Money Games

11 Things Everyone Should Know About The $1.7 Trillion Student Debt Crisis

Three experts explain what we all need to understand about the student debt crisis — and how it can be fixed.

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

It’s now May of 2022, and student loans haven’t been paid, or rather, haven’t been required to be paid, for some two years. President Biden is reportedly considering canceling $10,000 of student debt for borrowers who make less than $150,000 per year as single filers and $300,000 as joint filers. Some critics say that isn’t nearly enough — the average amount of student loan debt held is about $30,000 per borrower — for a debt that Americans were strongly encouraged to accrue as an investment in their financial futures. Conversely, others argue on behalf of those who have paid off their debt that it’s simply unfair.

In the broadest sense, what would canceling $10,000, $50,000, or all student debt for whomever qualifies, actually do for families and the broader economy? And if we cancel it, how do we stop the cycle of unpaid student debt? To suss out what the future could look like — and how transformative it could be if the average family suddenly didn’t have to pay out $400 to $500 a month in student loans (or rather than actually paying down their debt, they are more likely, paying down the interest on their principal loans), Fatherly spoke to Jane Fox, Alí R. Bustamante, and Persis Yu, three experts on the subject, to see what the future could look like. Here are their 11 biggest takeaways that give us a sense of the massive scope of the problem — and a hint as to how it could be resolved.

1. It Didn’t Use To Be This Bad

The student debt crisis is relatively new. “College basically used to be pretty close to free,” says Jane Fox, public legal defender at Legal Aid in New York, active attorney union member, and fellow at the Student Borrower Protection Center. “If you went to a state school, before the ’80s, college was affordable, you could get that summer job, make a couple thousand dollars, pay for your tuition for the next year. We made choices as a country to defund public higher education, and now we’ve got 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 to the borrower themselves. It’s critical for building healthier communities,” says Yu.

6. And It Would Put Nearly $400/Month Into Parents’ Pockets

Bustamante and Fox liken widespread student debt cancellation as a “parallel” to the child tax credit. “An individual family has the average payment of $393 a month in student debt. Having that in their pocketbooks every month can be transformative. It can mean being in poverty or not. It could mean whether you can pay for 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 getting essentially a UBI-type payment. [Millions] of families were lifted out of poverty because we did that. And we could do that. We decided to do two things, which is not collect on student debt, and we decided to give people some money and like, ‘Oh, guess what happened?’ People's lives were transformed.”

7. Student Debt Cancellation Would Help Close The Racial Wealth Gap For Black Families

“We know that communities of color are particularly burdened by student loan debt, and they’re disproportionately in default on their debt,” Yu says. Families of color are more likely to have their wages and tax refunds garnished. “Canceling a substantial amount of student loan debt would help close the racial wealth gap, which I think is incredibly important for us to consider as a policy 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 much more [student] debt. Black borrowers tend to have to borrow a lot more for undergrad because they have less in generational wealth.” For example, the median income of Black college graduates in their 30s is now less than one-tenth of the net worth of their white counterparts, per the Washington Post.

8. Student Debt Is Part Of The Reason Families Can’t Afford Homes

“For families, [student debt has major implications] for asset growth,” says Yu. “We know that folks are delaying starting families because of their outstanding loan debt, [that people are delaying buying] homes, one of the most basic assets for wealth-building.” Student debt makes it harder to save for retirement or to save for our own kids’ futures. These delays impact our financial health.

Fox agrees. “People make very significant life choices because of their student loans. [They] put off having a family, or trying to buy an apartment or a home, because they’re essentially already paying a mortgage.” With most student loan payments being somewhere between $400 and $500 a month, substantial debt cancellation would mean debt could stop affecting people’s choices, the jobs they want to take, and the families they want to form.

9. Student Debt Is A Mental Health Issue, Too

Yu notes that there’s a measured mental health toll that student debt has on people. One study, Second Chance: Life Without Student Debt, published in the National Bureau of Economic Research (NBER) in 2019, found folks who had defaulted on their student loans and forgave them completely. “What they found looking at those households is that the benefits to their finances and emotional well-being was immediate.”

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

10. Debt Cancellation Likely Won’t Affect Inflation

Bustamante notes that in terms of inflation — a common fear of what would happen if student debt were canceled — canceling student debt “isn’t really going to be causing any kind of destruction in the broader economy.” It’s not as though, say, you’re handing 45 million families a $10,000 or $50,000 check. “If you were to cancel the whole $1.7 trillion, you're actually technically canceling that over the lifetime of millions of people. It’s not this huge concentrated benefit. It has negligible impact on inflation.” In other words, $393 a month might be transformative for a family. But it won’t lead to the dollar being worthless.

11. It Would Also Benefit At Least 1/5 Of All Americans

Yu notes that canceling student debt fully would immediately benefit 20% of adults. That’s “a tremendous number of people. Most of our policies do not impact that many people.” And it doesn’t just help borrowers: “One in five adults maybe, but those folks have families. Student loan borrowers not holding that debt is going to impact their families as well.”