by banks and nonprofit lenders from 1965 to 2010. The Health Care and Education Reconciliation Act of 2010 eliminated new FFEL loans.
- In 1994, Congress established the William D. Ford Federal Direct Loan program, which issued student loans directly, with funds provided by the Treasury.
Between 1995 and 2017, the balance of outstanding federal student loan debt increased from $187 billion to $1.4 trillion (in 2017 dollars) — more than sevenfold. The volume of student loans has grown because the number of borrowers rose, the average amount they borrowed increased and the rate at which they repaid their loans slowed. As the tuition that colleges charged went up, the volume of student loans increased.
WHAT CAUSED THE STUDENT DEBT CRISIS?
Several factors have contributed to the current student loan problem in America:
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Rising tuition fees, housing and health care costs.
Making the Case, an Aspen Institute publication funded by the Annie E. Casey Foundation, cites a finding from the Bureau of Labor Statistics, which states that the price of tuition and fees increased by 63% between 2006 and 2016.
Various factors have contributed to this increase:
- The cost of the services that colleges and universities provide has risen.
- The cost of employing faculty and staff has grown.
- Support from states and localities has decreased — particularly affecting public colleges and universities.
- Students have easier access to education loans. Filling out a Free Application for Student Aid (FAFSA) is as simple as going online and answering a few questions. Undergraduate and graduate students and their parents may apply for four types of direct loans. Often, no credit check is required. Undergraduate students may borrow up to $12,500 per year, while graduate students may borrow up to $20,500 per year. Applicants may accept all or part of a loan.
- State funding for higher education has declined. According to The Pew Charitable Trusts, “Over the past two decades and particularly since the Great Recession, spending across levels of government converged as state investments declined, particularly in general-purpose support for institutions, and federal ones grew.”
- College degrees are losing value. Debt arising from a postsecondary education has typically been considered a necessary step for increasing lifetime income. Historically, individuals with a bachelor’s degree or higher earn hundreds of thousands of dollars more over their lifetimes than high school graduates. In recent years, having a college degree has not guaranteed a well-paying job — especially for Black female borrowers who face both structural racism and sexism. With an increasing number of college grads having to accept lower-than-expected paid work or being unemployed altogether, a college degree doesn’t carry the value it once did.
- Low-performing and fraudulent schools can access federal loan programs. A large number of for-profit colleges misrepresented students’ employment prospects, including guarantees they would find a job, encouraging them to take on federal student loans they likely wouldn’t be able to pay back.
THE SOCIAL AND ECONOMIC IMPACT OF THE STUDENT LOAN DEBT CRISIS
Unpaid student loan debt can have wide-ranging consequences. The burden of debt leaves individuals and households more vulnerable to other kinds of debt, such as medical expenses, and less able to generate wealth. This in turn slows economic growth, as those who carry debt are less able to spend money or purchase major assets, such as a home or automobile.
Student debt can also negatively impact the borrower’s:
- mental health;
- ability to build retirement savings;
- ability to accumulate emergency savings; and
- decision to start a family.
HOW DOES STUDENT LOAN DEBT AFFECT THE ECONOMY?
The Education Data Initiative notes, “The effect student loan debt has on the economy is similar to that of a recession, reducing business growth and suppressing consumer spending.” Student debt reduces spending, with borrowers less able to maintain disposable income or build wealth. It increases reliance on social programs, impedes the housing market and slows business growth — small business creation is especially hampered by student loan debt.
- In addition, many borrowers who carry debt struggle to repay their loans.
- An average of 15% of student loans are in default at any given time.
- About one in 10 student borrowers defaults on their educational loans within their first year of repayment.
- One in four defaults within their first five years of repayment.
- Student loan borrowers with law degrees are the most likely to fall into delinquency.
WHY IS STUDENT LOAN DEBT A SOCIAL PROBLEM?
Because of long-standing inequities, Black families have less generational wealth to pay for a college education. As Black borrowers are more likely to borrow and must borrow more, student loan debt disproportionately affects them. This further exacerbates the racial wealth gap, making it difficult for Black families, and other families of color, to build generational wealth and maintain economic security. A lack of wealth makes it difficult to participate in economic pursuits, including:
- obtaining an education;
- taking investment risks;
- moving or buying a home; and
- starting a business.
This can have dire consequences for psychological, physical and community health.
WHO IS HURT MOST BY THE STUDENT DEBT CRISIS?
The student debt crisis does not affect all borrowers equally and student debt disproportionately harms borrowers of color. According to Making the Case:
- Black and Latino borrowers are more likely to be behind on student loan payments than their white counterparts.
- The average Black borrower owes 95% of their student debt 20 years after enrollment.
- According to the Education Trust, Black women owe 13% more debt within 12 years of leaving college than they had borrowed compared to white men, who had paid off 44% of their debt in that timespan.
- Eighty percent of Black public school graduates take out student loans for a college degree.
- In addition, almost 40% of Black borrowers drop out with outstanding debt and struggle to pay it back.
Students who are parents or caring for other family members, first-generation students, women, those enrolled in for-profit colleges and low-income borrowers are also likely to be negatively affected by student loan debt.
IS THERE A SOLUTION TO THE STUDENT DEBT CRISIS IN THE UNITED STATES?
The pandemic’s impact on the U.S. economy underscored the need for viable solutions to the student loan debt crisis. There are several actions that policymakers, colleges and universities and employers can take to lessen the burden of student loans on borrowers.
SOLVING THE STUDENT DEBT CRISIS AT THE STATE AND FEDERAL LEVELS
According to How States Can Solve the Student Debt Crisis, another Aspen Institute publication funded by the Casey Foundation, policymakers looking to curb current and future student loan burdens should develop legislation that targets low-income borrowers as well as borrowers of color. The report suggests three key solutions to the student debt crisis:
- Reducing the out-of-pocket cost of college attendance. Strategies could include free college programs, additional aid and grants and four-year community college programs.
- Protecting students as they navigate existing debt. The report recommends reenrollment programs that encourage former students to return to school with the offer of debt forgiveness as well as legislation and enforcement of regulations that would better protect borrowers from predatory lenders.
- Decreasing existing student debt burdens. This could take the form of target loan repayment programs, housing assistance and employer tax credits.
In addition, Making the Case argues in favor of policies that aggressively combat student loan debt:
- Restricting access. New federal loan policies could restrict access to federal loan funds for public and private higher education institutions with a history of poor outcomes for students.
- Offering incentives. Governments could motivate businesses and other employers to provide student loan repayment benefits and tuition assistance with tax breaks and other perks.
HOW COLLEGES AND UNIVERSITIES CAN REDUCE LOAN DEBT FOR STUDENTS
Making the Case offers two solutions for how higher education institutions can help students avoid the burden of debt:
- Limit tuition rates at public colleges.
- Increase grant aid and tuition waivers for low- or moderate-income students.
HOW EMPLOYERS CAN COMBAT THE STUDENT DEBT CRISIS
Employers also can play a role in student debt relief by helping employees repay their loans:
- Provide repayment benefits. Employers can offer student loan repayment benefits and tuition assistance to employees.
- Make direct contributions. Increasingly, employers are offering monetary contributions to student debt as part of benefits packages.
- Tie payments to retirement plans. Workers make student loan payments themselves and then the company deposits a corresponding “match” into the employee’s 401(k) account.
- Financial counseling. Companies and organizations can connect employees to financial coaches or counselors to help them organize repayment plans.
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