The United States of Student Debt - 2023 Report
The Impact of the Pandemic on U.S. Student Debt
This is the second part of our four-part series that looks at the debt burden facing U.S. borrowers today – and the post-pandemic policy changes that will shake it up – created with career data journalist Emily Barone.
If you’ve been following the series, you know we’re on a quest to help you decode the labyrinth of student loans.
After exploring the basics and going global in Part 1, it’s time to focus in on the U.S. Why did student debt balloon to mind-blowing proportions? And how did the pandemic throw a wrench in the gears? In this installment, we’re breaking down all this and more.
Strap in, because it’s time for some real talk on how we got here and what COVID-19 meant for borrowers like you.
Why student debt got unfathomably big
In recent decades, federal student loan debt has ballooned. Back in 2007, students and their parents with federal loans were carrying a total of $516 billion in debt. As of the second quarter 2023, that amount is more than $1.6 trillion. That number is really hard to comprehend. But here are some ways to think about it:
There is not one single reason for the increase, but rather a series of factors that have played off each other, creating a tangle of causes and effects.
#1
The rising population of borrowers in recent decades
Since 2007, the number of loan recipients has jumped from 28 million borrowers to more than 43 million in 2022, fueled by rising enrollment.
Much of that growth stemmed from higher enrollment in the years during and following the Great Recession, when economic activity was sluggish and the job market was weak. With fewer employment opportunities, more people enrolled in school to seek higher degrees. According to a U.S. Census report from 2018, this change was concentrated in two-year colleges, which are often the choice for people who want to acquire new skills quickly.
Even after 2010, when the number of enrolled students began to shrink, student borrowers were still coming into the loan system faster than they were leaving it, so the federal student loan portfolio continued to grow until 2018, when the number of borrowers began to stabilize.
But student enrollment doesn’t fully account for the rising loan burden. Consider that the population of borrowers has increased about 150% since 2007 while the outstanding loan amount has increased 300% during that time.
It turns out, many other forces were feeding into the surging debt.
#2
Schools dramatically increasing their price tags
From community colleges and trade schools to in-state universities to private colleges, costs rose significantly in the span of a few decades.
The College Board, in its most recent Trends In College Pricing report, found that tuition and fees for private four-year schools increased 35% from 1992-93 to 2002-03 and then 26% from 2002-03 to 2012-13. Public four-year schools, while still less expensive than private schools, saw even steeper increases of 37% and 65% over the same time periods. (Costs were also rising in the mid 2010s, but then dropped since the pandemic resulting in little net change for the decade.)
#3
Price hikes didn't happen in a vacuum
Government actions and policies at both the state and federal levels have compounded the trend of rising costs.
At the state level, funding to public schools declined during the Great Recession and in its aftermath. That was a big deal because state and local governments allocate the bulk of their higher education funds—nearly 80%—to general school operations, according to the State Higher Education Executive Officers Association’s 2023 Finance Report. So as state coffers shrunk, schools relied more on tuition for financial support to keep operations running.
In 2001, government appropriations for public colleges were about $11,000 per full-time equivalent student, adjusted for inflation. That figure dropped to $7,600 by 2012. In 2022 it was back to $10,200. However, over those two decades, public school revenue has increasingly come from students; Student tuition now accounts for 42% of school revenue, up from 29% in 2001.
Changes at the federal level have played a role, as well. The creation of the Grad PLUS loan program in 2006, for example, ditched loan caps for graduate students (previously at $18,500 per year for most borrowers). This allowed graduate students to take on debt that covered the entire cost of attendance—but it also spurred universities to hike tuition. One 2023 research study published at the National Bureau for Economic Research found that “the sticker prices went up approximately dollar for dollar with increases in federal loans.”
#4
A time where government grants remained flat
Meanwhile, the government has not increased the size of grants in a manner that is commensurate with the increasing tuition costs.
Take Pell Grants, which are awarded to undergraduate students who display exceptional financial need. Around 6 million students received Pell Grants last year, according to The College Board’s Trends in Student Aid report, which is down from a high of 9.4 million following the Great Recession. But, as that report notes, not only are fewer students receiving these grants, but the value of the grants has failed to keep pace with rising tuition.
The maximum Pell Grant award for the 2023-24 school year will be $7,395, up from $6,895 in 2022-23. But even that $500 increase is a small fraction of the cost of school, particularly when room and board is included. While Pell Grants were once able to cover nearly 100% of tuition and fees at public schools, they now only cover 63%. What’s more, when grants go up, so, too, does tuition. A dollar increase in the maximum Pell Grant award results in a 37¢ increase in tuition according to a 2017 analysis from the Federal Reserve Bank of New York.
#5
American earnings weren't rising fast enough to keep up
While the cost of college shot up, American’s earnings weren’t rising fast enough to keep pace.
It would be one thing if each year’s graduates made significantly more than those who graduated before. But that has not been the case. As tuition rose every year and students took on more debt, they were facing the same wages upon graduation as their predecessors.
Tuition, fees, and room and board at four-year schools (public and private combined) rose 52% between 2000 and 2019 when adjusted for inflation, according to National Center for Education Statistics (NCES) data. But earnings among workers with a bachelor’s degree (and no graduate degree) stayed constant over the two decades when adjusted for inflation. Effectively, the cost to obtain a degree skyrocketed while the earning power of that degree didn’t budge.
#6
Prior to the repayment pause, loan interest was stacking up
Finally, there’s the problem of loan interest. Prior to the pandemic interest accrual pause, many borrowers were seeing their loan balances go up, even when they were paying on time.
According to the Federal Reserve, about 40% of borrowers had loan balances that increased between June 2018 and February 2020—the period just before the pandemic. Another 40% experienced declining balances. (The remaining 20% had no change.) In other words, borrowers were roughly split between having growing debt loads and shrinking debt loads.
That trend wasn’t new: The credit ratings agency Moody’s found that about half of federal loan borrowers who started repaying in 2011-2012 had reduced their balances after five years.
With most types of consumer loans, interest tends to accrue when the borrower is delinquent. But with student loans, certain borrowers making on-time payments see their balances go up due to interest. This typically happens when people on income-driven repayment (IDR) plans pay too-small an amount each month to cover the interest. As a result, the interest accrues, pushing the overall balance higher—a scenario known as “negative amortization.”
The pandemic largely put an end to that, but only temporarily. Interest will start to accrue again in September, 2023.
The pandemic disruption
In March 2020 the United States went into a state of lockdown in an effort to contain the spread of COVID-19. The sitting President at the time, Donald Trump, announced that people who owed student loans would be able to suspend their payments for two months (putting their loans into what’s called “forbearance”) without penalty. Interest wouldn’t accrue during that time, either.
That pause was extended multiple times, through two administrations, and lasted for about three and a half years.
During those years, universities had to adapt quickly to remote learning. In a global survey of student satisfaction, Studocu found that the number of U.S. undergraduate students taking at least one virtual course was 97% higher in 2020 than in fall of 2019. The number of those students exclusively enrolled in virtual classes was up 186%.
But virtual school shook up longstanding practices. For one thing, not everyone wanted to study remotely and enrollment plummeted, as shown here. What’s more, the cost to attend college, which had started to level off even before the pandemic, came down even more, as shown here. Falling tuition was both strategic (to lure students) and operational (overhead for virtual classes wasn’t as high). The confluence of these factors meant that loans issued during the pandemic were both fewer in number and lower in amount.
Meanwhile, for borrowers who had outstanding debts from prior schooling, the forbearance period offered a great relief. As mentioned earlier and shown in the chart, above, more than 40% of borrowers carried balances that were rising prior to the pandemic. Among the debt carriers, about 76% let their balances sit on ice. Another 19% paid down their debt during the forbearance period, even though they didn’t have to.
This is likely because, after the immediate shock of the pandemic shutdowns, the job market recovered relatively quickly and those who could work found themselves in a more lucrative position—especially if their households had received stimulus payments. In an analysis of Federal Reserve survey data collected in late 2021, the Urban Institute found that, among the respondents with student debt, 48% said they were doing better than in 2019, while 28% said they were doing about the same, and 24% said they were worse off.
Given that existing borrowers were able to catch their breath, and students who attended and graduated school during the pandemic weren’t carrying as much debt as their pre-pandemic counterparts, the country’s outstanding balance was finally able to level off after an incredibly steep, multi-decade climb, as shown in the chart below.
The pandemic era didn’t just bring about temporary emergency measures. It also ushered in a momentous push from the government to begin substantial student loan reforms. The biggest attempt by the Biden Administration was to issue broad loan forgiveness, but that idea was shot down in late June when the Supreme Court ruled that only Congress (not the executive branch) had the authority to go that far. The momentum from the administration hasn’t abated despite that defeat, and certain new repayment policies, outlined here, are likely to alleviate the burden for some students when their student loan bills again become due.
The country is about to enter a period of uncertain change given the new student loan repayment plan options. No one can see yet how effective this new era will be in managing the nation’s student debt. But some analysts from think tanks and the Federal Reserve, have already cautioned that certain groups of borrowers are likely to feel burdened when repayments restart.
Who are these people? There’s a good chance that they are borrowers who, prior to the pandemic, were struggling to keep up. The next part of this report uncovers more about these vulnerable populations.
What's next?
PART 3: Sinking into debt: An analysis of student loan repayments data
We take a deep dive into the differences in repayment rates across the United States. Stick with us as we unravel the complicated world of student loans, one blog post at a time.
Sharing this is a part of our commitment to creating a more level playing field in education across the world.
Want to see the full report with the detailed analysis? Download it here