Causes of and Solutions to the Student Debt Crisis

Updated November 1, 2022 | Posted April 20, 2020
By the Annie E. Casey Foundation
Student loan form

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: 

  • 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. 

Addi­tion­al Resources for Under­stand­ing the Stu­dent Debt Crisis

The stu­dent debt cri­sis is a com­plex prob­lem for which there are no sim­ple solu­tions. Delve into the top­ic with these Casey Foun­da­tion resources: 

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