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

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

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WRITTEN BY

CFR.org Editors

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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. In 2022, President Joe Biden launched a sweeping student debt relief plan that was subsequently struck down by the Supreme Court, leaving the future of reform efforts uncertain.

How much student debt is there?

Student debt has more than doubled over the last two decades. As of March 2023, about forty-four 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.

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 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.

Who owes it?

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 students graduate with less than $20,000 in debt, 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. 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.

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 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 expire in October 2023.

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.

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, and 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. Some policymakers have proposed reforms to treat student loans like any other consumer debt, meaning they 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. 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 forgive 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 per year. The program was expected to help around forty million borrowers, nearly half of whom would have their entire debt forgiven. In total, the program would have canceled $441 billion in loans, close to one-third of the federal government's student loan holdings. Meanwhile, the nonpartisan Congressional Budget Office estimated [PDF] that the cancellations would cost more than $400 billion over the next thirty years. The cost 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. Under the so-called SAVE plan, borrowers with undergraduate loans will see their monthly payments cut in 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 also announced that his administration is developing another process to forgive student loans outright, using authority from the HEA.

Opponents raise 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."

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."

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

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Higher education provides students many socioeconomic benefits and increases the global competitiveness of the United States, but mounting student loan debt has sparked a debate over federal lending ...

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While college tuition is increasing, college still provides a great return on investment which Bachelors degree holders earning 1.8 times those who only have a high school diploma and those holding PhD's or other professional degrees earning more than 2 times.

This can vary however depending on the major pursued as well as the institution attended

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Student loan debt is a growing economic concern that may be harming the US economy.

How should the United States address the growing student debt crisis?

Summary:

"For decades, the U.S. government has helped students finance their higher education to bolster the country’s economic competitiveness and national security.

U.S. student loan debt has ballooned in recent years, outpacing most other forms of consumer borrowing.

President Joe Biden has launched several plans to provide student debt relief, but they have sparked intense opposition and legal challenges" (CFR 2024).

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"large-scale debt cancellation would help advance racial and socioeconomic equality and boost the economy"

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"Student debt has more than doubled over the last two decades. As of March 2023, about forty-four million U.S. borrowers collectively owed more than $1.6 trillion in federal student loans."

In previous decades, many did not attend college and of those who did, "less than half borrowed money to do so." The idea of not attending college in todays world has become stigmatized leading to more people attending college and the cost of tuition increasing. Now, more people than ever are taking out student loans.

The majority of students graduate with less than $20,000 in debt while 7% of borrows owe over $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."

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Implementing these programs will alleviate a major burden that students experience while also stimulating economic growth.

The government currently offers:

Need-based tuition grants (Pell Grants)

Student loan programs

Veterans Benefits

Research Grants

"Funding levels for the program [pell grants] have not kept pace with the rising cost of college, resulting in more students turning to loans.

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Many feel that debt forgiveness is necessary due to the rising cost of college tuition. This is a way to stimulate the economy while also bridging the gap between socioeconomic groups by allowing

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Many feel that large scale debt forgiveness will only benefit those who took out higher amounts of debt and that will be more likely to pay it off. Doctors and lawyers for example will take out more debt, but will be more likely to pay them back due to higher earning.

Many also feel that it is not reasonable to burden tax payers with paying for these debt forgiveness programs

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Biden attempted to forgive "$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 per year" through the use of an executive order. This plan was struck down by the Supreme Court and deemed unconstitutional.

Under the SAVE plan, Biden plans to use an income driven repayment plan that will lead to full forgiveness within 10 to 20 years.

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"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."

"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."

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That lack of state investment means the cost of higher education is being transferred to students and parents, driving the nation's student-loan crisis. It also means students may not be getting the academic and other support they need to be successful in higher education and to graduate into fulfilling careers.

"It's pitiful," says United Faculty of Florida (UFF) President Andrew Gothard. "There's no reason a higher ed system of the quality we have, in a state with one of the highest economies in the world, can't be funded in a way that meets the needs of our student population. There's a real disconnect between what we need on the ground and the punitive desires of our leaders. At UFF, we want to see those issues rectified. We want our institutions to be what our students deserve."

Thanks to UFF's advocacy efforts, Florida's funding isn't the worst. States without staff and faculty unions have seen steeper declines in state investment, such as Louisiana, where higher-ed funding declined $5,500 per student, corrected for inflation, between 2008 and 2020. Meanwhile, in states where faculty and staff regularly speak to legislators, through their unions, public colleges and universities are more likely to see improved investment. In Illinois, for example, state funding increased by nearly $5,400 per student.

Across the nation, the average decline between 2008 and 2020 was nearly $1,500 per student, adjusted for inflation. In 2020, it looked like things were slowly improving, but then the pandemic hit. State appropriations fell again in 2021 and 2022, NEA's preliminary analysis shows.

Today, state lawmakers are working on 2023 budgets, and faculty and staff are ready to make a difference. First, they need to elect candidates who support public education, and then they need to make sure state lawmakers understand the needs of their students, says Gothard. "We will not be deterred," he promises.

Guess Who Pays for Funding Cuts?

When state lawmakers turn their backs on public colleges and universities, it falls to students and families to make up the difference. In other words, when state funding goes down, student tuition goes up.

Of course, in Florida, the problem of faculty retention isn't due to low pay alone. It's low pay plus legislative attacks on faculty rights and students, and a politicized climate that makes educators fear for their jobs. "We have very high-quality institutions in Florida, but this isn't a place where faculty are clamoring to come-and we, at the United Faculty of Florida, are very concerned about that," says Gothard.

Where's the Money Going?

Making matters worse, on many campuses, these scant funds are going toward things that have little to do with student learning. Instead of investing in faculty or student-support staff, administrators are hiring more administrators.

For example, NEA data shows that at Long Beach City College in California, where DeWayne Sheaffer, the president of NEA's National Council for Higher Education, is a career development counselor, the number of full-time "executive" employees has increased 78 percent over the past 20 years.

"We used to have five deans," recalls Sheaffer. "Now, we have more deans, more vice presidents, and associate deans too. I saw a new position created the other day and the salary... oh my!"

For the most part, colleges aren't investing in full-time faculty and student-facing staff, a 2021 report from the American Council of Trustees and Alumni (ACTA) found. Consider these numbers: From 2012 to 2018, while the number of business and financial operations staff rose a whopping 25 percent, the number of student-facing support staff fell 10 percent. Meanwhile, the number of full-time faculty rose by 5 percent. The report concluded: "Colleges and universities seem to be cutting lower-level staffers to hire more expensive, more specialized administrators ."

Many colleges and universities also are spending huge amounts of money on "the other college debt," which is the billions of dollars that institutions borrow to fund construction projects.

Indeed, all of that is happening. The Massachusetts Campus Debt Reveal Project found that UMass and state college students are paying an average $2,500 a year, per student, to cover their institutions' capital debt. As a result, students are taking out more student loans, or working multiple part-time jobs and struggling to learn and succeed.

"Personally, I chose to attend a state school because it's supposed to be less expensive," Framingham State University student Tyler Risteen told the Project. "The government is supposed to be helping us, but in reality, it's just the schools taking out loans and then us paying for those loans."

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State Funding for Higher Education Still Lagging | NEA

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A majority of state legislatures spent far less on public colleges and universities in 2020 than they did in 2008, an NEA analysis shows. This means colleges and universities must rely on students to pay the cost of college-and those students are borrowing to do it.

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Private school graduates as well as those who attended for-profit schools generally owe more than students who attended public universities.

"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."

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Abstract We provide the first comprehensive estimates of the size of the for-profit higher education sector and evaluate whether for-profits increase tuition in response to federal subsidies. By using state administrative data we include institutions that do not participate in federal student aid programs and are missed in official counts. Including these institutions doubles the number of for-profits and increases students by one-third compared with official counts. Aid-eligible institutions charge tuition for sub-baccalaureate (mainly certificate) programs that is about 78 percent higher than that charged by comparable programs in nonparticipating institutions, lending some credence to the "Bennett hypothesis" of federal aid capture.

Citation
Cellini, Stephanie Riegg, and Claudia Goldin. 2014. "Does Federal Student Aid Raise Tuition? New Evidence on For-Profit Colleges." American Economic Journal: Economic Policy, DOI: 10.1257/pol.6.4.174

Additional Materials

JEL Classification

H52 National Government Expenditures and Education

I22 Educational Finance; Financial Aid

I23 Higher Education; Research Institutions

I28 Education: Government Policy

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national government expenditures and education

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Does Federal Student Aid Raise Tuition? New Evidence on For-Profit Colleges

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Does Federal Student Aid Raise Tuition? New Evidence on For-Profit Colleges by Stephanie Riegg Cellini and Claudia Goldin. Published in volume 6, issue 4, pages 174-206 of American Economic Journal: Economic Policy, November 2014, Abstract: We provide the first comprehensive estimates of the size of...

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"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."

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Student Loan Borrowers With Certain Demographic Characteristics More Likely to Experience Default

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Over the past two decades, student loan borrowers falling into certain demographic groups have been more likely than others to experience default, according to a survey done for The Pew Charitable Trusts.

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The high cost of education deters lower income students from attending university. Since those who hold a degree have a higher earnings potential, a perpetual cycle is created in which the lower class remains in the lower class while the upper and middle classes excel.

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As a first generation college student that has benefited from government funding for education such as the Pell Grant, I can say that I understand the importance of such funding as I likely would not have been able to attend college without it. While such funding is something I believe is necessary, I don't necessary believe in blanket student loan forgiveness as there are many factors to be considered. Students need to look at the university they are attending. Is it out of state, is it private/public or for/non-profit, what degree will they plan on receiving, etc. These factors will all impact the amount they will pay or the debt they will take on as well as ensure that they will be able to receive a return on investment upon graduation. Funding needs to be available for low income or underrepresented communities, but I feel that the federal government also needs to focus on bringing tuition costs down. Providing aid while not addressing the issue of the high cost itself only leads to costs further increasing. Ultimately, I view education to be an investment in yourself. There are tangible benefits such as earnings after graduation but also intangible benefits that education offers. Regardless, I believe that the student holds some responsibility for ensuring that they are not taking out exorbitant amounts of debt to attend a 'dream school' without a plan to be able to pay it back. I also feel that the government is responsible for allowing tuition rates to skyrocket and that they also hold some responsibility to address the issue whether through grants or student loan forgiveness as long as they have a long term plan to bring costs down.