Student loan debt in the United States is a major economic, political, and social issue. As of today, total US student loan debt stands at over $1.35 trillion. According to MarketWatch's student debt clock, it grows by $2,726 each second. 42 million Americans have student loan debt, and about 70 percent of students graduate college with debt. The average balance is over $27,000. Student loan debt is notoriously difficult to discharge in bankruptcy. Many people want to know how the phenomenon happened, its societal effects, and policy proposals.
There are two major explanations for why student debt has skyrocketed in the postwar era. The first is that increased spending by the federal government since the 1944 GI Bill and 1965 Higher Education Act has induced colleges to inflate prices. The GI Bill's payments for tuition and living expenses set a precedent of government intervention in higher education. More recently enacted programs including Stafford, Perkins, and PLUS loans have made it easier for students to attend college. Thus colleges have raised their prices because they know students can take out loans from the government to pay for college regardless. That becomes an endless cycle of government offering more grants and loans and colleges raising prices. So the blame is placed on the federal government.
The second explanation is that colleges and universities have been steadily increasing their prices. Indeed, prices for tuition and fees, room and board, textbooks and supplies, athletic programs, and administrators' salaries have all risen in the postwar era, higher than inflation since 1980. In accordance with greatly increased demand for higher education degrees due to job market pressure, colleges have inflated their prices and the cost of obtaining an education. Private banks and debt collectors have entered also, offering unsubsidized loans with higher interest rates than federal loans and collecting fees from the government for pursuit of delinquent students. Some put the blame for sky-rocketing prices and student debt on greedy college administrations and financial institutions who exploit students.
Regardless of the cause, student loan debt has a detrimental effect on the economy. First, student debt hinders entrepreneurship and innovation, according to the Federal Reserve Bank of Philadelphia. Indebted graduates do not want to enter creative fields and start businesses because they need to service their debts beforehand. Second, because students need to make debt payments, they postpone spending on automobiles and housing and investing in savings and retirement. Third, student debt can also exacerbate wealth inequality, punishing poor graduates and rewarding private banks and debt collectors. Thus there is a growing sentiment especially among younger people that the economy is fundamentally unfair and broken, resulting in popular social and political movements today.
Fortunately, student debt is not a derivative-based bubble or systemic risk like mortgages were. Many varied policy proposals exist. Debt forgiveness would help heavily indebted graduates, but it would not address and solve the causes of the crisis. Tax-funded, debt-free public college would help students attend college without burden, but it also raises a question of fairness in allowing wealthy families to attend college for free. Private philanthropists should be convinced to further endow financial aid and grants at colleges. And legal reform needs to allow discharges of student debt in bankruptcy. An all-of-the-above approach should aim to combine the best parts of all policy proposals.