The $1.7 Trillion Student Debt Crisis, Explained

Student debt is a $1.7 trillion burden carried on the backs of 45 million Americans. The crisis is the one that defines the economic precariousness of a generation. For those millions of Americans who have an average debt of around $25,000 to $50,000, welcome relief came when, as part of the CARES Act of 2020, student loan repayments were temporarily suspended. And then pauses. And then stopped a few more times.

It’s May 2022 now, and student loans haven’t been paid, or rather, haven’t been required to be, for about two years. President Biden is reportedly considering canceling $10,000 in student debt for borrowers who earn less than $150,000 a year as sole filers and $300,000 as co-filers. Some critics say that’s not enough — the average amount of student debt held is around $30,000 per borrower — for debt that Americans have been strongly encouraged to rack up as an investment in their financial future. . Conversely, others argue on behalf of those who have repaid their debt that it is simply unfair.

In the broadest sense, what would canceling $10,000, $50,000, or all student debt for anyone who qualifies, actually do for families and the economy in general? And if we cancel it, how will we stop the cycle of unpaid student debt? To figure out what the future might look like — and how transformative it might be if the average family suddenly didn’t have to pay $400 to $500 a month in student loans (or rather than pay off their debt, they’re more likely, repaying interest on their principal loans), Paternal spoke with Jane Fox, Alí ​​R. Bustamante and Persis Yu, three subject matter experts, to see what the future might look like. Here are their 11 biggest takeaways that give us an idea of ​​the massive scope of the problem – and a clue as to how it might be solved.

1. It wasn’t so bad

The student debt crisis is relatively recent. “University used to be pretty close to free,” says Jane Fox, court-appointed attorney at Legal Aid in New York, active member of the attorneys’ union and member of the Student Borrower Protection Center. “If you went to a public school, before the ’80s college was affordable, you could get that summer job, make a few thousand dollars, pay your tuition for the next year. We made choices as a country to defund public higher education, and now we have 45 million people [who can’t get out of this debt.”

Alí R. Bustamante, the deputy director of the Education, Jobs & Worker Power program at the Roosevelt Institute, agrees. “Unlike credit card debt or mortgages, the only reason why student debt actually exists is because, over the past few decades, federal and state policies have placed the burden on financing universities on the backs of families.”

Over the past decade, for example, states have scaled back their funding for higher education by nearly $9 billion — and when 10 years ago students paid for about a third of the costs of operating universities with their tuition, now they pay about half. State budget cuts led to higher costs of education for students themselves, per analysis from the Center for Budget and Policy Priorities. In fact, 41 states have spent less on students in the last decade, and in eight states, funding fell by more than 30%. Tuition in 2018 was up by 37% from 2008. At the same time, 3.6% of federal spending in 2018 was spent on higher education: through federal student aid and loans, grants, and contracts.

2. Borrowers Are Not Irresponsible

Having student debt doesn’t make you irresponsible. “It’s not like these were impulse buys,” says Bustamante. “It was a part of pursuing the American dream.”

And such borrowing was, for generations, heavily subsidized.

While prior to the WWII era, college was the provenance of the wealthy, after WWII loans and grants to go to college became part and parcel of the GI Bill — meaning that many people who couldn’t afford to initially go to college were able to do so, per Marketplace analysis. Then, in 1965, the Higher Education Act was passed that was designed to support universities, as well as help students afford to go to them through grants and loans. (Grants, it should be noted, are like scholarships; loans need to be paid back.) Over the next few decades, laws were passed that made loans more accessible, limited income requirements to receive them, and allowed parents to take out loans for their kids — all while federal investment in schools began to dwindle, and loans replaced grants as the commonplace federal investment, that same analysis suggests. College costs rose; wages stayed flat; and instead of giving grants to students, the federal government gave out loans.

“Not only was it encouraged and couched as responsible, it was done so aggressively — in order to offset the reality that college costs are skyrocketing.” This is true even more so for in-state colleges, colleges that are usually seen as the more affordable option, where between 1988 and 2018, tuition rose more than 200%, and 130% at private colleges.

3. Don’t Have Debt? Your Parents Were Probably Wealthy

Most people who have student debt have it because they are not wealthy. “If you’re rich, you don’t have student debt,” says Fox. “If you grew up wealthy or even upper middle class, you don’t have student debt because your parents saved for college, your college was paid for. But most people’s parents, given the cost of college, could never have saved enough.”

A 2021 estimate by CNBC found that parents would have to save some $300 a month in order to send their kid to a four-year, in-state public college, and for private colleges, $600 a month. That’s some $3,600 to $7,200 a year for a single kid. The median national income for a family of four in the fiscal year of 2021 was $79,900 a year, meaning that to save for college for a single kid, a parent making the median income would need to save 4.5% to 9% of their income for their child’s future. For even more context, prior to the pandemic, married couples spent an average of 10% of their income on childcare, while single parents spent up to a third of their income on childcare. An estimate of household spending in 2020 found that the average household spends $21,409 a year for rent or mortgage, utilities, laundry, cleaning supplies, and utilities. Many millennial parents are also paying down their own student or medical debts, buying groceries, and paying for extracurriculars for their children.

4. Interest Rates Make It An Impossible Debt To Pay

The way people talk about student debt, it sounds like people are paying their student debt down. But most people who don’t have debt don’t realize that “no one is paying their principal. And if you’re not paying your principal, you’re just lighting money on fire,” (A 2018 estimate found that fewer than a quarter of people with student loans are actually repaying their principal loan — aka the amount of money they took out to go to college. That means that over 75% of students are paying down their interest and that people’s debt is continuing to grow.)

It’s akin to, per Fox, paying a 30-year mortgage, and then finding out after those 30 years that you actually owned less of your house and owed more money on the house than you thought. “That’s what we’ve set people up with, in how we’ve structured debt,” she says.

5. Student Debt Cancellation Would Likely Be An Economic Stimulus

During the student debt payment pause alone, families have been able to keep $85.5 billion a month of their own money “without having the government strip it away from them,” Bustamante says. And while that’s certainly helpful from an economic standpoint, canceling lots of student debt would make that change permanent.

Persis Yu, the policy director, and managing council at the Student Borrower Protection Center, agrees. “Money that they’re not paying towards their student loans, money that they’re able to put into their communities … [debt cancellation] is not isolated from the borrower himself. This is key to building healthier communities,” says Yu.

6. And that would put nearly $400/month in parents’ pockets

Bustamante and Fox liken widespread student debt cancellation to a “parallel” to the child tax credit. “A single family has the average payment of $393 per month in student debt. Having this in their wallet every month can be transformative. It can mean being in poverty or not. It could mean if you can afford summer camp.

“We saw a glimpse of [what debt cancellation could look like] with the child tax credit,” Fox said. “During the CARES Act, there was the student loan pause and people were basically getting a UBI-like payment. [Millions] families have been lifted out of poverty because we did it. And we could do it. We decided to do two things, and that was not to collect student debt, and we decided to give people money and say, “Oh, guess what happened ?” People’s lives have been transformed.

7. Canceling student debt would help close the racial wealth gap for black families

“We know that communities of color are particularly burdened with student loan debt and are disproportionately in default,” says Yu. Families of color are more likely to have their wages and tax refunds garnished . “Cancelling a substantial amount of student loan debt would help close the racial wealth gap, which I think is extremely important for us to see as a political goal in society.”

Fox agrees. “One of the things that Biden has talked about is…using the policy of debt cancellation to close the racial wealth gap. Black borrowers have a lot more [student] debt. Black borrowers tend to have to borrow significantly more for undergrads because they have less generational wealth. For example, the median income of black college graduates in their 30s is now less than a tenth of the net worth of their white counterparts, per the Washington Post.

8. Student debt is one of the reasons families can’t afford homes

“For families, [student debt has major implications] for asset growth,” Yu says. “We know that people put off starting a family because of their unpaid loan debt, [that people are delaying buying] homes, one of the most fundamental assets for wealth creation. Student debt makes it harder to save for retirement or to save for our own children’s future. These delays have an impact on our financial health.

Fox agrees. “People are making very important life choices because of their student loans. [They] put off having a family or trying to buy an apartment or a house because they are already paying a mortgage. With most student loan repayments between $400 and $500 a month, substantial debt cancellation would mean that debt could stop affecting people’s choices, the jobs they want to have, and the families they want. wish to found.

9. Student debt is also a mental health issue

Yu notes that there is a measured mental health impact that student debt has on people. A study, Second Chance: Life Without Student Debt, published in the National Bureau of Economic Research (NBER) in 2019, found people who failed to repay their student loans and completely forgave them. “What they discovered by looking at these households was that the benefits to their finances and their emotional well-being were immediate.”

Fox notes that there is a “psychic emotional toll on student debt” for the people she works with. “It’s so hopeless. It’s not like other household debt. With a mortgage, she notes, you can see the tangible difference that paying your mortgage has on your life. But with debt , you could see the principal and interest balance increase for the rest of your life.” It would simply be one of the most transformative things that has ever happened in American politics.”

10. Debt cancellation is unlikely to affect inflation

Bustamante notes that in terms of inflation—a common fear of what would happen if student debt were canceled—cancelling student debt “won’t really cause destruction in the economy at large.” It’s not like, say, you give 45 million families a check for $10,000 or $50,000. “If you were to write off the entire $1.7 trillion, you’re actually technically writing off that over the lifetime of millions of people. It’s not this huge concentrated benefit. It has a negligible impact on inflation. In other words, $393 a month might be transformative for a family, but it won’t make the dollar worthless.

11. It would also benefit at least 1/5 of all Americans

Yu notes that completely canceling student debt would immediately benefit 20% of adults. That’s “a huge number of people. Most of our policies do not impact large numbers of people. And that doesn’t just help borrowers: “One in five adults maybe, but those people have families.” Student borrowers who do not hold this debt will also have an impact on their families. »