Breaking Down the Student Loan Debt Crisis in the US

Learn about how much student loan debt has increased over the last 17 years and what can be done to address its negative effects.

Breaking Down the Student Loan Debt Crisis in the US
Muhammad Rizwan

The student loan debt crisis is a growing issue in the United States, affecting millions of borrowers and their families. With the cost of higher education continuing to rise, more students are taking on loans to finance their education, resulting in a total student loan debt that has surpassed $1.7 trillion. This debt has significant implications for borrowers, with many struggling to make payments and facing long-term financial consequences. 

This BrokeScholar report will provide an in-depth analysis of the student loan debt crisis, exploring the causes of the crisis, its impact on borrowers and the broader economy, and potential solutions to address the issue. By breaking down the student loan debt crisis, we aim to shed light on this pressing issue and provide insights into how policymakers, educators, and borrowers can work together to mitigate its effects.

Breaking Down the Student Loan Debt Crisis

When it comes to trying to pin down the cause of America’s student loan debt crisis, there is no obvious “smoking gun”. There is no single event or date that marks the escalation of student loan debt into a full-blown crisis, as the issue has been growing for several decades. However, there are some key factors that have contributed to the current state of the crisis.

One of the most significant factors is the rising cost of higher education, which has outpaced inflation and wage growth over the past few decades. As the cost of tuition and other college expenses have increased, students have had to borrow more money to finance their education. This has resulted in a massive increase in student loan debt, which now exceeds $1.7 trillion, which is needless to say, a historic high.

Another factor is the way in which student loans are structured and managed in the US. Unlike other forms of debt, such as mortgages and car loans, student loans cannot be discharged in bankruptcy, making it difficult for borrowers to escape the debt burden. What’s more, many student loans are issued by private lenders, who may have less incentive to work with borrowers who are struggling to make payments.

The impact of the student loan debt crisis is significant, with many borrowers struggling to make payments, delaying major life events such as buying a home or starting a family, and experiencing long-term financial consequences. The crisis also has broader implications for the economy, as high levels of student loan debt can limit economic growth and hinder social mobility.

Thus, while there is no single event that marks the escalation of the student loan debt crisis, the issue has been growing for several decades and has reached a point where it has significant implications for borrowers and the broader economy. 

Trends in Student Loans and Student Loan Debt

What is instructive is to look at the financial data on student loans and analyze it for any notable patterns. Using data sourced from the St. Louis Fed, including a dataset on the total amount of “Student Loans Owned and Securitized” and “Student Loans Owned and Securitized, Flow”, we can detect some interesting trends in the development of the student loan debt crisis.

Below is a chart depicting the dollar amount of student loans owned and securitized in the US, from the first quarter of 2006 to the fourth quarter of 2022:

One noticeable trend in this dataset on “Student Loans Owned and Securitized” is a steady increase in the amount of loans over time. The amount of loans increased from $480.97 billion in the first quarter 2006 to $1.76 trillion in fourth quarter 2022, indicating a significant growth in the student loan industry over the past two decades. Indeed, from the fourth quarter 2006 to fourth quarter 2022, the amount of student loans owned and securitized has grown by 238% — aka, it has more than tripled.

Another trend that is apparent is the general upward slope of the data, indicating that the amount of loans continued to increase over time, although there were some periods of slower growth. In fact, the periods of slower growth are quite interesting. For example, the period of the fastest rate of growth in student loans was approximately from 2006 to 2010. The highest year-over-year increase in student loans occurred from the fourth quarter 2007 to fourth quarter 2008, when the total amount of student loans rose by 14.7%: From roughly $589.49 billion to $675.95 billion. After the third quarter 2010, the year-over-year increase in student loans never again exceeded 13%. And after the third quarter 2012, the year-over-year growth rate never exceeded 10% again.

There could be several reasons for the most rapid growth occurring from 2006 to 2010, such as the general increase in the popularity and access to student loans, especially those offered by private lenders or even the shadow banking system (which was running at full steam in the 2000s during the housing bubble). A more specific reason for this period of rapid growth is the tendency, during economic recessions, for people to delay or divert energy from the job market and redirect themselves toward education. This explanation makes even more sense considering that interest rates were reduced during the Great Recession, making borrowing money, such as student loans, cheaper.

A third trend that can be observed is the impact of the COVID-19 pandemic on student loan ownership and securitization. While the trend of increasing loans continued throughout the pandemic, there was a significant slowdown in the rate of growth between the fourth quarter 2019 and second quarter 2020, likely due to the economic impacts of the pandemic. The amount of loans increased again after the second quarter 2020 but at a slower pace than before the pandemic.

Overall, this data highlights the significant and continued growth of the student loan industry, as well as the impact of broader economic trends on the industry. It also suggests that student loan debt is likely to continue to be a significant issue for borrowers and policymakers in the years to come. But the flattening of the rate of growth over the last three years may have implications in the future that we can’t discern yet.

The Flow of Student Loans and Student Loan Debt

The second interesting dataset mentioned is “Student Loans Owned and Securitized, Flow”. This dataset tracks the flow of student loans, with flow data representing changes in the level of credit due to economic and financial activity. Flow data is useful because it allows you to calculate the growth rate of consumer credit, in this case, student loans.

Below is a chart depicting the quarterly flow of student loans owned and securitized from the second quarter 2006 to the fourth quarter 2022:

In examining this data, one trend that stands out is the significant increase in flow between 2006 and 2008, peaking at $11.3 billion in the second quarter of 2008. This coincides with the subprime mortgage crisis and the beginning of the Great Recession, which had significant impacts on the broader economy.

Furthermore, an additional trend that is visible is the general decline in flow from 2011 to 2015. Indeed, the period with the highest flow of student loans was the first quarter of 2011, when it reached approximately $13.79 billion. But after that record high, quarterly flows embarked on a precipitous decline throughout the rest of 2011 and 2012. The second-highest quarterly flow occurred in the first quarter of 2016, when it reached roughly $12.63 billion. This was then followed by a general decline from 2017 to 2019. This could be attributed to a number of factors, including changes to federal student loan policies, the decreasing affordability of higher education, and a shift in attitudes towards borrowing for education.

What’s more, the data shows a significant decline in flow in the second and fourth quarters of 2020, likely due to the economic impacts of the COVID-19 pandemic. While flow rebounded slightly in the first quarter of 2021, it declined again in the third and fourth quarters of that year. Like with the dataset on the total amount of student loans owned and securitized, the data on their flow reveals future uncertainty about the direction student loan debt will take. The distorting effects of the pandemic led to a substantial decline in the rates of growth of student loans issued. And though the pandemic has markedly declined in its severity and impact on the economy, now three years on since its outbreak, no recovery in the rates of student loans owned and securitized has occurred.

Incomes and Student Loan Debt

Student loan debt is a considerable financial burden for millions of Americans, with the average borrower carrying thousands of dollars in debt. According to the Federal Reserve, the average student loan debt in the US is $38,792, with around 45 million borrowers collectively owing over $1.7 trillion in student loan debt. The relationship between average student loan debt and average income is complex and varies depending on a number of factors.

A major if often overlooked factor that impacts the relationship between student loan debt and income is the type of degree obtained. Students who obtain advanced degrees, such as law or medicine, may incur significantly higher levels of debt compared to those who obtain undergraduate degrees. As a result, the relationship between student loan debt and income can vary widely depending on the field of study.

Moreover, the relationship between student loan debt and income is influenced by factors such as the overall economic environment, job market conditions, and individual financial circumstances. For example, a borrower who graduates during a recession or economic downturn may struggle to find employment, making it more difficult to repay their student loans. Similarly, borrowers with lower incomes may have a harder time making payments on their student loans, particularly if they have other debts or financial obligations.

Despite these factors, data suggests that the burden of student loan debt is disproportionately impacting those with lower incomes. According to a recent report from the Brookings Institution, students from families in the bottom 20% of the income distribution who graduated from college in 2015 had an average of $28,000 in student loan debt. By comparison, students from families in the top 20% of the income distribution who graduated in the same year had an average of $16,000 in debt.

On the whole, the relationship between average student loan debt and average income is multifaceted and depends on a number of factors such as the field of study, economic conditions, and individual financial circumstances. However, data suggests that lower-income borrowers are disproportionately impacted by the burden of student loan debt, highlighting the need for policy solutions to address this issue.

What Policymakers Can Do to Address the Student Loan Debt Crisis

With the student loan debt crisis having become an ever-pressing issue in the US, and policymakers have proposed a variety of measures to help mitigate its effects. Here are some potential policy solutions:

  • Increase funding for higher education: One potential solution is to increase funding for higher education, which could help reduce the burden of student loan debt by making college more affordable. This could involve increasing funding for public universities or implementing programs that provide free or reduced-cost tuition to students from low-income families.

  • Expand loan forgiveness programs: Policymakers could also expand loan forgiveness programs, which forgive some or all of a borrower's student loan debt in exchange for working in certain fields or meeting other criteria. For example, the Public Service Loan Forgiveness Program forgives federal student loans for borrowers who work in certain public service jobs for at least 10 years.

  • Allow bankruptcy discharge of student loans: Another potential solution is to allow borrowers to discharge their student loan debt in bankruptcy, which would make it easier for borrowers who are struggling to repay their loans to get a fresh start. Currently, most student loans cannot be discharged in bankruptcy.

  • Implement income-driven repayment plans: Income-driven repayment plans allow borrowers to make payments on their student loans based on their income, making it easier for borrowers with lower incomes to make payments on their loans. Policymakers could implement or expand income-driven repayment plans to help mitigate the impact of student loan debt on borrowers.

  • Improve loan servicing: Finally, policymakers could work to improve the loan servicing process, which can be confusing and frustrating for borrowers. This could involve implementing better communication and customer service practices, as well as improving the process for resolving disputes and handling complaints.

The Bottom Line on the Student Loan Debt Crisis

In the end, there are a variety of policy solutions that could help mitigate the student loan debt crisis, from increasing funding for higher education to expanding loan forgiveness programs and implementing income-driven repayment plans. While there is no single solution to this complex issue, policymakers have a range of tools at their disposal to help address the impact of student loan debt on borrowers and the broader economy.

Andrew DePietro

Author: Andrew DePietro

Senior Researcher, and Content Strategist

Andrew DePietro is a finance writer covering topics such as entrepreneurship, investing, real estate and college for BrokeScholar, Forbes, CreditKarma, and more.