The Landscape of Student Loan Debt

By Robert Kelchen

The burden of student loan debt is getting a lot of attention among policymakers and in the general public. This is an issue that higher education leaders need to be aware of when talking with stakeholders. In this article I discuss the following items:

• The state of student loan debt in the United States
• Student loan repayment options and their implications for students and colleges
• Key federal policy proposals on student loan debt and repayment

The state of student loan debt

In the last fifteen years, the amount of outstanding student loan debt in the U.S. has more than tripled, going from $467 billion in 2005 (in inflation-adjusted dollars) to $1.47 trillion in 2019. Approximately 90% of this debt is from federal student loans, with the remainder coming from private or state loan programs.

Much of the increase in student debt is because of increases in the number of students attending college before and during the Great Recession, as well as the share of students borrowing for college. Since college enrollment is down nearly 10% from its peak in the 2010-11 academic year, and especially at for-profit colleges, the amount of student debt issued each year by the federal government has fallen. Overall borrowing peaked at $119 billion (in inflation-adjusted dollars) in the 2010-11 academic year and dropped to $94 billion in the 2017-18 academic year. Notably, nearly the entire decline in borrowing is at the undergraduate level, and graduate student borrowing is now 40% of all federal student loans issued each year.

Over time, student debt levels at the undergraduate level have only increased modestly, due in large part to limits on how much undergraduates can take out in federal loans. The below chart shows that students graduating from for-profit colleges with bachelor’s degrees tend to have higher debt burdens than both public and private nonprofit college graduates. Between 2012 and 2016, average debt burdens among graduates decreased at private colleges and increased only slightly at public colleges.

Earlier this year, the U.S. Department of Education updated its College Scorecard data tool to contain information on debt burdens at the undergraduate and graduate program level for the first time. (Previously, only institution-level data on undergraduate students was available.) There is relatively little variation in debt burdens across programs at the undergraduate level, but tremendous variation at the graduate level. 

For example, 172 graduate programs had median debt burdens of over $200,000, and most of these are health sciences programs. College leaders should be aware of the reported debt levels for their programs, especially as program-level earnings data are expected to come out later this year.

With growing levels of student loan debt, there are also growing concerns about whether students are able to manage their loans. The worst possible outcome for a student is defaulting on his or her loans, which happens when they do not make a payment for 270 days. Nationwide, 11% of students default on their loans within the first three years of repayment, and this rate has slowly declined over the last few years. 

However, many more students do not make progress reducing their loan balances after leaving college. Data from the College Scorecard show that barely half of all students manage to repay $1 in principal five years after entering repayment, and that repayment rates have fallen drastically for students who left college during and after the Great Recession.

Source: College Scorecard.

Student loan repayment options

Students can choose from up to eight different options to repay their federal student loans, depending on the types of loans that they have and their individual circumstances. Three of these options, including the default plan of constant monthly payments for ten years, are not tied to a borrower’s income. The other five plans are all income-driven, with borrowers paying as little as ten percent of their discretionary income (above 150% of the federal poverty line) for up to 20 years—this is the option available to most current student borrowers. For students with low incomes after college, income-driven plans are crucial in order to help them manage their loans.

Students working in the public sector and for many nonprofit organizations can qualify for Public Service Loan Forgiveness (PSLF), a special type of income-driven repayment designed to encourage people to work in historically lower-paid sectors of the economy. PSLF has two advantages over other income-driven plans. These loans can be forgiven after as little as ten years of payments, while other loan forgiveness plans require 20-25 years. The balance forgiven is also not subject to federal taxes, as other forgiven loans are. Only one percent of applicants have so far received forgiveness under PSLF, but that rate should improve over time as initial implementation issues get worked out.

College leaders face tough decisions in whether to encourage their students to choose particular repayment options. Colleges should strongly encourage students who are at risk of defaulting on their student loans to use income-driven repayment systems, as these plans allow students to remain current on their loans while making small or no payments if their incomes are low. This helps students avoid the worst possible outcome, and it also helps colleges look good on a key accountability metric. 

However, growing interest in using repayment rates as an accountability metric (such as the College Scorecard metric discussed above) means that colleges have an incentive to encourage as many students as possible to use the standard repayment option. Using the standard repayment option may mean that a high percentage of borrowers’ monthly incomes are going to repay student loans in the first few years after college, which could cause issues of food or housing insecurity. But this also means that borrowers are quickly beginning to repay principal, which makes the college look good. College leaders have to think carefully about how they will navigate this tension between what is best for students and what is best for the college.

Key federal policy proposals

As Congress discusses a long-overdue reauthorization of the federal Higher Education Act, there have been many proposals to reform the federal student loan programs. In this final section, I discuss three of the most prominent types of proposals and their implications for colleges.

Proposal 1: Implement a risk sharing system on federal student loans

Currently, colleges are only held accountable for their former students’ outcomes if more than 30% of their students default on loans within the first three years of entering repayment. There are currently several bipartisan proposals that would require colleges to pay a portion of loans that students do not repay. The goal is for colleges to have some additional skin in the game regarding their students’ outcomes, which would help restore policymakers’ trust in higher education.

Prognosis of passage: If the Higher Education Act is reauthorized (an uphill battle given the current gridlock in Washington), it is possible to see a risk-sharing system included. The challenge in creating this is that such a system is likely to disproportionately affect colleges that serve large numbers of minority and low-income students, such as HBCUs and for-profit colleges. It is possible to develop a system that provides bonuses to colleges that serve more historically underrepresented students to prevent unintended consequences, as the proposed legislation by Senators Jeanne Shaheen (D-NH) and Todd Young (R-IN) does. That likely means that most colleges will not see large effects from a risk-sharing system.

Proposal 2: Make the federal student loan system less generous for graduate students

The federal government made two changes that benefited graduate students in the mid-2000s. In 2006, the Grad PLUS program was created that allowed nearly all graduate and professional students to borrow up to the full cost of attendance, instead of being capped at approximately $20,000 per year. In 2007, the creation of the Public Service Loan Forgiveness program included all graduate student loans, meaning that students with six-figure graduate debts would be eligible for forgiveness after ten years of payments. The PSLF program is projected to be much more expensive for the federal government than initially expected, leading to calls from Republicans to limit graduate student lending and eliminate PSLF while encouraging private-sector income share agreements. 

Prognosis of passage: Unlikely, as growing political polarization about the federal role in student loan programs means that Democrats will dig in their heels. The Grad PLUS program is extremely unlikely to change, but some modest limit to the amount of graduate loans that can be forgiven under PSLF could be a potential area of compromise. The Obama administration’s proposals to cap forgiveness at $57,500 in loans is a reasonable starting point for negotiations.

Proposal 3: Forgive at least a portion of student loans for nearly all Americans

This idea has gained popularity among the crowded field of Democratic presidential candidates, with Senator Elizabeth Warren proposing to forgive up to $50,000 in debt for people below $100,000 in income and Senator Bernie Sanders proposing to forgive all student debt. These forgiveness proposals have polled well among the public, but also have raised concerns about the cost to taxpayers and whether benefits would disproportionately go to wealthy Americans.

Prognosis of passage: Although both Sanders and Warren have introduced legislation around their campaign proposals, there is no way they could gain the Republican support needed to pass in the next two years.

In summary, don’t expect any major changes in the landscape of student loans until 2021 at the earliest. Students and the public are growing more concerned about borrowing for college, but the wheels of change in Washington move very slowly.

About the author

Robert Kelchen is an assistant professor of higher education in the Department of Education Leadership, Management and Policy at Seton Hall University. He has written for Educational Evaluation and Policy Analysis, The Journal of Higher Education, and Educational Researcher; and is the author of Higher Education Accountability. He is frequently quoted in the media, including The Washington Post, National Public Radio, The Wall Street Journal, The New York Times, The Chronicle of Higher Education, and Politico, and has been recognized as one of the most influential faculty members on social media by Education Week and The Chronicle of Higher Education. Professor Kelchen holds a bachelor’s degree in economics and finance from Truman State University, a master’s degree in economics from the University of Wisconsin-Madison, and a PhD in educational policy studies from the University of Wisconsin-Madison.