Student loan borrowers in the U.S. owe $1.77 trillion in federal and private student loans, according to the Federal Reserve. Per borrower, the average student loan debt balance is $38,375, the latest research from the Education Data Initiative (EDI) finds.
Paying off student loan debt can erode borrowers’ savings, impact their ability to buy a house, and lead them to delay starting a family.
But problems with high student loans have an impact beyond individual borrowers; there are economic and societal implications as well. Read on to learn about the negative effects of student loan debt, why this debt has grown so rapidly in the U.S., and the effect it has on borrowers and communities.
Key Points
• Student loan debt has more than doubled in the last 16 years, growing faster than other types of household debt.
• Rising tuition rates, more borrowers needing to take out loans to afford college, and accumulating interest are some of the reasons student loan debt has increased significantly.
• Borrowers often delay major life milestones like buying a home, saving for retirement, and starting a family due to financial constraints caused by student loan debt.
• Student loan debt can impede national economic growth by slowing consumer spending, delaying homeownership, and reducing savings.
• Many student loan borrowers experience anxiety, hopelessness, and depression due to their debt burden.
The Growth of Student Loan Debt
The amount of student loan debt more than doubled in the last 16 years, from $772 billion in 2009 to $1.77 trillion today. It has also grown faster than other types of debt. Student loan debt is now the third-largest source of household debt after mortgages and auto loans.
The main reasons student loan debt has increased so much include the following:
Rising Tuition Costs
Over the past two decades, tuition and fees have increased substantially at both public and private universities. (Fees include housing, food, school supplies, and transportation.) Here’s how much tuition and fees have risen since 2005, adjusted for inflation:
• Private universities: 41%
• Out-of-state public universities: 32%
• In-state public universities: 45%
Increased Borrowing Rates
More Americans are taking out student loans to attend college. In 1992, the percentage of households with student loan debt was 10%. In 2022, it was 21%.
In households with younger adults, the rate is even higher. In homes of individuals ages 25 to 39, student loan debt climbed from 15% in 1992 to 41% in 2022.
There are now 42.7 million Americans with student loan debt.
Accumulating Interest
When borrowers take out student loans, they must repay the amount they borrowed plus interest. The interest rate is the cost of borrowing money from a lender and is a percentage of the loan amount. Interest on federal student loans and most private student loans accrues on a daily basis, which means that it grows larger the longer you hold your loans.
Each month, the payment you make pays down the interest that built up since your last monthly payment, and the rest goes toward your loan principal. Borrowers can reduce student loan interest by paying a little extra each month toward their loan principal.
If you’re struggling with your loan payments, you may want to consider changing student loan repayment plans. For example, income-driven plans base your federal monthly loan payments on your discretionary income and family size.
Another option to consider is student loan refinancing. When you refinance, you replace your old loans with a new loan from a private lender. If you qualify, you may get a lower interest rate or better repayment terms, which may make it easier to manage your loans.
A loan with a lower interest rate could lower student loan payments. Student loan refinancing requires a credit check, so you may want to make sure your credit is strong (or enlist a cosigner) to be eligible for a more favorable interest rate.
You can use our student loan refinancing calculator to see if refinancing could save you money. But be aware that refinancing federal student loans makes them ineligible for federal benefits, such as income-driven repayment and federal deferment.
Economic Implications
Student loan debt can impede national economic growth over time by slowing spending across various sectors, including real estate. It can also eat away at personal savings that might be needed for emergency expenses, such as car repairs or a medical bill, or dealing with an economic downturn like a recession.
These are some of the potential consequences.
Delayed Homeownership
Borrowers with a student loan payment that takes a chunk out of their monthly income may have trouble saving for the down payment on a house. According to the EDI, 50% of adults with student loan debt say their debt delayed the purchase of a home.
In addition, student loan holders with a high debt-to-income (DTI) ratio — a measure of total monthly debts compared to gross monthly income — may have a difficult time qualifying for a mortgage.
Reduced Consumer Spending
One of the problems with high student loans is a reduction in consumer spending. This means that people with student debt tend to spend less on things like housing, transportation, food, and other goods and services. The Education Data Initiative estimates that each time a person’s debt-to-income ratio increases 1%, their consumer spending declines by 3.7%, which can have a broader economic impact.
The reduced consumer spending by student loan borrowers could last decades. The average borrower takes over 18 years to pay off their loans, the EDI has found.
Impact on Entrepreneurship
Student loan borrowers hoping to start a business report that it’s more difficult for them to reach their goal. In a survey of 800 business owners and aspiring business owners between the ages of 18 and 34, nearly half of those with student debt reported that their loan payments affected their ability to start a business.
In addition, four in 10 young adults believe that student loan debt will impact their capability to invest in a business or hire employees.
Having student loan debt may prevent would-be entrepreneurs from pulling together the funds needed to launch a business — or to invest more capital in the business even if they are able to open it, which can affect profit and growth.
Recommended: How to Refinance Student Loans
Social and Psychological Effects
Borrowers with student loan debt report that their debt has had negative consequences for their well-being. These are some of the difficulties they face.
Mental Health Challenges
Student loan debt can be very stressful, research shows. In one survey, 79% of respondents said they experienced anxiety regarding their loans, 43.5% reported feeling hopelessness, and 41.5% experienced depression.
Delayed Life Milestones
Student loan borrowers may have to postpone major life milestones — such as purchasing a house, getting married, and starting a family — because of their debt..
In a survey of more than 3,000 student loan borrowers, respondents reported delays in:
• Saving for retirement: 55%
• Buying a home: 52%
• Buying a car: 40%
• Moving out of a parent/guardian’s home: 36%
Intergenerational Debt
Student loan debt can become an intergenerational problem as borrowers struggling to pay off their loans carry their debt from their young adult years into their retirement years. Currently, 3.5 million people ages 60 and up have student loan debt. Besides their own loans, they may also have student debt from their children’s and grandchildren’s education, which adds to their burden.
Recommended: Consolidating Student Loans
Disparities in Student Loan Debt
Numerous factors create imbalances in who carries student loan debt and how much debt they have. This includes racial and socioeconomic disparities, attendance at for-profit institutions, and not completing a degree program.
Racial and Socioeconomic Inequities
According to a report by The Pew Charitable Trusts, Black borrowers were more likely than white and Hispanics borrowers to carry higher student loan balances.
The report found that Black and Hispanic/Latino borrowers are more likely to have difficulty repaying student loans than white borrowers, often due to financial challenges, including lower household incomes, that can put them at risk of student loan default.
Research also shows that the student loan repayment system generally does not work as effectively for Black and Hispanic borrowers, which can increase their chances of loan default. These borrowers may also face challenges enrolling in and completing the necessary paperwork to stay in some repayment plans, such as income-driven plans.
For-Profit Institution Attendees
Students who attend for-profit institutions are more likely to take on more student loan debt and default on their loans at higher rates, compared to those who attend public institutions, according to research at Cornell University. For-profit schools tend to be more expensive, which causes students to borrow more, the researchers say.
Further compounding the problem, graduates of for-profits are less likely to land good jobs after graduation, which means they struggle to repay their loans. In fact, graduates of for-profit schools with associate degrees earned less than high school dropouts, according to findings by the Department of Education.
Noncompleters of Degree Programs
Student loan borrowers who don’t complete their college education have a more difficult time repaying their student loans. According to a recent report, individuals who didn’t complete college (a group known as noncompleters) collectively owed $918 million more than they borrowed to attend school. This indicates they don’t make high enough payments — likely because they earn lower wages — to keep up with accumulating interest on their student loans.
On the other hand, borrowers who completed their education owed $3.3 billion less than what they originally borrowed.
Policy and Systemic Factors
Finally, certain policies may play a role in the growing amount of student loan debt in the U.S. These include:
Limited Bankruptcy Protections
It’s very difficult to eliminate student loans in bankruptcy. In order to be successful, a borrower needs to prove that their student loans cause them undue hardship, which requires passing certain tests, and they also have to file what’s known as an adversarial proceeding.
Discharging student loans through bankruptcy is complex, so borrowers likely need to hire an attorney. The process can be expensive as well as damaging to their credit for years.
Variable Interest Rates
Private student loans may have either fixed or variable interest rates (federal loans have fixed interest rates). Fixed interest rates stay the same over the loan term, which means your monthly payment won’t change.
Variable interest rates fluctuate with market conditions and may go up or down, depending on what the market does. That means if interest rates go up, your monthly student loan payments may go up as well, making them difficult to budget for.
Lack of Financial Literacy Education
Financial literacy refers to the knowledge and ability to manage money. Studies show that many adults lack knowledge about personal finance, including saving, debt management, and banking. According to surveys, adults with low financial literacy were more likely to spend more and save less.
A study at Auburn University found that students with higher levels of loan debt had significantly lower financial literacy. In their conclusion, the study authors highlighted the need for greater financial literacy among adults.
The Takeaway
Student loan debt is at an all-time high, and its potential ramifications extend beyond individual borrowers. Those with student loan debt may delay home purchases or starting businesses and reduce consumer spending, all of which can affect the broader economy.
There are many reasons for the high student loan debt level, including the growing cost of college and the greater need to borrow loans to attend school. Fortunately, there are ways to help manage student debt, including improving financial literacy, enrolling in a repayment plan that might lower your monthly loan payments, and considering loan consolidation or refinancing.
Looking to lower your monthly student loan payment? Refinancing may be one way to do it — by extending your loan term, getting a lower interest rate than what you currently have, or both. (Please note that refinancing federal loans makes them ineligible for federal forgiveness and protections. Also, lengthening your loan term may mean paying more in interest over the life of the loan.) SoFi student loan refinancing offers flexible terms that fit your budget.
FAQ
How has student loan debt grown over the years?
The amount of student loan debt has more than doubled in the last 16 years, rising from $772 billion in 2009, to $1.77 trillion today. Student loan debt has also grown faster than other types of household debt, increasing over 500% between 2004 and 2023.
Why is student loan debt difficult to discharge through bankruptcy?
In order to be successful at discharging student loan debt through bankruptcy, a borrower needs to prove that their student loans cause them undue hardship. They also must file an adversarial proceeding, which essentially means they’re suing their lender or loan servicer. A borrower will likely need to hire an attorney to discharge student loans through bankruptcy because the process is complex. It can also be expensive and damage a borrower’s credit for years.
What is the impact of lacking financial literacy on student loan debt?
Research has found that borrowers with higher student loan debt have lower financial literacy. This can have lifelong implications, including more debt accumulation, poor credit scores, and financial hardship.
How does student loan debt affect retirement planning?
Repaying student loan debt each month impacts borrowers’ ability to save for other financial goals, including retirement. In addition, a substantial number of older adults nearing retirement, or who are already retired, are still repaying their student loans. Research shows that 3.5 million people age 60 and up have student loan debt.
How do variable interest rates affect student loan borrowers?
Variable interest rates fluctuate, based on market conditions. So student loan rates may go up or down, depending on what the market does. This can make monthly student loan payments unpredictable. When rates rise, your payments will likely go up (and vice versa), which can make your payments challenging to budget for.
photo credit: iStock/Phynart Studio
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