why is student debt a problem essay

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A smarter way to solve the student debt problem

Blanket loan forgiveness less effective than helping those who need it most, research suggests.

Editor’s Note: This piece was written by Constantine Yannelis, an assistant professor of finance at the University of Chicago Booth School of Business, and shared by Chicago Booth Review . The essay is based on testimony Yannelis submitted to the U.S. Senate Committee on Banking, Housing, and Urban Affairs’ Subcommittee on Economic Policy in April 2021.

Education is the single highest-return investment most Americans will make, so getting our system of higher-education finance right is fundamentally important for U.S. households and the economy.

A key point in the student-loan debate is that the outcomes of borrowers vary widely. Undeniably, a significant number of borrowers are struggling, and are sympathetic candidates for some kind of relief. Student-loan balances have surged over the past decades. According to the New York Fed, last year student loans had the highest delinquency rate of any form of household debt.

Most student borrowers end up as higher earners who do not have difficulties repaying their loans. A college education is, in the vast majority of cases in America, a ticket to success and a high-paying job. Of those who struggle to repay their loans, a large portion attended a relatively small number of institutions—predominantly for-profit colleges.

The core of the problem in the student-loan market lies in a misalignment of incentives for students, schools, and the government. This misalignment comes from the fact that borrowers use government loans to pay tuition to schools. If borrowers end up getting poor jobs, and they default on their loans, schools are not on the hook—taxpayers pay the costs. How do we address this incentive problem? There are many options, but one of the most commonly proposed solutions is universal loan forgiveness.

Various forms of blanket student-loan cancellation have been suggested, but all are extremely regressive, helping higher-income borrowers more than lower-income ones. This is primarily because people who go to college tend to earn more than those who do not go to college, and people who spend more on their college education—such as those who attend medical and law schools—tend to earn more than those who spend less on their college education, such as dropouts or associate’s degree holders.

My own research with Sylvain Catherine of the University of Pennsylvania demonstrates that most of the benefits of a universal-loan-cancellation policy in the United States would accrue to high-income individuals, those in the top 20 percent of the earnings distribution, who would receive six to eight times as much debt relief as individuals in the bottom 20 percent of the earnings distribution. These basic patterns are true for capped forgiveness policies that limit forgiveness up to $10,000 or $50,000 as well.

Another problem with capped student-loan forgiveness is that many struggling borrowers will still face difficulties. A small number of borrowers have large balances and low incomes. Policies forgiving $10,000 or $50,000 in debt will leave their significant problems unaddressed.

While income phaseouts—policies that limit or cut off relief for people above a certain income threshold—make forgiveness less regressive, they are blunt instruments and lead to many individuals who earn large amounts over their lives, such as medical residents and judicial clerks, receiving substantial loan forgiveness.

A fact that is often missed in the policy debate is that we already have a progressive student-loan forgiveness program, and that is income-driven repayment.

If policy makers want to make sure that funds get into the hands of borrowers at the bottom of the income distribution in a progressive way, blanket student-loan forgiveness does not accomplish this goal. Rather, the policy primarily benefits high earners.

While I am convinced from my own research that student-loan forgiveness is regressive, this is also the consensus of economists. The Initiative on Global Markets at Chicago Booth asked a panel of prominent economists to weigh in on this statement: “Having the government issue additional debt to pay off current outstanding loans would be net regressive.” The panel included economists from leading institutions from both the left and the right. The results of the survey were telling. Not a single economist disagreed with the idea that student-loan forgiveness is regressive. This is because the facts are clear—to borrow a phrase commonly used, “The science is settled”—student-loan forgiveness is a regressive policy that mostly benefits upper-income and upper-middle-class individuals.

Another facet of this policy issue is the effect of student-loan forgiveness on racial inequality. One of the most distressing failures of the federal loan program is the high default rates and significant loan burdens on Black borrowers. And student debt has been implicated as a contributor to the Black-white wealth gap. However, the data show that student debt is not a primary driver of the wealth gap, and student-loan forgiveness would make little progress closing the gap but at great expense. The average wealth of a white family is $171,000, while the average wealth of a Black family is $17,150. The racial wealth gap is thus approximately $153,850. According to our paper, which uses data from the Survey of Consumer Finances, and not taking into account the present value of the loan, the average white family holds $6,157 in student debt, while the average Black family holds $10,630. These numbers are unconditional on holding any student debt.

Thus, if all student loans were forgiven, the racial wealth gap would shrink from $153,850 to $149,377. The loan-cancellation policy would cost about $1.7 trillion and only shrink the racial wealth gap by about 3 percent. Surely there are much more effective ways to invest $1.7 trillion if the goal of policy makers is to close the racial wealth gap. For example, targeted, means-tested social-insurance programs are far more likely to benefit Black Americans relative to student-loan forgiveness. For most American families, their largest asset is their home, so increasing property values and homeownership among Black Americans would also likely do much more to close the racial wealth gap. Still, the racial income gap is the primary driver of the wealth gap; wealth is ultimately driven by earnings and workers’ skills—what economists call human capital. In sum, forgiving student-loan debt is a costly way to close a very small portion of the Black-white wealth gap.

How can we provide relief to borrowers who need it, while avoiding making large payments to well-off individuals? There are a number of policy options for legislators to consider. One is to bring back bankruptcy protection for student-loan borrowers.

Another option is expanding the use of income-driven repayment. A fact that is often missed in the policy debate is that we already have a progressive student-loan forgiveness program, and that is income-driven repayment (IDR). IDR plans link payments to income: borrowers typically pay 10–15 percent of their income above 150 percent of the federal poverty line. Depending on the plan, after 20 or 25 years, remaining balances are forgiven. Thus, if borrowers earn below 150 percent of the poverty line, as low-income individuals, they never pay anything, and the debt is forgiven. If borrowers earn low amounts above 150 percent of the poverty line, they make some payments and receive partial forgiveness. If borrowers earn a high income, they fully repay their loan. Put simply, higher-income people pay more and lower-income people pay less. IDR is thus a progressive policy.

IDR plans provide relief to struggling borrowers who face adverse life events or are otherwise unable to earn high incomes. There have been problems with the implementation of IDR plans in the U.S., but these are fixable, including through recent legislation. Many countries such as the United Kingdom and Australia successfully operate IDR programs that are administered through their respective tax authorities.

Beyond providing relief to borrowers, which is important, we could do more to fix technical problems and incentives. We could give servicers more tools to contact borrowers and inform them of repayment options such as IDR, and we could also incentivize servicers to sign more people up for an IDR plan. But while we may be able to make some technical fixes, servicers are not the root of the problem in the student-loan market: a small number of schools and programs account for a large portion of adverse outcomes.

To fix this, policy makers can also directly align the incentives for schools and borrowers. For example, Brazil, which has had similar problems with its student-loan program, recently gave schools skin in the game by requiring them to pay a fee based on dropout and default rates. This helped align the incentives of the schools and the student borrowers. Making revenues go directly to schools from IDR plans, or implementing income-share agreements in which individuals pay an uncapped portion of their income, could also help align the incentives of schools, students, and taxpayers.

Federal student loans are an important part of college financing and intergenerational mobility. The root of our student-loan crisis is a misalignment of incentives. Since the problem has been so slow moving and continuous, I like the analogy of a frog slowly boiling in a pot of water over a flame. Policies such as student-debt cancellation are not extinguishing the flame—they aren’t fixing the incentive problem. All they do is move the frog into a slightly cooler pot of water. And if we don’t fix the core of the problem, even if we forgive $50,000 of debt for current borrowers, balances will continue to grow, and we will be facing a similar crisis in 10 or 20 years.

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Is it fair to forgive student loans? Examining 3 of the arguments of a heated debate

Scott Horsley

Student loan borrowers stage a rally in front of The White House on Aug. 25 to celebrate President Biden cancelling student debt. The plan has sparked heated debate, including about its economic fairness. Paul Morigi/Getty Images for We the 45m hide caption

President Biden's plan to forgive hundreds of billions of dollars in student debt is sparking heated debate.

Biden last week announced plans to forgive up to $20,000 in federal student loan debt for Pell Grant recipients and up to $10,000 for others who qualify.

The news will provide relief for borrowers at a time when the cost of higher education has surged.

Student loan forgiveness is politically popular. But not all Democrats are on board

But critics are questioning the fairness of the plan and warn about the potential impact on inflation should the students with the forgiven loans increase their spending.

Here are three key arguments – for and against the wisdom of Biden's decision.

Raising living standards or adding fuel to inflation?

Undoubtedly, student debt is a big burden for a lot of people.

Under Biden's plan, 43 million people stand to have their loan payments reduced, while 20 million would have their debt forgiven altogether.

People whose payments are cut or eliminated should have more money to spend elsewhere – maybe to buy a car, put a down payment on a house or even put money aside for their own kids' college savings plan. So the debt forgiveness has the potential to raise the living standard for tens of millions of people.

Critics, however, say that additional spending power would just pour more gasoline on the inflationary fire in an economy where businesses are already struggling to keep up with consumer demand.

Inflation remains near its highest rate in 40 years and the Federal Reserve is moving to aggressively raise interest rates in hopes of bringing prices back under control.

Not all economists believe the debt forgiveness will do much to fuel inflation.

Debt forgiveness is not like the $1200 relief checks the government sent out last year, which some experts say added to inflationary pressure. Borrowers won't suddenly have $20,000 deposited in their bank accounts. Instead, they'll be relieved of making loan payments over many years.

President Biden announces student loan relief in the Roosevelt Room of the White House in Washington, D.C. on Aug. 24. Olivier Douliery/AFP via Getty Images hide caption

President Biden announces student loan relief in the Roosevelt Room of the White House in Washington, D.C. on Aug. 24.

Because the relief is dribbled out slowly, Ali Bustamante, who's with left-leaning Roosevelt Institute says Biden's move won't move the needle on inflation very much.

"It's just really a drop in the bucket when it come to just the massive level of consumer spending in our very service- and consumer-driven economy," he says.

The White House also notes that borrowers who still have outstanding student debt will have to start making payments again next year. Those payments have been on hold throughout the pandemic.

Restarting them will take money out of borrower's pockets, offsetting some of the additional spending power that comes from loan forgiveness.

Helping lower income Americans or a sop to the rich?

Another big point of contention has to do with fairness.

Forgiving loans would would effectively transfer hundreds of billions of dollars in debt from individuals and families to the federal government, and ultimately, the taxpayers.

Some believe that transfer effectively penalizes people who scrimped and saved to pay for college, as well as the majority of Americans who don't go to college.

They might not mind subsidizing a newly minted social worker, making $25,000 a year. But they might bristle at underwriting debt relief for a business school graduate who's about to go to Wall Street and earn six figures.

Students from George Washington University wear their graduation gowns outside of the White House in Washington, D.C, on May 18. Economists worry President Biden's plan to forgive student loans could encourage more people to take on debt in the hopes of also being forgiven. Stefani Reynolds/AFP via Getty Images hide caption

The White House estimates 90% of the debt relief would go to people making under $75,000 a year. Lower-income borrowers who qualified for Pell Grants in college are eligible for twice as much debt forgiveness as other borrowers.

But individuals making as much as $125,000 and couples making up to $250,000 are eligible for some debt forgiveness. Subsidizing college for those upper-income borrowers might rub people the wrong way.

"I still think a lot of this benefit is going to go to doctors, lawyers, MBAs, other graduates that have very high earnings potential and may even have very high earnings this year already," says Marc Goldwein senior policy director at the Committee for a Responsible Federal Budget.

Helping those in need or making college tuition worse?

Goldwein also complains that the loan forgiveness doesn't address the larger problem of soaring college tuition costs.

In fact, he suggests, it might make that problem worse — like a Band-Aid that masks a more serious infection underneath.

For years, the cost of college education has risen much faster than inflation, which is one reason student debt has exploded.

And now what? The question that follows Biden's student loan forgiveness plan

By forgiving some of that debt, the government will provide relief to current and former students.

But Goldwein says the government might encourage future students to take on even more debt, while doing little to instill cost discipline at schools.

"People are going to assume there's a likelihood that debt is canceled again and again," Goldwein says. "And if you assume there's a likelihood it's canceled, you're going to be more likely to take out more debt up front. That's going to give colleges more pricing power to raise tuition without pressure and to offer more low-value degrees."

The old rule in economics is when the government subsidizes something, you tend to get more of it. And that includes high tuition and college debt.

student debt forgiveness
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Student debt forgiveness would impact nearly every aspect of people’s lives

Subscribe to global connection, stephen roll , stephen roll research assistant professor, social policy institute, brown school - washington university in st. louis jason jabbari , and jason jabbari research assistant professor - social policy institute at washington university in st. louis michal grinstein-weiss michal grinstein-weiss nonresident senior fellow - economic studies @michalgw.

May 18, 2021

Though the emergency relief measures passed in response to the COVID-19 pandemic allowed student loan borrowers to defer their loan payments, student loan debt burdens still loom large for millions of U.S. households. According to the Federal Reserve , the national student debt level in the fourth quarter of 2020 was $1.7 trillion spread across 45 million borrowers—the highest level on record. Given the size of the debt burden, it is perhaps unsurprising that the possibility of student loan forgiveness has become a major policy discussion.

Most recently, President Joe Biden called for $10,000 in student debt forgiveness, while others, such as Senator Elizabeth Warren, have called for as much as $50,000 in debt forgiveness. Some have even called for total debt forgiveness, which would represent a larger amount of spending than the cumulative spending on unemployment insurance over the last 20 years . In a recent poll from the Center for Responsible Lending, 63 percent of respondents supported permanently reducing student loan debt by $20,000. As policymakers grapple with this question, it is important to explore how debt forgiveness might relate to household behaviors.

A student loan forgiveness experiment

To examine the relationship between student debt forgiveness and household behaviors, researchers at the Social Policy Institute conducted a survey experiment that asked participants with student debt to imagine a scenario in which the federal government forgave some amount of their student debt, and then had these participants report on how this would affect their decisions and behaviors. Participants were randomly assigned to one of four conditions that featured different levels of student debt forgiveness:

Condition 1: $5,000 of student debt forgiveness
Condition 2: $10,000 of student debt forgiveness
Condition 3: $20,000 of student debt forgiveness
Condition 4: All student debt forgiven

Participants could then select different behaviors they would engage in if their student debt were forgiven. The response options were intended to capture a wide range of experiences like working less, changing purchasing behaviors, having children or getting married, saving for different purposes, or returning to school. In total, 1,009 respondents who reported having student debt participated in the experiment.

The amount of debt forgiven matters

We present the results from this experiment in Figure 1. Generally speaking, the most common ways people reported that they would change their behaviors after student debt forgiveness—regardless of the amount forgiven—concerned their balance sheets. Large proportions of student debt holders reported that they would pay down other debts, save more for emergencies, save for a down payment on a home, or save more for retirement.

Figure 1. The relationship between the amount of student debt forgiven and household behaviors

Source: Social Policy Institute

Note: These results are from a survey experiment in which student debt holders were randomly assigned to receive one of four levels of student debt forgiveness. The impacts of the different levels of debt forgiveness were estimated using logistic regression models that also controlled for the amount of student debt held by participants. N=1,009. The brackets on each bar represent the 95 percent confidence interval of each estimate.

Turning to the differences between experimental conditions, we see interesting patterns in the relationship between the amount of debt forgiven and household behaviors. In particular:

The amount of student debt forgiven was not strongly associated with either working less or paying down other debts.
Higher levels of student debt forgiveness were associated with higher reported rates of purchasing more/better food, making large purchases like a car or appliance, returning to school, and saving more for emergencies.
Student debt holders only say they would save more for retirement if all their student debt were forgiven, which implies that many student debt holders would prioritize other behaviors over the long-term goal of saving for retirement.
Student debt holders were also twice as likely to report that they would have a child if they received $10,000 of debt forgiveness or complete debt forgiveness as they would if they only received $5,000 of debt forgiveness ($20,000 of debt forgiveness did not produce a statistically significant difference from $5,000).
Higher amounts of student debt forgiveness were associated with other investment behaviors like starting a business or savings for a down payment on a home, as well as a willingness to spend more on entertainment.

The proportion of debt forgiven matters, too

In Figure 2, we shift our focus away from the amount of debt forgiveness to the proportion of debt forgiveness. For this analysis, we converted the amount of forgiveness in each experimental condition to a percentage based on each participant’s reported amount of student debt. That is, someone with $20,000 of student debt assigned to the $5,000 forgiveness condition would have 25 percent of their student debt forgiven, whereas if that person were assigned to the $10,000 forgiveness condition, they would have 50 percent of their debt forgiven. Everyone assigned to Condition 4, as well as everyone assigned to a condition that offered more student debt forgiveness than the amount of debt they owed, were coded as having 100 percent of their student debt forgiven.

Figure 2. The relationship between the proportion of student debt forgiven and household behaviors

Note: These results are from a survey experiment in which student debt holders were randomly assigned to receive one of four levels of student debt forgiveness. The proportions were calculated by diving the amount of student debt held by the proposed amount of student debt forgiven. The impacts of the different proportions of debt forgiveness were estimated using logistic regression models that also controlled for the amount of student debt held by participants. N=1,009. The brackets on each bar represent the 95 percent confidence interval of each estimate.

Interestingly, Figure 2 shows some interesting differences in response patterns when we shift from considering the amount forgiven to the proportion forgiven.

There is now a clear relationship between the proportion of student debt forgiven and working less—roughly 10 percent of respondents who had 50 percent or more of their student debt forgiven would work less, compared to almost no one having 25 percent or less of their debt forgiven.
Respondents having less than half of their student debt forgiven were much more likely to report paying down other debts than those with higher proportions of debt forgiven.
The bulk of respondents saying they would be more likely to have a child if their student debt were forgiven were those who would have all their debt forgiven.
Respondents became much more likely to report that they would save for emergencies once the proportion of their student debt forgiven exceeds 25 percent, and were more likely to return to school when the proportion exceeds 50 percent.
Respondents who had all of their debt forgiven were also much more likely to report starting a business as well.

Student debt forgiveness would benefit both high- and low-income households

As a supplemental analysis, we investigated whether or not student debt holders’ incomes influenced the relationship between student debt forgiveness amounts and hypothetical changes in their behaviors. Interestingly, for the vast majority of possible behaviors, both high- and low-income households reported that different amounts of student debt forgiveness would affect them in similar ways. The one primary exception to this was in terms of savings for emergencies—low-income households were much more likely than high-income households to say that they would increase the amount they saved for emergencies as the amount of student debt forgiveness increased.

Implications

These results show two things. First, they show how extensively student debt affects debt holders. The responses to this experiment indicate that student debt is strongly influencing decisions that can have large implications for household economic stability (e.g., emergency savings) and mobility (e.g., saving for a down payment on a home, starting a business). In addition, student debt may be altering the structure of families themselves. Roughly 7 percent of respondents reported that they would be more likely to get married (results not shown) or have children if their student debt were forgiven, indicating that this debt burden is affecting even fundamental decisions about debt holders’ life trajectories.

Second, these results show that the level of student debt forgiveness matters. In particular, setting a student debt forgiveness target too low may not lead to broad-based changes in households’ economic behaviors. However, setting a student debt forgiveness amount at a point where the average debt holder would have more than a quarter of their debt forgiven may yield large changes in savings behaviors, human capital investments (e.g., returning to school), and business starts, without leading to large changes in labor supply.

As policymakers grapple with whether or not to forgive student debt, how much to forgive, and who gets their debt forgiven, it is important to consider the impact of debt forgiveness on household behaviors and how this might differ by the amount of debt held. Our results suggest that larger amounts of debt forgiveness can improve both family stability and upward mobility—especially when these amounts make up a greater proportion of their overall student debt amounts.

A proportional approach to student loan forgiveness

Among those who are considering student debt forgiveness policies, the debate is often framed as a choice between a universal or a targeted policy approach. In this debate, proponents of targeted approaches suggest that universal approaches tend to be inequitable, as they offer benefits to individuals who don’t necessarily need them, and that these approaches tend to be unfair, as these breaks do not apply to previous debt holders who paid off their student loans. As universal approaches tend to be more expensive, proponents of targeted approaches also note fiscal trade-offs, as the money used to pay off the “luxuries” of higher earners could instead be used to help lower earners meet basic needs, such as food and housing.

While the universal approach often focuses on the dollar amount of debt forgiven and the targeted approach often focuses on the income threshold for who would qualify for debt forgiveness, our results suggest that an approach forgiving a proportion of loans should be considered as an option as well. Here, policies could take into account the actual amount of individuals’ debt and forgive a certain proportion of it. This strategy could be applied to either universal or targeted debt forgiveness, or a combination of both approaches. For example, all individuals could have a proportion of their student debt forgiven, and this proportion could increase for lower-income individuals. This approach would have the benefit of addressing the equity concerns of those advocating for a more targeted approach, while still providing real and substantial benefits to student debt holders across the income spectrum.

Causes of and Solutions to the Student Debt Crisis

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:

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:

Center for Working Families at Community Colleges: Clearing the Financial Barriers to Student Success, Emerging Practices and Trends
The Disparate Effects of Student Debt on Black Borrowers
How States Can Solve the Student Debt Crisis
How Student Debt Hurts Young Adults of Color
Making the Case: Solving the Student Debt Crisis
Solutions to the Student Debt Crisis in a Time of Economic Distress

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4 reasons why the $1.7 trillion student debt crisis is so bad for 45 million Americans

The Bipartisan Policy Center released a report analyzing how policy decisions affect the student debt crisis.
It highlighted reasons for the surging crisis, such as lack of accountability and unchecked lending.
Some Democrats believe cancelling student debt would be a significant stimulus for the US economy.

The student debt crisis has surged 144% over the past decade, forcing 45 million Americans to shoulder $1.7 trillion in loans. Rising tuition costs and unchecked borrowing aren't helping.

The Bipartisan Policy Center — a DC-based think tank — released a report on Wednesday examining how student loans impact the federal budget and economic outlook for the US. It explained that while the federal student debt portfolio in 2007 was $642 billion, it ballooned 144% to $1.56 trillion by 2020, outpacing the growth in the number of borrowers, which increased from 28 million to 43 million over the same time period.

If this trend continues, the report said, both borrowers and taxpayers are facing bleak economic futures should the student-loan industry continue to hand out loans that borrowers cannot afford to pay back.

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The “fairness” debate over student loan forgiveness, explained

Why economists are fighting over whether canceling debt is a good idea.

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Protesters in front of the White House in Washington, DC, carry signs that read, “Cancel student debt.”

For many of the 43 million Americans with federal student loan debt, President Joe Biden’s plan to forgive up to $20,000 in debt is unequivocally good news.

But in the days since the policy was announced, it has also led to pushback, debate, and controversy — arguments that are likely to be studied for months and adjudicated by researchers for years, if not decades.

There are two leading — and overlapping — criticisms of the loan forgiveness plan. One question is whether debt forgiveness is the right thing to do. It asks whether forgiving student loans is the best way to spend an estimated $500 billion , given that some, though not all, of those who benefit have college degrees and relatively high household incomes.

The other is about whether debt forgiveness is the right thing to do right now. If households freed from the burdens of their debts spend more money, it could drive inflation higher — meaning that the consequences of loan forgiveness would be borne by everyone, and soon. To dampen inflation, the Federal Reserve is actively trying to get consumers to spend less.

It’s unsurprising that Biden’s political opponents have raised these concerns. But the criticism has also extended to some economists who have served in previous Democratic administrations or consider themselves sympathetic to Biden’s goals. “Pouring roughly half trillion dollars of gasoline on the inflationary fire that is already burning is reckless,” Jason Furman, President Barack Obama’s chief economist, tweeted when Biden’s plan was announced.

Not all economists agree with Furman’s view . But the fact that the inflation debate is happening at all is a sign of how broader economic trends have shifted.

The push for student debt forgiveness was born a decade ago in the depths of the Great Recession, when even college graduates struggled to find work. Inflation was low and falling. It’s become reality under very different economic circumstances, and that shift is part of what’s fueling the current debate.

The first debate: Is loan forgiveness the right thing to do?

The Biden administration crafted its student debt forgiveness proposal in an attempt to avoid benefiting the wealthiest families. To be eligible for $10,000 in loan forgiveness, student debtors must have earned less than $125,000 (or $250,000 for a married couple) in the 2020 or 2021 tax years.

Students who receive Pell Grants to attend college — meaning they came from low-income families, overwhelmingly earning less than the median household income in the United States — are eligible for an additional $10,000 in debt relief. This is an extra boost for those who started higher education without the safety net of intergenerational wealth.

The proposal would entirely wipe out student debt for 20 million people — nearly half of the 43 million Americans who borrowed to pay for college and are still paying the loans back. An analysis from the Education Department found that almost 90 percent of the benefits would go to people earning less than $75,000 per year, though because any loans taken out before July 2022 are eligible for forgiveness, that figure includes current students and very recent graduates whose salaries could rise in the near future.

The reaction from Biden’s opponents has been to call forgiveness unfair, both to those who didn’t attend college and to those who already paid off their loans.

Senate Minority Leader Mitch McConnell, who would have perhaps the most to gain from a political backlash to the program, called the idea “a slap in the face to every family who sacrificed to save for college, every graduate who paid their debt, and every American who chose a certain career path or volunteered to serve in our Armed Forces in order to avoid taking on debt.”

This attitude is in line with how policymakers in the United States have typically viewed higher education. The federal government helps some students from poor families by offering Pell Grants that don’t have to be paid back, although the grant, which tops out at just under $7,000, means the majority of recipients still need loans . But the bulk of federal financial aid to students comes in the form of loans.

The American system of higher education finance is based on the idea that a college degree primarily benefits the individual who earns it. The federal government issues a small leg up by offering loans at a cheaper rate than a private bank would offer to an 18-year-old with no credit history or a young adult trying to support a family while earning a degree. (The current rate on an undergraduate student loan is just under 5 percent , compared to up to 14 percent from a private lender.)

A few assumptions underlie all of this: that most student loan borrowers are young people working toward bachelor’s degrees, that they will graduate, and that the degree will help them earn back more than enough to pay their debts. Hence the pushback against loan forgiveness: Why help out a 20-something who majored in philosophy at an expensive private college, instead of the 50-year-old next door with no degree at all?

But those assumptions are no longer always true. Biden’s plan is intended to fit the reality of the student loan program as it exists today. The lines between those who will benefit from debt forgiveness and those who are left on the sidelines are blurrier than blue-collar versus white-collar, working-class versus middle-class, old versus young.

One in five people with outstanding student loans is over age 50 , some of whom likely borrowed on their own behalf (including those who pursued graduate degrees) and some of whom took out loans to pay for their children’s education. Many student debtors are no longer young adults starting at a four-year college; they’re older and more likely to attend a community college or for-profit program. An analysis by Mark Huelsman, director of policy and advocacy at the Hope Center for College, Community and Justice at Temple University, found that almost 40 percent of those who entered college in the 2011-12 school year and took on student debt never earned a credential.

Forgiveness will be especially helpful to those in default — the terrifying Upside Down of the financial aid system, where, after at least 9 months of missed payments, the Education Department can garnish wages and even Social Security checks in order to get its money back. The typical defaulter did not graduate and owes just under $10,000 .

There are other versions of the fairness argument circulating. One holds that forgiveness is unfair to those who borrowed but paid off their debts — an argument that could be raised against any social program on behalf of those who were born too early to benefit from it.

The counterpoint to these critiques is that critics are holding student debt forgiveness to a fairness standard applied to few other government programs or benefits. Forgiveness could be life-changing for millions of people, especially those struggling with default, the argument goes, while hurting no one.

Which is where the other part of the critiques come in.

Is it the right thing to do right now?

The student debt forgiveness movement emerged about a decade ago from the crucible of the Great Recession. Students were borrowing more than ever to pay for college and, amid the cratering economy, were struggling to find jobs that would help them pay their loans back.

In 2012, the unemployment rate for bachelor’s degree holders was around 4.5 percent, and nearly 8 percent for college dropouts and those with two-year degrees. Interest rates were low. A prominent argument against student debt for the next eight years was that it was slowing down the economy: Young adults burdened by debt were being held back from buying homes, starting businesses, and spending money.

Few could foresee that by the time forgiveness became a reality, unemployment for bachelor’s degree recipients would have halved, interest rates would have more than doubled, and inflation would be the overriding economic concern. Even in 2019, when loan forgiveness became a serious issue in a Democratic primary campaign for the first time, inflation was rarely mentioned; by the 2020 election, with the economy contracting from the shock of the coronavirus pandemic, student debt forgiveness seemed to have a plausible path to becoming reality as a form of stimulus.

In the past year, though, things have changed. With consumer prices up 8.5 percent over a year ago, some economists now argue that debt cancellation is too big a risk. The concern is that, freed from loan debt or facing reduced payments, student borrowers will spend more at a time when the Federal Reserve is trying its best to get Americans to spend less and cool down the economy.

How much of an effect this will have — if it has one at all — is the subject of further debate.

The federal government paused repayment on most student loans during the pandemic, so millions of borrowers have not had to make a payment on their student loans in two years. The majority of student loan debtors will need to return to making some kind of payment in January, when the pause expires, even if it’s less than they would have had to pay before forgiveness.

The student loan pause was always supposed to end eventually, and it will in January. But for the past two years, the moratorium was extended multiple times, leading to an unusual situation: tens of millions of people owed student debt but didn’t have to make any payments.

Now, this situation is at the heart of the debate over inflation. When economists warn that student debt will drive up prices for everyone, what are they comparing it to? The current situation, where no one is making payments at all?

An analysis by Goldman Sachs economists found that the impact of forgiveness on inflation is likely to be offset by most borrowers resuming payments when the student loan pause ends in January. People who have had their loans forgiven will continue to pay what they’ve been paying for the past two years (nothing), meaning that their household spending should be unaffected. But people who owed more than Biden could forgive, or who earned too much to qualify for forgiveness, will have to resume making payments after two years of not doing so, meaning they’ll actually have less money to spend on everything else.

Or is the proper comparison an alternate path, where Biden allowed payments to resume for all loans, meaning that more people would owe more money per month than they will under the new plan?

Furman estimated that the loan forgiveness plan, even with the resumption of payments for most borrowers in January, could drive up inflation by 0.2 to 0.3 percentage points, compared to the alternative of resuming payments for everyone at their existing debt loads. If inflation continues to rise, prices will become more expensive for all households, meaning that American consumers broadly would pay for the consequences of debt forgiveness.

Ultimately, this argument about inflation is also tied up with the concerns about fairness. If student debt forgiveness drives inflation slightly higher, is that worth it?

Critics argue that it is not: “Student loan debt relief is spending that raises demand and increases inflation,” former Treasury Secretary Larry Summers tweeted last week. “It consumes resources that could be better used helping those who did not, for whatever reason, have the chance to attend college. It will also tend to be inflationary by raising tuitions.”

But that position is not universal. “I am not in favor of framing student-loan policy as a lever for managing inflation,” Sue Dynarski, a Harvard professor, an expert on higher education finance, and a former forgiveness skeptic, wrote in the New York Times on Tuesday. “Eliminating food subsidies for poor families — SNAP, as the food stamp program is known today — would definitely slow the economy, but that doesn’t mean we should do it.”

Where do we go from here?

One thing virtually all sides of the debate agree on is that one-time forgiveness is not enough. It is, by design, a one-off — siblings from the same family who graduate from college a few years apart, having borrowed the same amount to pay for it, could end up with debt loads that differ by thousands of dollars.

The Biden administration is hoping to make income-based student loan repayment more generous, outlining changes that would require borrowers to pay 5 percent of discretionary income per month (down from 10 percent in the current program).

But there is currently no federal plan to actually make college cheaper for students, to reduce borrowing, or to hold colleges accountable for whether students can pay off their loans. That’s not for lack of ideas or for lack of trying. The Obama administration proposed rating colleges based on the “value” they provide to students, an attempt that ultimately went nowhere.

In 2016, both Bernie Sanders and Hillary Clinton called for the federal government to partner with states to make college tuition cheaper. It inspired many of the same debates that loan forgiveness has provoked — should college be subsidized for everyone, and if so, by how much? But the “free college” program was ultimately one of the first things dropped from Democrats’ legislative agenda.

The scope of Biden’s student debt forgiveness plan might seem radical. But by leaving the ultimate structure of how American higher education is paid for unchanged, it’s actually a less dramatic departure than any of the alternatives.

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The Economics of Administration Action on Student Debt

Higher education financing allows many Americans from lower- and middle-income backgrounds to invest in education. However, over the past 30 years, college tuition prices have increased faster than median incomes, leaving many Americans with large amounts of student debt that they struggle or are unable to, pay off.

Recognizing the burden of this debt, the Biden-Harris Administration has pursued two key strategies for debt reduction and cancellation. The first, student debt relief (SDR), aims to address the ill effects of flaws in the student debt system for borrowers. The second, the SAVE plan, reforms the federal student loan system, improving student loan affordability for future students and providing current graduates with breathing room during the beginning of a new career.

This issue brief examines the factors that precipitated the current student debt landscape, and details how both SDR and SAVE will enhance the economic status of millions of Americans with student debt: enabling them to allocate more funds towards basic necessities, take career risks, start businesses, and purchase homes. This brief highlights credible research, underscoring how the Administration’s student debt relief could boost consumption in the short-term by billions of dollars and could have important impacts on borrower mental health, financial security, and outcomes such as homeownership and entrepreneurship. This brief also details how the SAVE plan makes repaying college costs more affordable for current borrowers and future generations. CEA simulations show that, under SAVE, an average borrower with a bachelor’s degree could save $20,000 in loan payments, while a borrower with an associate degree could see nearly 90 percent savings compared to the standard loan repayment plan. These changes enable more people to pursue education and contribute to the broader economy.

Why do borrowers need relief?

Over the last 20 years especially, the sticker price of college has risen significantly. Despite recent minor declines, sticker prices at public universities (which over 70% of undergraduate students in the United States attend) are 56% higher today than two decades ago. [1] While there are many reasons for this trend, the most rapid increases in tuition often occur during economic downturns as tuitions grow to fill the budgetary holes that are left when states cut their support to public colleges ( Webber, 2017 ; Deming and Walters 2018 ). This is especially problematic given many people choose to return to school during economic downturns ( Betts and MacFarland 1995 ; Hillman and Orians 2013 ). Unfortunately, contracting state appropriations have played a role in shifting the responsibility of financing away from public subsidies and toward students and families ( Turner and Barr, 2013 ; Bound et al., 2019 )–leading many students to take on more debt.

At the same time that college sticker prices have risen, the wage premium (the earnings difference between college goers and high school graduates) has not seen analogous growth. While obtaining a college degree remains a reliable entry point to the middle class, the relative earning gains for degree holders began to stagnate in the early 2000s after increasing for several decades. As shown in Figure 1b, since 2000, the wage premium for both bachelor’s degree holders and those with “some college” education (which includes anyone who enrolled in college but didn’t earn a BA) saw declines around the 2001-02 and 2008-10 recessions and a slow, inconsistent recovery thereafter. The decline is particularly notable for students who didn’t complete a four-year degree, a group that includes two-year college enrollees who have among the highest student loan default rates. [2]

Traditional economic theory tells us that individuals choose to invest in post-secondary education based on the expected costs and wage returns associated with the investment. But rapid and unforeseeable rises in prices and declines in college wage premia have contributed to decades of “unlucky” college-entry cohorts affected by a form of recessionary scarring . For example, a student who entered college in 2006 would have expected a sticker price of roughly $8,800 per year for a four-year college, but actually faced tuition of over $10,000 in their final year of college, a roughly 15% difference. This same student, upon graduation if they worked full time, would have earned about $3,500 less, on average, than what they would have expected upon entering. This example illustrates that many borrowers made sound borrowing decisions with available information, but as a result of these trends ended up with more debt than they could afford to pay off. [3] Consistent with this notion, the default rate for “unlucky” college entry cohorts of the 2000s is much higher than those of other cohorts, with undergraduate default rates doubling between 2000 and 2010: in 2017, 21 percent of undergraduate loan holders and 6 percent of graduate loan holders defaulted within 3 years ( CBO, 2020 ).

It is important to note that sticker prices for public institutions have declined 7 percent since 2021, the same period over which college wage premiums have been rising. Declining tuition, for the first time in decades, coincided with increased investment in higher education through pandemic-era legislation such as the American Rescue Plan, which allocated $40 billion in 2021 to support institutes of higher education and their students. Despite these improvements, as well as significant advances in the return on college investments over the last three years, many current borrowers still need some relief. The Administration has taken significant action to protect future cohorts from similar risks.

How the Administration is providing relief

Retrospective: Student Debt Relief Helps Existing Borrowers

In a commitment to help those who are overburdened with debt, the Administration has already approved Federal student debt cancellation for nearly 4 million Americans through various actions. Today , the Administration announced details of proposed rules that, if finalized as proposed, would provide relief to over 30 million borrowers when taken together with actions to date.

Importantly, much of this debt forgiveness comes from correcting program administration and improving regulations related to laws that were on the books before this Administration took office. This debt relief has affected borrowers from all walks of life, including nearly 900,000 Americans who have dedicated their lives to public service (such as teachers, social workers, nurses, firefighters, police officers, and others), borrowers who were misled and cheated by their institutions, and borrowers who are facing total or permanent disability, including many veterans. By relieving these borrowers of long-held, and in some cases very large burdens of debt, relief can have significant meaning and impact for borrowers, families, and their communities.

By reducing debtors’ liabilities, debt relief raises net worth (assets, including income less liabilities). Debt relief can also ease the financial burden of making payments—leading to greater disposable income for borrowers and their families, which enhances living standards and could positively influence decisions about employment, home buying, and mobility. While there are few direct estimates of the effect of debt cancelation in the literature, estimates based on the relationship between wealth and consumption suggest that this forgiveness could increase consumption by several billions of dollars each year in the next five to ten years.

Additionally, a recent study suggests that student debt cancellation can lead to increased earnings (due to greater geographic and career mobility), improved credit scores, and lower delinquency rates on other debts ( Di Maggio, Kalda, and Yao, 2019 ). This can facilitate access to capital for starting a business or buying a car or home. As home mortgages often require a certain debt-to-income ratio and depend heavily on credit scores, student debt cancellation could potentially increase home ownership. Indeed, based on the mechanical relationship between housing industry affordability standards and debt-to-income ratios, industry sources have suggested that those without student debt could afford to take out substantially larger mortgages ( Zillow, 2018 ). Other research also indicates a negative correlation between student loan debt and homeownership ( Mezza et al., 2020 ).

It is important to note that, while these pecuniary benefits are important, the benefits associated with debt relief are not merely financial. Experimental evidence has linked holding debt to heightened levels of stress and anxiety ( Drentea and Reynolds, 2012 ), worse self-reported physical health ( Sweet et al., 2013 ), and reduced cognitive capacity ( Robb et al., 2012 ; Ong et al., 2019 ). Studies also show that holding student debt can be a barrier to positive life cycle outcomes such as entrepreneurship ( Krishnan and Wang, 2019 ), and marriage ( Gicheva, 2016 ; Sieg and Wang, 2018 ). Student debt relief has the potential to improve these key outcomes for millions of borrowers.

Prospective: The SAVE Plan Helps Prevent Future Challenges

To address unaffordable education financing moving forward, the Administration has also introduced the Saving on a Valuable Education (SAVE) loan repayment program. The SAVE plan prospectively helps student borrowers by ensuring that once they graduate, they never have to pay more than they can afford towards their student loan debt. Importantly, the SAVE plan protects borrowers from being “unlucky” by ensuring that high tuition or low earnings do not result in loan payments that borrowers can’t afford. The CEA has detailed the real benefits of SAVE for borrowers in issue briefs and blogs , underscoring that SAVE is the most affordable student loan repayment program in U.S. history. By substantially reducing monthly payment amounts compared to previous income driven repayment (IDR) plans and reducing time to forgiveness to as little as 10 years for people who borrowed smaller amounts, the SAVE plan can mean tens of thousands of dollars in real savings for borrowers over the course of repayment.

Figure 2 gives the example of two representative borrowers. Take the first, a 4-year college graduate who has $31,000 in debt and earns about $40,500 per year. Under a standard repayment plan, this borrower would pay roughly $330 dollars each month for 10 years. Under SAVE, this borrower would pay about $50 per month for the first ten years, and on average about $130 per month for the next 10 years. Over a 20-year period, this borrower would make roughly $17,500 less in payments, not accounting for inflation over that period. This represents a 56 percent reduction in total payments compared to the standard repayment plan and includes considerable loan forgiveness. Similarly, the representative 2-year college graduate has $10,000 in debt and earns about $32,000 per year. Under a standard plan, this borrower would pay $110 dollars each month for 10 years. Under SAVE, this borrower would pay $0 per month for the first two years, and under $20 per month for the next eight years before their debt is forgiven at year 10. Overall, this borrower would be responsible for roughly $11,700 less in lifetime payments, not accounting for inflation. This borrower sees nearly 90 percent savings compared to the standard plan and receives considerable loan forgiveness.

SAVE can also have benefits beyond the individual borrower. More money in borrowers’ pockets due to lower payment obligations under SAVE could boost consumption and give borrowers breathing room to make payments on other debt. This consumption effect is bolstered by a large literature documenting the benefits of easing liquidity constraints (see, for example, Aydin, 2022 ; Parker et al., 2022 ). Additionally, by shortening time to forgiveness for undergraduate borrowers, SAVE can lead to positive debt-relief outcomes (as discussed above) for many more borrowers.

Another key aspect of income-driven repayment plans like SAVE is that they protect borrowers from having to make large payments when incomes are low. Specifically, the required payments are not based on the initial loan balance, but on one’s income and household size so that those cohorts who need to borrow more to pay for college do not make larger payments unless they make more income. SAVE also protects more of a borrower’s income as discretionary and, when the full plan is implemented in Summer 2024, will limit monthly payments on undergraduate loans to 5 percent of discretionary income. In fact, for single borrowers who make less than $33,000 per year, the required monthly payments will be zero dollars. From a finance perspective, the SAVE plan provides a form of insurance against tuition spikes and economic downturns–taking some of the risk out of investing in one’s education while also bringing costs down.

A common concern, and one that could mute these benefits, is that increases in the generosity of education financing may encourage institutions to raise tuition and fees in response, a phenomenon commonly referred to as the Bennett Hypothesis (for an excellent overview of research, see Dynarski et al., 2022 ). Theoretically, in a market when sellers are maximizing profits, any policy that increases demand will also increase prices. However, this is less likely to impact the over 70% of U.S. undergraduates who attend public colleges, which are not profit-driven and often have statutorily set tuition. Consistent with this notion, the evidence in support of the Bennett Hypothesis primarily comes from for-profit colleges, which are highly reliant on students who receive federal financial aid ( Cellini and Goldin, 2014 ; Baird et al, 2022 ). [4] Importantly, although the for-profit sector enrolls some of the country’s most vulnerable students, enrollment in the sector in 2021 accounted for only 5 percent of total undergraduate enrollment, suggesting that aggregate tuition increases in response to changes in education financing may be modest. Furthermore, the Biden-Harris Administration has taken action to crack down on for-profit colleges that take advantage of, or mislead, their students. And, recent regulations, such as the Gainful Employment ( GE ) rule, add safeguards against unaffordable debt regardless of more generous education financing.

Although the SAVE plan stands to benefit borrowers of all backgrounds, the plan has important racial and socioeconomic equity implications because it is particularly beneficial for those borrowers with the lowest incomes. Centuries of inequities have led to Black, Hispanic, and Native households being more likely than their White peers to fall in the low end of the income distribution. This means that, mechanically, the SAVE plan’s benefits could accrue disproportionately to these groups. Indeed, using completion data from recent years, an Urban Institute analysis estimates that 59 percent of credentials earned by Black students and 53 percent of credentials earned by Hispanic students are likely to be eligible for some amount of loan forgiveness under SAVE, compared to 42 percent of credentials earned by White students ( Delisle and Cohn, 2023 ). Finally, the interest subsidy described in an August 2023 CEA blog , prevents ballooning balances when a borrower cannot cover their entire monthly interest payment, a phenomenon that has historically led to many borrowers in general, and Black borrowers in particular, to see loan balances that are higher than their original loan amount, even several years out from graduating with a bachelor’s degree ( NCES, 2023 ).

Broader economic impacts

The benefits associated with SDR and SAVE for millions of Americans are considerable. In the short run, under both SDR and SAVE, those who receive relief may be able to spend more in their communities and contribute to their local economies. Summing the likely consumption effects of the Administration’s student debt relief and SAVE programs results in billions of dollars in additional consumption annually. Despite the modest effect on the macroeconomy as a whole (note that the U.S. economy is roughly $28 trillion with a population of roughly 320 million), these consumption effects represent incredibly meaningful impacts on individual borrowers’ financial security and the economic wellbeing of their communities.

SAVE, because it brings down the cost of taking out loans to go to college, has the potential to lead to longer-term economic growth if it leads to greater educational attainment. This increased attainment can occur both through improved retention and completion of post-secondary education, and also the movement of students into college who would not have otherwise enrolled. There is a long macroeconomics literature linking educational attainment in a nation to GDP growth (see, for example, Lucas, 1988 ; Hanushek and Woesmann, 2008 ). While identifying the causal effect of schooling on GDP is challenging, researchers, using a variety of approaches, find that a one-year increase in average education (for the entire working population) would increase the real GDP level by between 5 and 12 percent ( Barro and Lee, 2013 ; Soto, 2002 ) —a result that is in line with the micro-founded relationship between years of education and earnings ( Lovenheim and Smith, 2022 ).

To put this relationship in perspective and highlight the growth potential of increasing educational attainment, the CEA simulated the hypothetical effect on GDP of increasing the college-going rate by 1, 3, and 5 percentage points, respectively. This range represents the kinds of changes in college going that have been observed over several years: the college enrollment rate for 18- to 24-year-olds declined 4 percentage points between 2011 and 2021 after increasing by 6 percentage points between 2000 and 2011 ( NCES 2023 ). CEA simulations show that by 2055, a policy that increased the college going rate by 1, 3, and 5 percentage points could increase the level of GDP in 2055 (thirty years from now) by 0.2, 0.6, and 1 percent respectively. This represents hundreds of billions of dollars of additional economic activity in the long run.

While increased growth is an exciting possibility, it would only occur insofar as SAVE leads to increased educational attainment, which is uncertain. The academic literature has found that student loans can promote academic performance ( Barr, et. al. 2021 ), and increase educational attainment by increasing transfers from 2-year to 4-year colleges and increasing college completion among enrollees ( Marx and Turner, 2019 ). At the same time, increases in college-going due to SAVE are by no means guaranteed. While, historically, policies that reduce the cost of college through direct means—such as providing students with generous grant aid, or reducing tuition—have succeeded at raising college enrollment levels ( Dynarski, 2003 ; Turner, 2011 ), a pair of recent studies show that prospective students may only respond to cost changes when they are salient, i.e., they are framed and marketed in the right way ( Dynarski et al., 2021 ), and relatively certain ( Burland et al., 2022 ). However, evidence suggests that there is demand for plans like SAVE ( Balakrishnan et al., 2024 ), particularly as SAVE can provide sizable benefits to borrowers in terms of reducing their long-term debt burden and keep monthly payments low (dependent on a borrower’s income) after they finish school.

This highlights the importance of communicating the benefits of the SAVE program to prospective students who otherwise would not enroll in college due to cost concerns, including potential barriers to paying off student loans in the future. Doing so could lead to meaningful increases in college enrollment, and the resulting improvements in productive capacity could increase the size of the U.S. economy for years to come.

Concluding remarks

The Biden-Harris Administration has taken bold action to address a student debt problem that has been decades in the making. This student debt cancellation will provide well-deserved relief for borrowers who have paid their fair share, many of whom had the proverbial rug pulled out from under them with concurrent rapidly rising tuition and declining returns to a college degree. The relief has and will improve economic health and wellbeing of those who have devoted years of their life to public service, those who were defrauded or misled by their institutions, and those who have been doing all they can to make payments, but have still seen their loan balances grow. Looking to future generations, the Administration implemented the SAVE plan to protect borrowers against tuition spikes and poorer than expected labor market outcomes that often plague students graduating into a period of economic downturn ( Rothstein, 2021 ; Schwandt and von Wachter, 2023 ).

Both student debt relief and SAVE will enhance the economic status of millions of Americans with student debt: enable them to allocate more funds towards basic necessities, take career risks, start businesses, and purchase homes with the understanding that they will never have to pay more than they can afford towards their student loans. Moreover, the SAVE plan makes repayment more affordable for future generations, which helps borrowers manage monthly payments, but also enables more people from all walks of life to explore their full potential and pursue higher education, enhancing the potential of the U.S. workforce and the economy more broadly.

[1] In 2021, 51% of total undergraduates attended public 4-year universities and 21% attended public 2-years in 2021.

[2] The BA group excludes those with a graduate degree, or any education beyond a bachelor’s degree.

[3] Recent research shows that, despite a positive return on investment (ROI) for many, including the average student, the distribution of ROI has widened over the last several decades such that the likelihood of negative ROI is higher than it has historically been, particularly so for underrepresented minority students ( Webber 2022 ).

[4] There is also some evidence in support of the Bennett Hypothesis at the graduate level ( Black et al. 2023 ).

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College debt is higher than ever. One in 2 grads with loans have regrets.

More than half of bachelor’s degree students graduate with debt, and a new poll shows many are worried about being able to pay it off..

An illustration of a stack of dollar bills captured in a mouse trap. The image is set on a light green background.

C ynthia Jalbert, a 57-year-old housekeeper in Lewiston, Maine, took out a $2,500 Parent PLUS loan to help her older son get a bachelor’s degree. After a year at Boston Architectural College, he’d transferred to the University of Southern Maine, a public institution that’s a relative bargain as New England colleges go. One year of in-state tuition at USM costs $8,910; with room, board, and fees, the price tag is just over $23,000. Compare that with Wellesley College and Boston, Tufts, and Yale universities, where starting this fall, total costs at each of the private schools will exceed the $90,000-a-year mark. At BU, The Boston Globe recently reported, the annual bill has surged more than 40 percent in a decade.

Jalbert was one of 6,000 New Englanders surveyed in February by Emerson College Polling, in partnership with the Globe Magazine, about perceptions of the value of college and the impact of its costs. Borrowing for higher education was not easy, Jalbert says, but she believes in the importance of a degree and has insisted her sons go to college. “My sons aren’t inclined to do plumbing or any of that,” she says,”so they kind of had to go to college to be able to learn something and find a career.”

Jalbert makes $30,000 a year, so the $2,500 loan was substantial. The pain of it was amplified when she realized that it could cost her nearly $6,000 if she stuck to the payment schedule that stretches nearly 10 years from start to finish (she hopes to pay it off sooner). “I don’t mind taking out loans,” she says, “but if I take out a loan for under three grand, it shouldn’t double by the time I’m done paying it.”

More than 50 percent of bachelor’s degree students in the United States graduated with debt in 2021-2022, with those borrowers owing an average of $29,400, according to the nonprofit College Board. There is wide variation within that national average, however — women carry about two-thirds of student debt , for example, and Black women hold the most, an average of $37,558, according to a report from the American Association of University Women. The racial and gender wage gaps in the workplace often slow the speed of loan repayment, meaning more interest being owed.

Meanwhile, the cost of college just keeps climbing. In 1963-1964, a year of tuition, fees, room, and board at a public university averaged $912 (or about $9,000 in today’s dollars), according to figures from the National Center for Education Statistics. In 2022-2023, the average had grown to $20,401 a year.

With money like that at stake, it’s no wonder that in our survey, 77 percent of New England adults who have student loans are very or somewhat concerned about their ability to afford their payments. A striking 52 percent of respondents say their loans are not worth the cost and they regret taking them on. But the intensity of regret varies across different groups. For example, it’s strongest among those under age 50, men, Black people, Hispanic/Latino people, Republicans, and Independents. There are lower levels of regret among Democrats and people over the age of 50.

Since 2021, the Biden administration has green-lighted close to $138 billion in student debt cancellation for nearly 3.9 million borrowers. Our survey results show that 53 percent of New England adults support using government funds to reduce or eliminate student debt, while 30 percent oppose it and 17 percent are unsure.

Survey respondent Eric Sorensen, a woodworker and former business owner who lives in Rhode Island, says he’s against using federal funds to help borrowers. Now 70, he attended college for a year and a half without using loans. Sorensen believes, instead, that colleges need to be pressured to lower their prices. “I think the problem is that every dollar that gets thrown at [colleges], they manage to absorb and expand building, so it is not furthering education.”

Respondent Liza Jabar-Cagney, a 64-year-old registered nurse in Maine, agrees college has grown too expensive. She took out loans for her undergraduate degree (which required some two decades to pay) and an additional roughly $22,000 to get her nursing degree at age 50 (which she’s still paying off). “It is really outrageous,” she says of the amount of debt many students need to take on now to pursue degrees, “and it limits people in what they can do.”

That’s why Jabar-Cagney believes student-debt cancellation is a powerful national investment. “I see it as infrastructure to our populace, such as good bridges and roads,” she says. “I don’t see a downside to doing that or implementing free college. It exposes people to possibilities and choices.”

Survey methodology: The Boston Globe Magazine-Emerson College Polling survey of New England adults was conducted February 2-7, 2024. The study interviewed 6,000 adults (n=1,000 residents per New England state), with a credibility interval, similar to a poll's margin of error, per state of +/-3%. The overall New England sample was weighted proportionately for n=2,167 with a credibility interval of +/-2%. Data was collected by contacting cellphones via MMS-to-web, landlines via Interactive Voice Response, email, and an online panel.

Julia DaSilva-Novotny is pursuing her master’s degree in publishing and writing at Emerson College. Send comments to [email protected] . This project was produced in collaboration with an Emerson College writing course led by associate professor Susanne Althoff, a former editor of the Globe Magazine.

Why Is Student Debt So High?

To the Editor:

Re “ Student Debt’s Grip on the Economy ” (editorial, May 21):

Hand-wringing over the cost of a college education, which is two and a half times what it was in 1978-79, adjusted for inflation, while median income has risen only 20 percent, is certainly warranted. And your suggestions for easing the burden of student loans — better repayment plans, enabling wage growth for debtors — make good sense. But we’ve heard this song many times before to no avail.

Focus on the consequences of crushing debt doesn’t address the root problem: Why are college costs out of control? Let’s take a look at a range of institutions of higher learning, public and private, to see exactly why they have become out of reach for so many Americans.

Is the education two and a half times better? Are there ways to cut costs without sacrificing the core mission? What is the role of large endowment funds?

Too often, preoccupation with the effect of a problem ignores its cause.

LILA S. ROSENBLUM, NEW YORK

The American Association of University Women is bringing a gender lens to the student debt crisis in our report “ Deeper in Debt: Women and Student Loans .” Women are now the majority of college students, but they also take on more student debt than men do, and female graduates take longer to repay that debt partly because of the gender pay gap.

As a result, women hold almost two-thirds of student debt in the United States and have a harder time making ends meet while repaying their student loans.

Women and men both use higher education to start careers that lead to economic security, but women are particularly reliant on education as a leg up. Student debt is threatening to turn that education from an opportunity into a trap.

KEVIN MILLER, WASHINGTON

The writer is a senior researcher at the American Association of University Women.

In the countless discussions about student debt, why isn’t anyone talking about the schools to which all of this money is being paid?

The lavish capital improvement projects at both my alma mater and my daughter’s university ($66,000 a year) make me wonder if tuition really has to be as high as it is.

It seems to me that the schools should be taking steps to tighten their belts and figuring out ways to reduce student debt instead of just spend, spend, spend.

KATHY EVANS WISNER GLENCOE, ILL.

The solution to the millstone of student debt is to accord vocational education the respect it deserves. For example, welders earn salaries in the high five and low six figures without having to repay four-year loans for their education.

The reality is that college is not for everyone. But as long as we persist in the fiction that the absence of a bachelor’s degree means substandard salaries for life, too many students will be victimized.

WALT GARDNER, LOS ANGELES

The writer’s Reality Check blog is published in Education Week.

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What to know about Biden’s latest attempt at student loan cancellation

President Joe Biden says student loan relief will empower Americans to pursue their dreams without the burden of debt. Visiting Wisconsin, Biden announced details of a new plan to help more than 30 million people.

President Joe Biden speaks at an event about canceling student debt, at the Madison Area Technical College Truax campus on Monday, April 8, 2024, in Madison, Wis. (AP Photo/Kayla Wolf)

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President Joe Biden departs after delivering remarks on student loan debt at Madison College, Monday, April 8, 2024, in Madison, Wis. (AP Photo/Evan Vucci)

President Joe Biden delivers remarks on student loan debt at Madison College, Monday, April 8, 2024, in Madison, Wis. (AP Photo/Evan Vucci)

WASHINGTON (AP) — President Joe Biden is taking another shot at student loan cancellation, hoping to deliver on a key campaign promise that he has so far failed to fulfill.

In a visit to Wisconsin on Monday, Biden detailed a proposal that would cancel at least some debt for more than 30 million Americans. It’s been in the works for months after the Supreme Court rejected Biden’s first try at mass cancellation.

Biden called the court’s decision a “mistake” but ordered the Education Department to craft a new plan using a different legal authority. The latest proposal is more targeted than his original plan, focusing on those for whom student debt is a major obstacle.

Here’s what to know about the new plan:

HOW IS THIS DIFFERENT FROM BIDEN’S FIRST PLAN?

Biden’s first attempt at widespread student loan cancellation would have erased $10,000 for borrowers with yearly incomes of up to $125,000, plus an additional $10,000 if they received federal Pell grants for low-income students. It was estimated to cost $400 billion and cancel at least some student debt for more than 40 million people.

President Joe Biden delivers remarks on student loan debt at Madison College, Monday, April 8, 2024, in Madison, Wis. (AP Photo/Evan Vucci)

The Supreme Court rejected that plan last year, saying Biden overstepped his authority.

The new plan uses a different legal justification — the Higher Education Act, which allows the secretary of education to waive student loan debt in certain cases. The Education Department has been going through a federal rulemaking process to clarify how the secretary can invoke that authority.

The new plan targets five categories of borrowers, focusing on those believed to be in the greatest need of help. It would provide relief to an estimated 30 million borrowers. The administration has not said how much the plan would cost.

WHO’S ELIGIBLE?

Biden’s new proposal would offer cancellation to five categories of borrowers.

The widest-reaching provision aims to reset student loan balances for borrowers who have seen their debt grow because of unpaid interest. It would cancel up to $20,000 in interest for Americans who now owe more than they originally borrowed. That cap wouldn’t apply for individuals who make less than $120,000 a year or couples who earn less than $240,000 and also are enrolled in an income-driven repayment plan.

The Education Department says 25 million people would be eligible for that relief, including 23 million who would get their interest erased entirely.

Borrowers who are eligible for other federal forgiveness programs but haven’t applied would also get their loans canceled under the new proposal. It applies to the Public Service Loan Forgiveness program and income-driven repayment plans, among others. It’s meant to help people who missed out on forgiveness because of complex paperwork, bad advice or other obstacles. An estimated 2 million people would be eligible for that help.

All debt would be canceled for borrowers who have been repaying undergraduate loans for 20 years or more, or 25 years for those with graduate school debt. The Biden administration says it would erase loans for more than 2 million people.

Those who attended college programs of “low financial value” would be eligible for forgiveness. The plan would cancel debt for borrowers who went to institutions that lost eligibility for federal education funding because they cheated students. It would also cancel loans for people who went to college programs that left graduates with low incomes compared to their student loans.

A final category would cancel loans for Americans facing hardship that prevents them from repaying their student loans. The rule would allow the Education Department to cancel debt for borrowers who are considered highly likely to default on their loans, and it would create an application system for individuals to detail other forms of hardship.

DO I NEED TO APPLY?

Most of the cancellation would be done automatically with no need to apply. That would be the case for the interest cancellation, borrowers with older loans, those that attended low-value programs, and those eligible for other cancellation programs.

There’s one exception: If borrowers want to make a case that they face some sort of hardship that merits cancellation, they would need to apply individually.

WHEN WILL I GET RELIEF?

The Biden administration says some debt could be canceled as soon as this fall, including interest that has snowballed on top of borrowers’ loans.

That timeline would require some maneuvering. The Education Department said it plans to release a formal proposal in the “coming months.” That would usually be followed by a public comment period of 60 days. Then if the rule is finalized by Nov. 1, it would usually take effect the following July — in this case, July 2025.

But the Higher Education Act authorizes the education secretary to fast-track rules for “early implementation” in some cases. The Biden administration recently used that power to accelerate student loan cancellation offered through a new federal repayment plan. Invoking that authority could allow Biden to start canceling debt later this year.

IS THIS A SURE THING?

Anything but. The Biden administration says it’s confident that the plan is allowed by the Higher Education Act. But loan cancellation of this type is uncharted territory, and conservative opponents are expected to challenge Biden’s plan in court.

Republicans have repeatedly fought Biden’s plan for student loan cancellation, saying it’s an unfair benefit shouldered by taxpayers who repaid their loans or didn’t go to college. Opponents say the Supreme Court was clear that widespread loan cancellation must come from Congress.

If Biden’s plan faces a lawsuit, courts could order the administration to halt cancellation until legal questions are sorted out. That scenario could leave the plan on hold beyond the November presidential election. Even if it survives legal challenges, a Donald Trump victory would spell almost certain doom for Biden’s plan.

CAN CANCELLATION BE REVERSED?

If Biden’s plan is overturned after the administration starts canceling loans, it would present a thorny question: Can forgiven student loans be unforgiven?

Technically, there are ways that canceled student debt can be reinstated. But doing it on such a large scale could be difficult and costly, requiring heavy work from loan servicers contracted to work for the Education Department.

It could also be politically fraught to reinstate debt after it’s been forgiven. Ultimately it could be up to the courts to decide how to handle debt that’s already been canceled.

The Associated Press’ education coverage receives financial support from multiple private foundations. AP is solely responsible for all content. Find AP’s standards for working with philanthropies, a list of supporters and funded coverage areas at AP.org .

Gen Z wants student loan forgiveness without any accountability. It doesn't work that way.

Blanket cancellation does nothing to combat the problem of the student loan crisis. it would only serve as a further incentive for students to attend colleges they can’t afford..

My generation has a political problem. We gravitate toward quick fixes for massive problems that plague our country. The generation raised on instant gratification, to little surprise, is looking for the same in politics and government.

On no other issue is this more apparent than the student loan crisis. Rather than targeting the root of the problem of federally subsidized student loans, President Joe Biden has instead pushed forward the Band-Aid fix of blanket student debt cancellation in order to score a cheap political win with America's youth.

On the 2020 campaign trail, candidate Biden championed his plan to "immediately cancel a minimum of $10,000 of student debt per person." That empty promise appears to have worked the first time around, as he captured 65% of the Gen Z vote , compared with Trump’s 31%.

So is it any surprise that Biden's promise to eliminate student debt went on to be one of his administration's major policy moves? That might be why 77% of voters ages 18-29 said student debt relief was a motivating factor for their turnout in the midterm elections.

Gen Z's support for Biden's student debt plan is maddening

On the issue of student loans, Gen Z broadly favors blanket debt cancellation similar to Biden’s proposed plan. Almost 60% of those born in 1997 or later support the plan that has since been struck down by the Supreme Court , compared with just 46% of all voters in swing states.

Maddeningly enough, that same Bloomberg News/Morning Consult survey reveals Gen Z is far less literate on the details of the plan than other generations, with 42% reporting they had heard “not much” or “not at all” of the plan, compared with just 30% of all other voters in swing states.

Why I'm not voting: I'm not voting for Trump or Biden. You want my vote? Choose better candidates.

I struggle to come up with a term to describe my generation on this issue besides “entitled.” Not only are we broadly in favor of other people paying off our debts, a majority of whom do not hold a bachelor's degree or higher, we don’t even have the decency to be more aware of the issue than generations that are more likely to have already paid off their loans.

A sobering truth for young Americans needs to be heard. You do not have the right to demand other people pay off your poor financial decisions.

Gen Z should push Congress to find a long-term solution

Biden’s plan was not only unwise but also unconstitutional at its core, as highlighted by the Supreme Court when it struck down the plan last June . While I think this course of action is unwise and immoral, Gen Z has a better chance of accomplishing debt relief through Congress, which is responsible for the power of the purse.

Gen Z isn't going away: Don't believe the narrative that Gen Z will vote Biden. My generation is up for grabs.

Blanket cancellation does nothing to combat the problem of the student loan crisis. In fact, it would only serve as a further incentive for students to attend colleges they can’t afford, obtaining degrees that give them little chance of allowing them to pay off the debt they accrued in the process.

Congressional efforts are much better geared toward legislation curtailing the federal student lending programs that have gotten us into this mess in the first place.

The problem is federal involvement in student loans

Our government’s involvement in the student debt crisis is clearly unacceptable. Federal lending programs now offer aid to the vast majority of students.

A 2017 study from the Federal Reserve indicates that for every dollar of federal student loans an institution receives, it's able to raise the cost of attendance by 60 cents.

In a time when 37% of graduates report being unable to afford their monthly loan repayment , a short-term fix like cancellation will do nothing to prevent future generations from suffering the same fate. Young voters should look to other methods to sway their vote for actual change on the issue, not false promises attempting to bribe them.

Gen Z should concentrate our efforts on voting for candidates who promise actual change on the issue, or better yet, take personal responsibility for financial decisions. Understanding your financial decision in attending college, rather than blaming politicians for not stealing other people’s money to pay your debt, is a much better use of your time and will lead to better results for your future.

Dace Potas is an Opinion fellow for USA TODAY. A graduate from DePaul University with a degree in political science, he's also president of the Lone Conservative , the largest conservative student-run publication in the country .

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Effects of Student Loan Debt

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Published: Mar 5, 2024

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