Student loans in the United States
In the United States, student loans are a form of financial aid intended to help students access higher education. In 2018, 70 percent of higher education graduates had used loans to cover some or all of their expenses.[1] With notable exceptions, student loans must be repaid, in contrast to other forms of financial aid such as scholarships, which are not repaid, and grants, which rarely have to be repaid. Student loans may be discharged through bankruptcy, but this is difficult.[2] Research shows that access to student loans increases credit-constrained students' degree completion, later-life earnings, and student loan repayment while having no impact on overall debt.[3]
Student loan debt has proliferated since 2006, totaling $1.73 trillion by July 2021. In 2019, students who borrowed to complete a bachelor's degree had about $30,000 of debt upon graduation.[4]: 1 [5] Almost half of all loans are for graduate school, typically in much higher amounts.[4]: 1 [5] Loan amounts vary widely based on race, social class, age, institution type, and degree sought. As of 2017, student debt constituted the largest non-mortgage liability for US households.[6] Research indicates that increasing borrowing limits drives tuition increases.[7]
Student loan defaults are disproportionately common in the for-profit college sector.[8] Around 2010, about 10 percent of college students attended for-profit colleges, but almost 40 percent of all defaults on federal student loans were to for-profit attendees.[9] The schools whose students have the highest amount of debt are University of Phoenix, Walden University, Nova Southeastern University, Capella University, and Strayer University.[10] Except for Nova Southeastern, they are all for-profit. In 2018, the National Center for Education Statistics reported that the 12-year student loan default rate for for-profit colleges was 52 percent.[11]
The default rate for borrowers who do not complete their degree is three times the rate for those who did.[4]: 1 A Brookings Institution study from 2023 revealed that when the government pauses repayment on student loans, it most often "...benefit[s] affluent borrowers the most..." primarily due to affluent borrowers holding the largest student debt balances.[12][13]
Loan servicers[edit]
The U.S. Department of Education contracts with companies to manage, or service, the loans it owns. These companies are the primary point of contact for borrowers after they graduate and enter repayment.
A student loan servicer is a company which facilitates different aspects of a loan. The servicing group will typically be responsible for maintaining records on a particular loan, handling loan distribution, and providing requested information to the loan recipient.[89] US student loan servicers include Navient, FedLoan Servicing (PHEAA), MOHELA, HESC/EdFinancial, Granite State - GSMR, OSLA Servicing, and Debt Management and Collections System.[90]
In recent years, some student loan servicers have gone under legal scrutiny for alleged wrongdoing. Navient, formerly Sallie Mae, was charged with multiple class action lawsuits for their loan servicing methods. Navient was also sued by the Consumer Financial Protection Bureau (CFPB) for improper handling of borrower relations. FedLoan has also received public pressure for possible mistreatment of loan recipients.[91]
As of July 2023, the four companies which service the majority of student loans are Aidvantage, EdFinancial Services, MOHELA (Higher Education Loan Authority of the State of Missouri) and Nelnet.[92] ECSI (Educational Computer Systems, Inc.) is the exclusive servicer for the remaining Perkins Loans. Borrowers who have defaulted on loans are assigned to the Department of Education’s Default Resolution Group for servicing.
Student loan asset-backed securities (SLABS)[edit]
FFELP and private loans are bundled, securitized, rated, then sold to institutional investors as student loan asset-backed securities (SLABS). Navient and Nelnet are two major private lenders.[93] Wells Fargo Bank, JP MorganChase, Goldman Sachs and other large banks package and sell SLABS in bundles. Moody's, Fitch Ratings, and Standard and Poor's rate SLAB quality.[94]
The Asset-Backed Security (ABS) industry received financial relief in 2008 and in 2020 through the Term Asset-Backed Securities Loan Facility (TALF) program, which was created to preserve the flow of credit to consumers and businesses, including student loans.[95] In 2020, critics argued that the SLAB market was poorly regulated and could be headed toward a significant downturn, despite perceptions that it was low risk.[96]
Criticisms[edit]
School effects[edit]
Some critics of financial aid in general claim that it allows schools to raise their fees, to accept unprepared students, and to produce too many graduates in some fields of study.[122]
In 1987, then-Secretary of Education William Bennett argued that “... increases in financial aid in recent years have enabled colleges and universities blithely to raise tuition, confident that Federal loan subsidies would help cushion the increase.”[123] This statement came to be known as the “Bennett Hypothesis”.
In July 2015, a Federal Reserve Bank of New York Staff Report concluded that institutions more exposed to increases in student loan program maximums tended to respond with disproportionate tuition increases. Pell Grant, subsidized, and unsubsidized loans led to increases of about 40, 60, and 15 cents on the dollar, respectively. In the 20 years between 1987 and 2007, tuition costs rose 326%.[124] Public universities increased their fees by 27% over the five years ending in 2012, or 20% adjusted for inflation. Public university students paid an average of almost $8,400 annually for in-state tuition, while out-of-state students paid more than $19,000. For the two decades ending in 2013, college costs rose 1.6% more than inflation each year. By contrast, government funding per student fell 27% between 2007 and 2012.[125][126]
Many students cannot get loans or determine that the cost of going to school is not worth the debt, believing that they would still be unable to make enough income to pay it back.[127]
Some universities steered borrowers to preferred lenders that charged higher interest rates. Some of these lenders allegedly paid kick backs to university financial aid staff. After the behavior became public, many universities rebated fees to affected borrowers.[128][129]
Interest rates[edit]
The federal student loan program was criticized for not adjusting interest rates according to factors under students' control, such as the choice of academic major. Critics have contended that flat-rate pricing contributes to inefficiency and misallocation of resources in higher education and lower productivity in the labor market.[16] However, one study found that high debt and default levels do not burden society substantially.[130]
Long-term debt and default[edit]
About one-third of borrowers never pay off their loans. Those who default shift their burden to taxpayers.[122]
According to Harvard Business School researchers, "when student debt is erased, a huge burden is lifted and people take big steps to improve their lives: They seek higher-paying careers in new states, improve their education, get their other finances in order, and make more substantial contributions to the economy."[132]
A June 2023 report by the Jain Family Institute concluded that much of the outstanding 1.8 trillion in student loan debt will never be repaid, as more and more borrowers are unable to repay, and the cancelling of a large portion of outstanding student debt will be inevitable. The increased necessity of higher education to attain employment means more and more people are forced to take out loans. Stagnating wages, rising tuition, and the shrinking of government funding for higher education result in more and more borrowers being unable to repay and are forced to carry that debt burden well into the future, "impairing economic well-being for a widening and diversifying swath of the population, inhibiting savings, increasing precarity, and draining the very incomes the student debt was supposed to increase." The report says that, unless something changes, future generations will suffer the same consequences of student loan debt as millennials have, including "delayed marriages, reduced childbearing, less entrepreneurship, and decreased retirement security, among others."[133][134]
Sallie Mae and Nelnet[edit]
Sallie Mae and Nelnet are the largest lenders and are frequently defendants in lawsuits. The False Claims Suit was filed on behalf of the federal government by former DOE researcher Dr. Jon Oberg against Sallie Mae, Nelnet, and other lenders. Oberg argued that the lenders overcharged the United States Government and defrauded taxpayers of over $22 million. In August 2010, Nelnet settled and paid $55 million.[135] Ultimately seven lenders returned taxpayer funds as a result of his lawsuits.[136]
School quality[edit]
In April 2019, Brookings Institution fellow Adam Looney, a long-time analyst of student loans, claimed that:
Reform proposals[edit]
Organizations that advocate for student loan reform include the Debt Collective and Student Loan Justice.[145][146][147]
Some pundits proposed that colleges share liability on defaulted student loans.[148][149][150]
Sen. Bernie Sanders (I-Vt.) and Rep. Pramila Jayapal (D-Wash.) introduced legislation in 2017 to "make public colleges and universities tuition-free for working families and to significantly reduce student debt." The policy would eliminate undergraduate tuition and fees at public colleges and universities, lower interest rates, and allow those with existing debt to refinance.[151][152] Sanders offered a new proposal in 2019 that would cancel $1.6 trillion of student loan, undergraduate and graduate debt for around 45 million Americans.[153]
Senator Brian Schatz (D-Hawaii) reintroduced the Debt Free College Act in 2019.[154][155]
In 2020, a majority of economists surveyed by the Initiative on Global Markets felt that forgiving all student loans would be more beneficial to higher income earners than lower income earners.[156]
During the 2020 presidential election, then-candidate Joe Biden said he planned to allow $10,000 in debt forgiveness to all student debtors. On August 24, 2022, Biden announced that he would forgive an amount of $10,000 for an estimated 43 million borrowers, and an additional $10,000 for Pell Grant recipients, with this relief limited to singles earning under $125,000 and married couples earning under $250,000,[157] including refunding payments during the forbearance period by any borrower who requests it.[158] This would reduce debt for an estimated 43 million borrowers and eliminate student loan debt for an estimated 20 million.[159] The Congressional Budget Office estimated that it would cost the government about $400 billion.[160][161][162] The administration also proposed a new income-driven repayment plan.[163] The U.S. Supreme Court ruled June 30, 2023 in Biden v. Nebraska that Biden's plan required action by Congress and that the Higher Education Relief Opportunities For Students Act did not permit the administration to act on its own.[164]
Some borrowers still have loans issued under the Federal Family Education Loan Program which closed in 2010. The Biden forgiveness plan originally allowed these borrowers to receive forgiveness by consolidating into Direct Loans, but due to potential lawsuits stopped allowing this on September 29, 2022, potentially excluding 800,000 FFEL borrowers.[165][160]
In February 2024, the Biden administration announced it would cancel $1.2 billion of student debt. The debt cancellation applies only to those enrolled in the Saving on a Valuable Education (SAVE) repayment plan who have been making payments for at least 10 years and who originally borrowed $12,000 or less for school.[166] In April 2024, Biden announced plans to ease student loan debt, benefiting 23 million Americans. The plans included cancellation of up to $20,000 of accrued interest, regardless of income and automatic cancellation of debt for borrowers who were eligible for certain forgiveness programs, who had entered repayment decades ago, who had enrolled in low financial value programs, or who had been experiencing hardship.[167]