How Student Loan Debt Became a $1.7 Trillion Crisis – CNBC | Vette Leader

For decades, the country’s outstanding student loan debt has trended in only one direction: up.

Today, around 44 million Americans owe a total of $1.7 trillion for their education. But it didn’t have to be that way.

Legislation such as the GI Bill, the National Defense Education Act, and the Higher Education Act of 1965 paved the way for greater access to college, and enrollment rose while costs remained low.

But eventually, deep cuts in government funding for higher education paved the way for significant tuition increases and pushed a larger chunk of college costs onto students.

Today, tuition accounts for about half of public college revenue, with state and local governments providing the other half. But a few decades ago, the split was very different, with tuition accounting for only about a quarter of revenue, and state and local governments picking up the rest.

In the 30 years between 1991-92 and 2021-22, average tuition more than doubled, rising to $10,740 from $4,160 at public four-year colleges and $38,070 from $19,360 at private institutions, after adjusting for inflation, according to the College Tafel .

Wages have not kept up. “Household income is stagnating,” said university expert Mark Kantrowitz.

With so few families able to afford the rising cost of college, they increasingly turned to government and private help to pay the bills.

The shift to “high tuition, high grants” created a “massive overall debt volume,” according to Emily Cook, an assistant professor of economics at Tulane University.

“The federal government should get out of the student loan business,” said Diana Angstgott-Roth, an economics professor at George Washington University and former chief economist at the Department of Labor.

Because there’s almost no limit to the amount of credit students can borrow to meet rising college costs, “there’s an incentive to increase tuition,” she said.

Now “the schools can charge as much as they want,” added Angstgott-Roth.

Once families reach their federal student loan limits, they turn to parental loans and private financing to send their children to college, an increasingly necessary step for people to have a decent chance of ending up in the middle class.

More and more students believe they need to go to graduate school to be competitive in the job market. And more time in school means more expenses and higher credit needs. About 40% of outstanding federal student loan debt is now taken on post-college for masters and PhD programs.

The average student debt to parents was over $35,000 in 2018-19, up from about $5,000 in the early 1990s.

According to the Student Borrower Protection Center, the market for personal student loans has grown by more than 70% over the past decade. Americans now owe more on personal student loans than they do on past due medical debt or payday loans.

Each year, millions of new students are pumped into the student loan system while current borrowers struggle to exit.

According to Kantrowitz, many college graduates cannot afford the standard 10-year payback period.

“Generally, people choose the amortization plan with the lowest monthly rate, which is also the plan with the longest term,” he said.

As a result, it takes people an average of 17 years to pay off their education debt, US Department of Education data shows.

Many borrowers have put their loans on hold with forbearance, causing their pre-interest debt balances to skyrocket, and widespread failures in government forgiveness programs have led those who expected their debts to be written off after a certain period of time will still have to shoulder them.

The average loan balance at closing has tripled from $10,000 to $30,000 since the 1990s. About 7% of student loan borrowers now owe more than $100,000.

More from Personal Finance:
How much student debt could Biden forgive?
Biden extends federal student loan payment pause
Is studying really worth it?

Without any intervention, Kantrowitz could reach $3 trillion in outstanding student loan debt over the next two decades.

“Given how linear student debt growth is, these events are easily predictable,” he said.

Subscribe to CNBC on YouTube.

Leave a Comment