What Is the Student Loan Crisis?
Table of Contents
- Student Loan Debt Crisis Statistics
- What Caused the Student Loan Crisis?
- Current Student Loan Debt Programs
- Bankruptcy for Student Loan Debt
- Solutions to Student Loan Debt Crisis
- Can the Student Loan Debt Crisis Be Solved?
Student loan debt might seem more like a personal issue than a policy issue. But when you consider that 43 million Americans carry federal student loan debt, you realize it's a widespread issue with far-reaching consequences.
For that reason, regulators, politicians, and policy organizations are trying to come up with ways to address the student debt crisis. However, with the total outstanding federal and private student loan debt standing at $1.6 trillion, that's a task that is easier said than done.
Did you know FindLaw has a Guide to Student Loan Debt?
Before we get into what is currently offered to assist Americans with student loan debt and what is being proposed for the future, let's take a look at some statistics to better understand the crisis:
- The total outstanding federal student loan debt is $1.4 trillion. Total private student loan debt is $124.65 billion.
- On average, each U.S. household with student debt owes $47,671.
- Among 2018 college grads, 65% left school with student debt.
- Among 2018 college grads, average student debt ranged from $19,750 in Utah to $38,650 in Connecticut, with a U.S. average of $29,200.
- About a third of Americans under 30 have student loan debt.
- About one-fifth of Americans 30 to 44 have student loan debt, same with about 4% of Americans 45 and older.
- About 5.2 million federal loan borrowers are in default.
If it seems like the student loan debt crisis is a relatively new problem, you're right. It wasn't until the early 1990s that Congress expanded the Higher Education Act of 1965, opening up the federal student loan program to all students — regardless of need — and raising the annual borrowing limits. At the same time, the number of people attending higher education increased exponentially, and so did tuition costs.
With the proverbial floodgates open, the debt grew at an unprecedented rate. In April 2012, student loan debt surpassed $1 trillion. Today, about 70% of students graduating with bachelor's degrees leave school with debt.
There have been many different federal programs created in effort to alleviate the burden of student loan debt, especially for people with lower incomes and those who work in public service. There is also the possibility of bankruptcy, which doesn't always work with student loan debt, but may be a more viable option than most people realize.
Income-Driven Repayment Plans
There are several different federal student loan repayment options based on income. Currently, the federal government offers four different income-driven repayment plans for people who need to reduce their monthly payments. The plans, which set monthly payments between 10% and 20% of discretionary income, include:
- Income-based repayment
- Income-contingent repayment
- Pay As You Earn (PAYE)
- Revised Pay as You Earn (REPAYE)
According to Nerd Wallet, income-driven repayment plans can result in monthly payments of as low as $0. They require annual income verification, and the payments can change each year. These plans create a loan term of 20 or 25 years, and at the end of the term, the remaining loan balance is forgiven (but borrowers have to pay income taxes on the amount that was forgiven).
The FUTURE Act was signed into law at the end of 2019 and is aimed at making it easier to access affordable student loan repayment options (in addition to making it easier to apply for federal financial aid). The law allows borrowers to automatically share their annual income information with the Education Department as part of the annual re-certification process. Borrowers only have to opt in once, and can stay in as long as they are participating in an income-driven plan.
There are 7.37 million federal loan borrowers who use an income-driven repayment plan. The Education Department has a Repayment Estimator that allows borrowers to enter their information to see what they'd owe under each plan so they can choose the one that saves the most money.
Is Student Loan Forgiveness Real?
There is a federal program called Public Service Loan Forgiveness (PSLF) that applies to government workers and employees of nonprofits that are tax-exempt under the tax code. After 120 qualifying loan payments, the loan balance could be forgiven with no tax. Participants are able to use an income-based payment plan while making the 120 loan payments.
There are other federal loan forgiveness programs as well, such as Perkins loan cancellation and programs for qualifying medical and nursing school graduates, teachers, Army National Guard members, and AmeriCorps volunteers.
Finally, there are student loan discharge programs for:
- Borrowers whose schools close.
- Borrowers who were defrauded by their colleges.
- Borrowers who cannot work because they are totally and permanently disabled, physically or mentally.
- Veterans who are totally and permanently disabled.
- Borrowers who die.
Private Student Loan Debt
Unfortunately, private student loans do not qualify for the federal programs aimed at reducing the student loan burden. Typically, the only option for borrowers with private student loans is working with the lender to find a solution. Some private lenders do offer student loan repayment programs.
Under the current law, it is very difficult to have student loan debt discharged through bankruptcy. In order to be discharged, the borrower must show that repaying their student loans would impose an "undue hardship" on them, which is a high standard.
Case law provides the test most commonly used by courts to set the undue hardship standard. The Brunner test ( from Brunner v. New York State Higher Educ. Servs. Corp., 831 F. 2d 395), requires that:
- The debtor cannot maintain, based on current income and expenses, a “minimal" standard of living for the debtor and the debtor's dependents if forced to repay the student loans;
- Additional circumstances exist indicating that this state of affairs is likely to persist for a significant portion of the repayment period of the student loans; and
- The debtor has made good faith efforts to repay the loans.
Many resources deter borrowers from even considering bankruptcy for student loan debt, but this approach has been facing growing criticism. The law is changing and 1987's Brunner test may soon become part of history.
Some in the bankruptcy field say that whether or not student debt is forgiven can depend heavily on the rules in a particular bankruptcy district and the judge assigned to the case.
Even though there are many programs in place intended to help people with significant student loan debt, most are called ineffective and over-complicated. Some argue that an entire generation has been unfairly saddled with debt they will never be able to repay. Others say the debt is stalling economic growth as borrowers are putting off buying homes while others are even struggling to make ends meet.
Aggressive solutions have been proposed by Democrats who vied for the presidential nomination, including:
- Wiping away all student debt for all borrowers, proposed by Sen. Bernie Sanders
- Wiping away a significant amount of student loan debt for many borrowers, proposed by Sen. Elizabeth Warren
- Reducing payments based on income to as low as $0 per month or 5% of discretionary income, proposed by former Vice President Joe Biden
The College Affordability Act, meanwhile, has been proposed in Congress as an update to the Higher Education Act, and would get rid of student loan origination fees that are charged to borrowers when they take out student loans. That measure has bipartisan support.
Even some conservatives are proposing student loan debt solutions such as allowing borrowers to more easily qualify for bankruptcy and "money-back guarantees" for degrees.
In another interesting solution, a bipartisan bill called the Employer Participation in Repayment Act would give companies a tax break for helping employees pay back their student loans. The bill, which has the support of several large corporations, would allow employers to contribute by up to $5,250 per employee per year. Neither the company nor the employee would pay tax on the money.
The Trump Administration has proposed getting rid of the loan forgiveness program for those in public interest, and instead creating a program for student loan forgiveness after 15 years for undergrad loans, and capping annual and lifetime student loans for graduate students and parent borrowers.
Like President Trump, other policymakers and advocacy groups have also been taking a look at preventing hefty student loan debt in the first place, such as by making higher public-education free for all and holding higher education institutions more accountable.
Because there are trillions of dollars on the line, this is not a public policy issue that is easily solved. However, borrowers should be comforted by the fact that they are not alone in this, and some form of relief could be coming. The problem has reached a level of crisis and policymakers know that they have no choice but to act.
If you have concerns or your debt is becoming a legal issue, talk with a debt attorney to understand your options.