What are the drivers that lead to higher student loan balances? Why a one-time student loan forgiveness program doesn’t solve the problem of increasing student debt. What are some more viable longer-term solutions.
Topics covered include:
- How big is the Biden Administration student debt forgiveness plan
- How big has the student debt burden grown
- Why are borrowings for students increasing
- Why Baby Boomers spent so much less on college
- How are student loans accounted for by the U.S. federal government
- What is the impact on the deficit and potentially inflation of forgiving billions of dollars of student debt
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Welcome to Money for the Rest of Us. This is a personal finance show on money, how it works, how to invest it, and how to live without worrying about it. I’m your host, David Stein. Today is episode 402. It’s titled “Why student loan debt is so high, and why forgiving it doesn’t fix the problem.”
Biden’s Student Debt Forgiveness Plan
Last month, President Biden announced a plan to forgive some student loan debt via executive order. At the same time, the administration announced the moratorium on making student loan payments would end. The Biden administration intends to write off $20,000 of loans for individuals that took out Pell Grants, and up to $10,000 for other borrowers who didn’t take out Pell Grants.
This is for borrowers whose income is less than $125,000 a year. Currently, there’s about $1.6 trillion of federal student loans outstanding in the US, about 45.3 million individuals. About 7 million individuals have student loans of less than $5,000, and another seven and a half million have student loans of less than $10,000. In other words, between $5,000 and $10,000, potentially then 15 million individuals could see their student loans gone, assuming they meet the income threshold.
There’s been different estimates of how big this total forgiveness bill will be, and it depends on what percentage of students who qualify for forgiveness actually take advantage of the opportunity. The Biden administration expects 75% of qualifying borrowers will seek forgiveness. Estimates for how much the total cost, which is essentially the amount forgiven of debt—those estimates are between 500 billion and one trillion dollars.
When I got my undergraduate and graduate degree in the early ’90s, my mother was also attending college for a portion of that time, so our income was low, and I qualified for Pell Grants. In the early years of my education, it paid for a sizable portion of my tuition. I also got scholarships, some internships, but I also took out student loans, and I left school with about $10,000 in student loan debt. The student loan debt balances are much higher today.
The total amount of student loan debt has grown from $640 billion in 2007 to about $1.6 trillion today. That’s a 144% increase. The total amount of student loans has outpaced the growth in the number of borrowers. The number of borrowers went from 28 million to 43 million, so about a 52% increase, but each of those students is taking out more debt.
Why Student Loan Balances Are Increasing
Between 2007 and 2020, the average amount of outstanding federal student loan debt per borrower increased from $22,680 to $36,510. Those are in real inflation-adjusted terms, and this is data from the Bipartisan Policy Center in Washington DC. They’re a think tank that fosters bipartisanship by combining the best ideas from both Republicans and Democrats.
Why is it that student loan debt has exploded over the past 15 years or so? There are a number of reasons.
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