The jury’s still out on that $1.6 trillion in student loan debt

“We’ve passed the point where nothing can be done on student debt," one expert told us.

The two-year pause for non-private student loan repayment is about to end. On May 1, for 43.4 million borrowers across America, the 0% pandemic interest rate will disappear and default collections will resume — unless the federal government decides against it. 

With the current outstanding federal student loan debt totaling $1.61 trillion and the May deadline approaching, millions of borrowers are waiting to see what happens next.  

“The president’s going to look at what we should do on student debt before the pause expires, or he’ll extend the pause,” White House chief of staff Ron Klain said in an interview with Pod Save America earlier this month, suggesting another extension might be in the cards.

Getting to where we are

“The rise in student loan debt has been rapid and relentless,” said Mark Huelsman, the Director of Policy and Advocacy at Temple University’s Hope Center. 

Between 2007 and 2020, total student debt ballooned 144%. “That doesn’t happen without, you know, a series of intentional and unintentional policy choices and I would say neglect from policymakers,” Huelsman said. 

There’s been a lack of federal oversight of state disinvestment in public higher education systems. During every economic downturn since the 1980s, Huelsman said, states have offloaded the cost of college to students. Public colleges, unlike other high-budget state expenses, have what he called a “release valve,” in that students can pay higher tuition as states pull back their funding.

Along the way, federal loan policies became less lenient to the borrower. Until the Higher Education Amendments of 1991 and 1992, federal student loans had a statute of limitations of six years, but amendments ended that policy for all loans taken out after 1986. Unlike other debt, without demonstrating undue hardship, federal borrowers also can’t declare bankruptcy to get debt relief. 

According to Mark Kantrowitz, the founder of finaid.org, this is an extremely difficult standard to prove — and the guidelines have only grown more strict. 

Then, there was a marketing shift. “There was a political choice to promote the use of student debt as the main way we finance college,” Huelsman said, going beyond public colleges into private and for-profit schools. Before this shift, federal loans were a means of paying for college, not the primary means of paying for it. 

When student loans became the dominant way to pay for college tuition, it was advertised and labeled as “good debt,” Huelsman said, on the basis that the debt would yield a high return on investment for borrowers putting money into their own education. This new reliance on debt came at a time when cost of living began rising exorbitantly, however, damaging borrowers’ ability to repay. 

The “good debt” rhetoric was not met with “good lender” practices. According to Mark Kantrowitz, the federal government “adopted harsh punishment for student loan borrowers.” A combination of complex debt repayment, debt forgiveness plans and stringent bankruptcy laws led to a default crisis. When borrowers default on federal loans, the Department of Education can withhold federal payments like disability benefits, social security, and tax refunds. They can also garnish up to 15% of a borrower’s paycheck to repay the loans.

“They don’t know how they’re going to make ends meet”

The average estimated student loan payment is $460 per month — $460 a lot of borrowers don’t have to spare. The pause in loan payments has highlighted the emotional toll of the student debt crisis, in addition to the financial toll. 

“People carry so much shame,” said Kyra Taylor, a staff attorney at the National Consumer Law Center, who works with clients dealing with federal student debt. 

Debt forces borrowers to hold off on major life events, like buying houses or getting married. During the pause, many borrowers used loan payment money to cover necessary expenses or pay down other debts. 

Topline economic recovery since the debt pause started indicates that, in theory, borrowers should be able to start paying soon. Taylor said things tend to look very different around the kitchen table. 

“I talked to a number of borrowers who are really afraid of repayment starting because they don’t know how they’re going to make ends meet when repayment starts again,” Taylor said. 

What Biden can do

“There is mounting pressure on the Biden administration to offer cancellation with the stroke of a pen through executive action, and there’s plenty of legal evidence that they can do that,” said Huelsman. 

For both Huelsman and Taylor, it’s about relief for people in dire need, borrowers of color and Black borrowers in particular. The Biden administration has touted both its desire to address the debt crisis and its commitment to racial justice.

“When you know that your system is disproportionately harming communities of color, that demands a solution,” said Taylor. “Another reason, to me, that this is a crisis is that our student loan system reflects the same inequalities we have in this country. So we see structural racism coming into play, we see that this burden disproportionately harms borrowers of color, that they also have a harder time repaying their debt. They carry it for longer, and it complicates their ability to take on familial wealth and to close the racial wealth gap.” 

According to Taylor, not only borrowers stand to benefit from debt cancellation, which could relieve the Department of Education of a major administrative burden.

Huelsman sees some signs that broad debt cancellation could be on the way. “I think you can look no further than the fact that the Biden administration has been very vocal and proud when they have canceled student debt over the past year,” Huelsman said. President Biden also campaigned on student debt forgiveness, pledging to forgive $10,000 for federal borrowers. 

“I think the Biden administration and congressional leaders, to some extent, recognize that we can’t go on like this,” Huelsman said. From his perspective “we’ve passed the point where nothing can be done on student debt.” 

“I am quite confident that there is going to be something done, either by executive action or congressional action, to wipe away some student debt,” Huelsman said. 

For now, both the administration and financial experts are advising borrowers to get ready to pay again in two months. “Plan for the restart of repayment,” Kantrowitz said, recommending building up savings in the next months — where possible — to ease the transition.