12 Answers to “Big Picture” Questions About Student Loans

The FAQ below addresses big-picture questions about the U.S. student loan situation as of October, 2023.  This FAQ is for anyone interested in the economic and social impact of student loans in 2023.  For more detailed answers about the mechanics of student loans, see 39 Answers to Student Loan Questions, which is written for parents, students, and borrowers and gets into the nitty-gritty of how the system works: different kinds of loans, borrowing limits, repayment options and more.

There is a lot of inaccurate and misleading information in the media about student loans, and a lot of questions still swirling around.  This FAQ should clear up some of the big questions, and in general I would encourage readers to verify anything you read with original sources
– i.e., the Department of Education (ED), its Office of Federal Student Aid (FSA), the Consumer Financial Protection Bureau (CFPB), or the Federal Reserve.

The Numbers: Analyzing Student Debt in 2023

How much student debt is there really? 
All private, state and federal student loans as of Q1 2023 are $1.78 trillion.

Is $1.78 trillion a lot more than before?
According to the Federal Reserve, in 2006, student borrowers owed $724 billion in 2023 dollars, so the real increase to $1.78 trillion is 245% in 16 years, or 15% real growth per year.  Total postsecondary enrollment has grown four percent (from 18.3 million to 19.0 million) since 2006, which accounts for some of the increase.

Comparing Student Debt to Other Consumer Debts

How does $1.78 trillion compare to other categories of consumer debt?
In Q1 of 2023, car loans were $1.43 trillion, credit card debt was $986 billion, and mortgages were $12 trillion according to the Federal Reserve.  Student loans represent 10.5% of all household debt, but student debt is distributed more unevenly across households than mortgage, credit card or auto debt.

Is $1.78 trillion a lot of money in the scheme of things?
It’s a matter of opinion, but to put such a big number into context, the annual federal budget is $6.1 trillion, annual U.S. GDP is $26.5 trillion, and the national debt is $32.5 trillion.

Trends in Student Borrowing: Undergraduates and Graduates

Are college students taking out fewer loans nowadays?
It appears so. This data from the National Center for Education Statistics (NCES) shows that the proportion of undergraduates taking out federal loans dropped from 50% in 2010 to 38% in 2020, and the average amount borrowed dropped by eight percent.

How about graduate students?
The NCES shows graduate student debt roughly doubling from 2000 to 2016. By 2016, new Ph.D.s held $98,800, new lawyers held $145,000, and new doctors held $246,000.  According to this 2017 report from the Congressional Budget Office, about 40% of student loan dollars are taken out for graduate programs while 60% are taken out for undergraduate programs.  Because undergraduates are subject to strict federal borrowing limits, borrowers with over $100,000 in student debt are overwhelmingly those who went to graduate school.

Private Lenders in the Student Debt Landscape

What proportion of total student debt is held by private lenders?
About seven percent, or $127 billion, though the data is less reliable here.  Eighty nine percent of private loans are for undergraduate education, since federal loan programs limit what undergraduates can borrow.

Repayment Concerns: Delinquency, Default Rates and Credit Score Impact

When repayment resumes, are we expecting a lot of delinquency and default among student borrowers?
The administration has said that during its twelve-month “on-ramp,” delinquent payments won’t be reported to credit bureaus.  The details aren’t clear, but we may not know what the delinquency and default rates look like unless they are reported in the aggregate by the Department of Education.  That said, there are reasons to be concerned about delinquency and default rates when repayment begins. Consumer Financial Protection Bureau data shows that credit card delinquencies for student loan borrowers are rising, suggesting that student loan delinquencies may rise too.

What’s the credit score impact of delinquency and default?
The impact of delinquency and default may be muted by the twelve-month on-ramp and the Fresh Start program which may help some defaulted borrowers who qualify, but delinquencies and defaults do have a significant credit score impact.  Of course, when students make payments on their loans it helps their credit scores. Read VantageScore’s analysis of the potential impact on credit scores.

Related: Managing Student Loans for Better Credit Health

Analyzing Repayment Progress and Challenges

Are students, overall, making progress on paying off their loans?
This New York Times opinion piece shows that half or more of student borrowers carry loan balances that exceed what they originally borrowed, that this trend has accelerated in recent years, and that it is unevenly distributed demographically.

The SAVE Plan for Student Loans

How much does the new income driven repayment plan, Saving on a Valuable Education (SAVE), change the system?
If fully implemented – which is by no means sure – SAVE would have a big economic impact. Relatively modest provisions of SAVE were already implemented.  More aggressive provisions of SAVE may become effective in 2024.  If they do, the Department of Education estimates the following effects:

• Monthly payments cut in half.  Participants who apply for and are enrolled in the SAVE program will have their undergraduate monthly payments cut to 5% of discretionary income from 10%.

• Many more $0 monthly payments.  An increased living expense exclusion (i.e., the part that is not part of a borrower’s “discretionary income”) will mean that payments for many borrowers may drop to zero or near zero.

• Interest forgiveness.  Interest that exceeds a borrower’s monthly payments will be forgiven.  This eliminates the mechanism through which many borrowers’ balances have remained high or even exceed their original principal.

• Balance forgiveness after as few as ten years.  Balances may be forgiven after as few as ten years, and at most twenty years, of payments.

• Couples can separate their incomes.  The SAVE Plan will exclude spousal income for borrowers who are married and file taxes separately

Related: What is the SAVE Plan for Student Loans?

Looking Ahead to Future Debt Relief

How much would the Biden administration’s second proposed student debt relief plan change the system? 
It is too early to tell. The Department of Education posted this notice to start the negotiated rulemaking process, which will consider “the authorities granted to the Secretary in HEA Section 432(a), which relate to the modification, waiver, or compromise of Federal student loans.”  The “authorities granted” are very broad, giving the Secretary of Education the power to, “compromise, waive, or release any right, title, claim, lien, or demand” with respect to student loans.  That would seem to mean that anything goes – but there’s more to it than that.  The Department needs to spend a year or more to create a rule, and that rule will face legal challenges.  It’s unclear how those lawsuits will come out.

Dan Currell was Deputy Under Secretary and Senior Advisor at the U.S. Department of Education (ED) from 2018 to 2021.  He is CEO of the Digital Commerce Alliance and an author and commentator on education policy.

The views, opinions and recommendations expressed in this post are those of the author and do not necessarily reflect the views of VantageScore Solutions, LLC. This article is for informational purposes only and shall not be relied upon as personal, financial or legal advice.

The post Understanding the Economic and Social Impact of Student Loans appeared first on VantageScore.