How US student loan debt has weighed down a generation of borrowers

Amanda Collins, 39, has spent nearly half her life paying back her $60,000 in student loans for her undergraduate degree at Morehead State University in Kentucky. A social worker and single mother, she took a second job marketing for a car lot to make ends meet.

Collins felt she could finally keep her head above the water when the US government paused student loan payments in March 2020 in response to the coronavirus pandemic. Two years later, President Joe Biden has now announced up to $20,000 in forgiveness for student loan holders, which will slash Collins’ remaining debt to $3,000.

“I’m more of a ‘I’ll believe it when I see it’ type person, but I’m at least hopeful to be out of this nightmare soon,” said Collins, who says she has held off on marriage and returning to school due to student loan debt.

For months, America’s student loan borrowers were left in limbo over when payments would restart. Whether to extend the pause again — or go a step further by fulfilling a campaign pledge to forgive a portion of student loan debt altogether — had been a thorny decision for Biden, as the president sought to avoid upsetting his Democratic base ahead of the midterms while not giving Republicans any ammunition to use in their campaigning.

Student borrowers say the extended pause on student loan payments has offered a layer of security as they struggled to make payments amid rampant inflation, which is growing at a decades-long high in the US. In an Financial Times survey of nearly 600 borrowers, half said they put money in savings or paid down other debts as a result of the pause on student loan payments. Twenty per cent said they were able to make a large purchase like a car or a home.

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On Wednesday, the president announced a three-part plan to address the student debt crisis, cancelling $10,000 in federal student loan debt for all borrowers earning less than $125,000 and an additional $10,000 for Pell Grant recipients, a federal scholarship for low-income students. The payment pause on federal student loans would also be extended for the seventh, and, he said, final time to December 31.

“Education is a ticket to a better life . . . but over time that ticket’s become too expensive for too many Americans,” said the US president, acknowledging the current system was “broken.”

The decision was largely met with cheers from the Democratic party. But critics of the plan came from both sides of the political spectrum who argue forgiveness would stoke inflation and would do nothing to solve the problem of how unaffordable college has become in the US.

“We have got to do more,” said Democratic senator Bernie Sanders, who wants to make public colleges free. “At a time of massive income and wealth inequality, education must be a fundamental right for all.”

Approximately 43mn Americans owe $1.6tn in federal student loans, which make up the vast majority of student loan debt, according to the Federal Reserve Bank of New York. Biden’s new plan would cancel the full remaining balance of student debt for 20mn Americans, according to the administration.

“I would not call [the announcement] life-changing . . . It does help but does not really reduce the entire long-term burden of student loans,” said Zachary Huebschman, 25, who owes $70,000 in student loans. “I will not significantly change my spending.”

The mushrooming of student loan debt is a largely recent phenomenon in the US, as tuition rates skyrocketed in the past three decades. A single year of college at a four-year institution in the US averaged $29,033 in 2020, more than double two decades ago and about twice the OECD average, according to the National Center for Education Statistics and OECD data.

The US has a hodgepodge system for student loans where borrowers can tap multiple loan programmes and lenders. According to the Education Data Initiative, a research group, an additional $140bn is held in private student loans, which, unlike federal student loans, are not held by the US government and tend not to have fixed interest rates.

Rapidly rising tuition prices have hurt an entire generation’s ability to save and reach milestones. According to a study by TIAA and MIT AgeLab, 84 per cent of borrowers said their student loans were negatively impacting the amount they were saving for retirement. Among borrowers who took out less than $25,000, more than a third said the loans impacted when they planned to buy a home, and nearly a fifth said loans impacted their plans to have children.

Wande Ogun, 35, borrowed $60,000 for her undergraduate degree at Rutgers University. Unable to find a good-paying job in journalism after college, she put her loans in deferment and was later threatened with wage garnishment.

“A big part of me still feels like I graduated college yesterday,” said Ogun. “I don’t have a solid career. I don’t have a retirement fund set up. I don’t have any property. I’m not married. I don’t have any children.”

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A study by the Social Policy Institute found that a universal $10,000 cancellation could cause large behavioural shifts in households. When asked what changes they would make if they had $10,000 forgiven, 44 per cent of student loan borrowers said they would save more for emergencies. Fifteen per cent said they would go back to school.

“We not only expect President Biden’s student loan forgiveness policy to improve household economic stability . . . but we also expect this policy to improve economic mobility through wealth-building opportunities, like purchasing a new home,” said Jason Jabbari, one of the authors of the study.

But some experts fear the forgiveness programme could worsen inequality. Constantine Yannelis, a professor at the University of Chicago, calls student loan forgiveness “regressive” because higher-income earners tend to hold more degrees and thus incur more student loan debt.

“The announced forgiveness plans will primarily benefit upper and middle class earners,” Yannelis said. “The fact that there is an income cap prevents dollars going to those earning very high amounts today, but many college graduates will earn significant amounts over their lives.”

In addition to the extension of the payment pause and forgiveness, the Biden administration has also proposed limiting monthly payments for undergraduate loans to 5 per cent of an individual’s monthly income and forgive borrowers after 10 years of payments.

Liz Sampson owed $58,217 for her undergraduate degree in health services administration at D’Youville University in Buffalo, New York. She juggled four jobs and lived pay cheque to pay cheque for three years after college to pay off her loans. Despite the burden of her debt, she said she does not support student loan forgiveness.

“It still does not solve the root cause of the problem, which is college is unaffordable,” said Sampson.

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