Decade in Debt: Student Loans

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The question of how to pay for college has dominated the last decade. And the answer for students across the country has invariably been federal and private student loans, with educational debt in the U.S. hitting historic levels.

Consider these student debt statistics: In 2010, education loans accounted for 6.3% of America’s total debt, a $760 billion chunk. By the end of 2019, that had grown to 10.7%, or a whopping $1.5 trillion. Student loans have even outpaced debt accumulated for credit cards and car loans.

And note that this jump in total student debt has come even as the growth in students’ borrowing for education has started to slow.

Looking back — and ahead — student loans remain a force to be reckoned with.

Key findings

  • Student loans dominate the debt conversation: Outstanding loans nearly doubled between the first quarter of 2010 and the third quarter of 2019. And as mentioned above, they grew from 6.3% of overall U.S. debt to 10.7% over that time, surpassing the credit card and car loan categories to trail only mortgages as the country’s most widespread debt.
  • Growth of federal student loans to blame: The Department of Education’s portfolio of outstanding government loans almost doubled over the same time period, morphing from $750 billion in 2010 to $1.45 trillion in 2019.
  • Delinquency rates reach ominous highs: At the beginning of the last decade, being late on student loan payments was less common than being delinquent on mortgage, credit card or other debt (which includes consumer finance and retail), according to the Federal Reserve. But as we move into 2020, student debt delinquency rates now trump those for other debt types, though total delinquencies have at least come down from their peak.
  • Reasons for optimism in the decade ahead: Still, even as total student debt has ballooned, new borrowing of federal and private loans has decreased eight straight years since an all-time high of $132 billion was lent and received for the 2010-2011 school year.

Student loans dominate America’s conversation on debt

If mortgage debt dominated the conversation of the 2000s, federal and private student loans led the debate during the 2010s. They grew to comprise almost 11% of all debt held in the country.

That’s partly why you’re hearing 2020 presidential candidates make bold promises on higher education, including proposals such as mass loan forgiveness to free college for all. The numbers may be forcing their hand.

There’s plenty of blame to go around. You could point to expensive colleges stuffing loans into financial aid offers, parents struggling to save up for school or students misunderstanding the aid process.

The effects of the fastest-growing debt category are also numerous. According to our 2019 survey of recent graduates, education debt harmed their progress toward economy-boosting personal finance goals such as saving for retirement, investing, moving, starting a business and spending in general.

Federal student loans’ growth caused total debt to balloon

As noted, Americans’ debt to the Department of Education jumped from about $750 billion to $1.45 trillion over the past 10 years. But at the same time, the number of borrowers increased by only 25%, rising from 34.3 million to 43 million.

What gives? For starters, the Department of Education taking a more active role in student lending.

If you’re familiar with student loan history, you might know that that private lenders previously funded government-guaranteed debt via the Federal Family Education Loan (FFEL) Program. Banks and other creditors would lend to students under the government’s watch and hold the debt on their own balance sheets, not Uncle Sam’s.

With the Health Care and Education Reconciliation Act of 2010, however, the FFEL system was thrown out, and the Direct Loan program took its place. Instead of outsourcing lending to private institutions, the Education Department began lending money directly to students without a middle man (albeit still using servicers to manage loan repayment).

As a result, the federal loan portfolio almost doubled, leading to Education Secretary Betsy DeVos’ recent suggestion that her department leave the lending business altogether.

Student loan delinquency rates rose during the decade

Delinquency rates across most debt types decreased over the 2010s as the economy improved, distancing itself from the Great Recession of 2008 — but that wasn’t true for student loan debt, however. In 2010, 8.7% of federal and private student loan debt was 90 days or more delinquent, according to Federal Reserve data. By 2019, that rate was close to 11%.

On the brighter side, the delinquency rate for education debt has eased from its peak — nearly 12% in the third quarter of 2013.

Student loan delinquency rates have held steady over the past seven years, thanks in part to income-driven repayment (IDR) plans. Federal loan borrowers can use IDRs to cap their monthly payment amount at a more affordable percentage of their discretionary income.

Unfortunately but not unsurprisingly, delinquency rates were higher for older debt. Throughout the 2010s, between 10% and 14% of borrowers in their 40s saw their debt enter delinquency.

By comparison, all other age groups started and ended the decade with single-digit delinquency rates. At the same time, though, borrowers across most age groups struggle to end their debt within 10 years of borrowing it.

Student loan debt likely on the downswing in the decade ahead

The fate of student loan borrowers has yet to be decided. For instance, a political push for landmark legislation could deliver on that controversial promise of mass loan forgiveness, or at least improve the Public Service Loan Forgiveness program.

These burdened borrowers could also take matters into their hands by maneuvering within the Department of Education’s framework, perhaps by switching repayment plans or consolidating, or else by refinancing with a private lender.

The horizon for current and future students at least seems brighter. According to data from the College Board, new loan borrowing has decreased annually for eight straight years, from $132 billion in 2010-11 to $106 billion in 2018-19. Federal loan borrowing, in particular, has fallen by about $15 billion over the last five years.

On the other hand, new federal loan borrowing among graduate and professional students (in the form of Grad PLUS Loans) and new private loan borrowing are still on the rise. Each of these hit decade highs in 2019.

Still, student borrowing is trending downward overall, whether because families are more aware of the financial aid process or because more students are working through college to avoid taking on (more) debt. Whatever the cause, the student loan situation may have a rosier outlook in the 2020s.

Published in News & Policy