Line charts showing how student loans with balances exceeding the original borrowing amount due to interest have increased over time, until the pandemic repayment pause in 2020 stagnated loans.
Here is a picture of America’s student debt over time, focusing on loans with balances higher than the original borrowed amount due to accumulating interest.
Normally, borrowers slowly begin to repay loans after finishing college. So, the older the loan, the less likely it is to have a balance exceeding the borrowed amount.
But this system has been breaking down. 2013 was the first year when over half of all student loans carried a balance greater than originally borrowed.
Recognizing the rise in struggling borrowers, the government expanded the income-driven repayment program in 2015. Borrowers under that plan don’t have to make full payments. But their unpaid interest accumulates faster.
The line is high and flat in 2019, showing that most student borrowers couldn’t keep up with interest.
The 2020 student loan repayment pause shook up this unhealthy dynamic. From then on, the youngest loans never accumulated unpaid interest, and the overall share of loans with balances greater than borrowed amounts began to come down.
In 2022, recent borrowers were still benefiting from the pause. When the pause ends in September, balances are expected to trend back toward the 2019 plateau.
Source: Experian Information Solutions; Jain Family Institute
Laura Beamer is the lead higher education finance researcher at the Jain Family Institute. Marshall Steinbaum is a senior research fellow at the institute and an assistant economics professor at the University of Utah.
In the early days of the Covid-19 pandemic, the federal government stopped requiring regular payments of student loan debt — a pause that has lasted more than three years. But student loan repayment had been dwindling for at least a decade before the pause.
You can imagine the stock of outstanding student debt as an overflowing bathtub: More students purchasing more undergraduate and advanced degrees at increasing tuition prices is the water gushing out of the faucet, and non-repayment is a blockage in the drain. The drain is blocked because despite what economists, policy-makers and educational administrators claim, a college degree doesn’t always “pay off.”
In recent years, many Americans with student loans weren’t making enough money to pay even the accumulating interest on their debt, let alone make progress on the principal. Wage stagnation is a long-running phenomenon that worsened after the Great Recession. But an important additional source of student loan misery is the widening and diversifying nature of the Americans who take them out. It’s increasingly the case that people who were always going to have low earnings no matter their educational attainment are also overloaded with student debt — think of underpaid teachers who acquired expensive master’s degrees for only a modest pay increase. The promise of higher education leading directly to high incomes is hollow.
Regardless of what happens after the scheduled resumption of payments in September and to the Biden administration’s plans for partial student debt forgiveness following the Supreme Court’s ruling in June, we predict that most of the outstanding balances — not to mention the roughly $100 billion in new loans issued every year — won’t ever be repaid. In the meantime, while the administration and the courts wrangle over the executive branch’s ability to waive student debt under existing law, student debtors feel forced to downsize their life plans. They delay or forgo marriage and family formation, homeownership, retirement and their children’s education: a profound failure of social reproduction.
Our student debt research uses credit reports, both from an annual, representative cross-section of student borrowers and from a single group of borrowers we’ve been following since 2009. We found that counterintuitively, the repayment pause was the best thing that ever happened to help student loans get repaid. That’s because in normal times, student debt balances mostly increase, thanks to monthly interest payments many borrowers are unable to keep up with. In 2020, 60.7 percent of outstanding student loans had a higher balance than when they were first issued. By 2022, that number had declined to 53.7 percent because interest was waived during the pandemic and some borrowers continued to pay down their principal.
The chart below compares repayment progress on loans in our 2020 cross-section with progress in 2022. The group with increasing balances shrank enormously during the repayment pause. Notably, Black and Latino borrowers had more loans with increasing balances before the pause; they benefit disproportionately while it remains in effect.
The pandemic payment pause is a salve for a sick student loan system
Loans that previously had increasing balances instead held steady, while some borrowers continued to pay down their debt.
Source: Jain Family Institute
Note: Racial groups are imputed from the American Community Survey’s census tract demographic data for the borrower.
Student borrowers are not a monolithic group, and some demographic groups fare far better with their education debt than others. From the group of 2009-era debtors we’ve been following, we learned that female, Black and Latino borrowers generally saw their loan balances continue to increase above their 2009 level; male, white and Asian borrowers generally were able to make progress in paying their balances down (albeit not to zero — and the standard repayment term on federal loans is 10 years).
The diverging trajectories of Americans with student loans
On average, male, white and Asian borrowers made progress on their loans between 2009 and 2022. Female, Black and Latino borrowers had increasing balances until the repayment pause came into effect.
Source: Jain Family Institute
These divergent trajectories are due to structural inequalities in the labor market, which disadvantaged workers try to overcome with increased educational attainment. More advantaged workers don’t need to borrow as much to earn a decent salary and can start paying off the debt they do take on more quickly. The pandemic repayment pause changed the game, causing balances that had been increasing over the prior decade to start to fall. A student loan system in which borrowers do not generally repay their student loans during normal times, but in which they do repay them when they’re not required to, cannot be said to be functioning well.
This situation is the fruit of a tacit agreement among state legislatures, college administrators and the federal government dating back to the 1970s: defund public colleges and universities and shift them to a tuition-based revenue model, with the federal government backstopping the system with student debt so that more students can continue to obtain more expensive education. This change was justified by the idea that higher education “pays off” in the labor market.
Opportunities for middle-class employment without a college degree have certainly dwindled. But increasing the educational credentials required for any given job or salary doesn’t magically make pay go up. It just means the higher education system gets to take a larger slice of a worker’s lifetime earnings on the front end. And if the debt can’t be repaid, taxpayers swallow the loss on the back end — but only after the borrower has endured years of mounting balances and their negative consequences for wealth accumulation and creditworthiness.
This odd structure — in which federal funding comes in the form of student loans that won’t ever be repaid, as opposed to direct funding of colleges and universities — lets school administrators off the regulatory hook. In theory, the market of students selecting their preferred college experience is supposed to discipline schools’ financial conduct. In reality, it does not. This is why college administrators resist free-college proposals that amount to direct federal funding in return for capping tuition: They fear their socioeconomically segregated business models wouldn’t survive the regulatory scrutiny attached to those dollars.
The $1.7 trillion tower of mostly unrepayable student debt is a symbol of education policy failure. Unfortunately, politicians in both parties seem unable to think outside the neoliberal box that got us here. Republicans in Congress have proposed limits to federal loans, barring students from the system once their balances reach a certain threshold. That is an exclusionary vision that seeks to return higher education to its pre-G.I. Bill status as a bastion of white privilege for a tiny elite.
The Biden administration proposes to regulate (some) colleges based on whether their students can eventually repay their student loans and to force all programs to disclose post-graduation earnings and debt burden before students enroll. Those proposals cling to the idea that the labor market is where the value of an education is ultimately determined. Colleges can convincingly object that they don’t control their students’ lives after graduation and would be penalized for enrolling needier students.
To get a handle on the student debt crisis, the government will eventually have to redesign its relationship with American higher education. The current era of tuition-based revenue models has colleges competing for the students who can pay full freight, which can relegate the neediest students to the least-resourced institutions. A healthier system would look more homogenous, with students from all over the income scale spread across institutions nationwide, instead of being an elite scramble between students and schools to fill a few open seats at the top.
To get there, the Department of Education should make institution-level eligibility for federal student loans contingent on a uniform, very low cost of attendance for undergraduates and affordable tuition levels for professional programs. The structure of federal student loans should reflect society’s long-term needs, not just those of employers and universities preying on the generosity of the student loan program and of students desperate for jobs in an economy that feels ever more winner-take-all.
One way of ensuring and backstopping those policy goals could be the creation of a new federal university system, in which the campuses would be homogeneous in terms of financial and other resources and the student bodies socioeconomically diverse, rather than the other way around. But it’s more comfortable and politically convenient to continue to fight the culture war over higher education than to confront the facts about the causes and consequences of this ugly mountain of student debt. The Supreme Court has ruled. The Biden administration is searching for a new way forward. It’s time for a change of course.