Policymakers acted swiftly last year to help student loan borrowers after the onset of the COVID-19 pandemic and subsequent economic downturn by pausing most required payments through at least September 2021. Much of the recent student loan policy discussion has focused on short-term issues, such as borrowers’ abilities to make payments during a public health emergency, but what happened after the Great Recession suggests that repayment challenges could linger or accelerate after the pandemic ends.
As the Great Recession receded nearly a decade ago, the share of student loans in serious delinquency—that is, loan payments overdue by at least 90 days—had grown from 7.3% in 2009 to 10.5% in early 2013. This climb stood in stark contrast to other forms of consumer debt, which tended to show sharp reductions in serious delinquency rates once the economy began to recover. (See Figure 1.) The percentage of mortgage debt in serious delinquency, for example, fell to less than half its peak level within the same period.
But signs suggest that the impact of the COVID-19 economy on higher education financing will be different from past downturns in important ways. For example, this time undergraduate enrollment in higher education has declined, especially at community colleges. Still, a close look at the last recession highlights factors that could help determine the extent to which current and future borrowers encounter loan repayment challenges.
This analysis examines two factors that contributed to repayment issues following the Great Recession and the extent to which they might apply to the current economy. They are:
- The surge in enrollment, borrowing, and subsequent repayment challenges among adult students in their 20s and 30s who attended for-profit and two-year schools, often with low completion rates, following the onset of the previous recession.
- The lingering economic weakness that then dampened employment prospects for these students after they left school.
Enrollment and borrowing trends affected repayment outcomes
A key factor in why student loan repayment challenges grew after the last recession was the rise in postsecondary enrollment during the recession and a corresponding shift in which students were taking out student loans. As in previous downturns, the Great Recession saw a significant spike in higher education enrollment, growing from 19.1 million in 2008 to 21 million in 2010, as people sought to build job skills while employment prospects were weak.
Much of this growth came from adult students in their 20s and 30s who disproportionately enrolled at for-profit and two-year institutions. These institutions also saw the biggest growth in loans during the recession, according to research by economists Adam Looney and Constantine Yannelis. Many adult students are drawn to for-profit and two-year institutions, in part because these schools typically offer more flexible course scheduling that enables students to enroll while continuing to work. For-profit schools also have had a large presence in online learning. By the fall of 2012, more than half of students attending for-profit schools were already taking courses exclusively online.
But these new borrowers frequently stayed in school for relatively short periods because they attended short-term programs or because they left school without completing a degree. Both factors contributed to a surge in borrowers entering repayment just as the recession was ending.
Many then struggled more than other borrowers to repay their loans. Among those who entered repayment in 2011, around 30% who had attended for-profit, two-year, and nonselective four-year institutions defaulted within three years. Nonselective schools typically admit more than 85% of applicants. In comparison, 13% of undergraduate borrowers at four-year schools with at least some selectivity defaulted in that time frame, according to the analysis by Looney and Yannelis.
These repayment difficulties were linked, in large part, to the kinds of schools attended. The analysts caution that they cannot fully explain the link between default and the type of school, but they note that these for-profit, two-year, and nonselective four-year schools generally had lower rates of completion. And research shows that degree noncompletion is strongly linked to student loan default. More recent research suggests that schools themselves play an important role in determining student outcomes, including educational attainment and future earnings.
Looney and Yannelis note that these schools tended to enroll students with certain characteristics—more were financially independent, came from low-income families, or both. That compounded their vulnerability to default, perhaps partly because they were less likely to get family support. The analysis still found a connection between school type and default, even after accounting for these characteristics.
But data limitations prevented the economists from looking at certain important demographic measures such as race. Other studies have shown that Black borrowers face outsized student loan challenges, with larger loan balances and higher rates of default than peers in other racial and ethnic groups. However, there is little information comparing student loan borrower experiences by race and ethnicity around the time of the Great Recession.
Why Student Loan Repayment Outcomes Differ From Other Loan Types
The increasing number of borrowers vulnerable to repayment challenges during the most recent recession reflects the widespread availability of student loans. Unlike other categories of debt, the federal government does not impose underwriting standards—restrictions on lending based on an assessment of ability to pay—on most student loans. This is by design. These loans are intended to promote access to higher education by assuring that students will have the funds needed to attend college regardless of their financial background. Underwriting standards could restrict access.
The federal government does restrict where students can use loans by requiring institutions to be accredited. The schools also must have short-term default rates below certain levels, among other factors, to be eligible for federal aid.
Still, over the past two decades, schools have rarely faced sanctions for high default rates. There are also annual caps on how much undergraduate students can borrow in federal student loans. Parents and graduate students, however, can borrow up to the full cost.
In contrast, other categories of consumer debt, such as mortgages, have underwriting standards, including many that were tightened during the Great Recession. Thus, even as a growing share of student loans flowed to borrowers who were more likely to encounter repayment challenges, lenders in other areas increasingly restricted loans to borrowers who were deemed at risk of not being able to repay.
This difference in accessibility helps explain the pattern in Figure 1, which shows student loans in serious delinquency rising in the wake of the last recession as similar signs of repayment struggles fell—in some instances sharply—across other areas of consumer lending.
Slow recovery prolonged repayment challenges
The slow economic recovery after the Great Recession contributed to repayment challenges. The downturn started in late 2007 and the recovery began in June 2009, but it was not until late 2015 that unemployment fell to 5%, where it had been just before the recession.
Many students who enrolled in for-profit and two-year institutions entered the labor market before the economy had much time to recover. According to Looney and Yannelis, these borrowers experienced higher unemployment and lower earnings outcomes during the sluggish recovery than peers who attended selective four-year schools. Their analysis found that, in addition to factors already outlined, challenges in the job market were a strong predictor of loan default in the years following the last recession.
Although the students who attended these types of institutions faced more difficulties even when the economy was stronger, the weak economy exacerbated their economic struggles and left them even further behind their peers.
More generally, research shows that 30% of unemployed borrowers end up defaulting on their student loans, nearly twice the rate of those who are employed. And even for borrowers who do land secure jobs, simply graduating during a recession can have a long-term negative impact on lifetime earnings, limiting income for at least 10 to 15 years. Departing school in a weak economy can make loan repayment more difficult for years after a recession has ended.
Differences between recessions
As the country begins to emerge from the pandemic, early signs suggest some key differences from the last recession in enrollment and the pace of economic recovery that could make a post-recession spike in delinquency and default less likely.
Instead of seeing a boom, higher education enrollment is experiencing a decline at the undergraduate level. In the 2020 fall semester, enrollment at that level was down 3.6% from the previous fall with a particularly large 10% drop across community colleges. The latest data on 2021 spring enrollment suggests a similar pattern of decline from the previous spring.
Although this enrollment trend might mean fewer borrowers are at risk of repayment challenges in the future, it also raises concerns that many may be missing out on educational opportunities because of economic or pandemic-related challenges.
In terms of the pace of economic growth, many leading forecasts predict a strong recovery as the virus recedes, outpacing the upswing that followed the Great Recession.
Moreover, the federal government has passed economic stimulus packages that include significantly more aid than provided during the previous downturn, intended to promote economic growth and make sure that it is broad. Congress included provisions to help postsecondary students, institutions, and student borrowers as well as low-income families, the unemployed, and the broader economy.
Beyond enrollment and a faster recovery, there are other key differences with the Great Recession that could mitigate the level of repayment challenges going forward. One is a large increase in the use of income-driven repayment (IDR) plans, which tie borrowers’ monthly bills to their income. This change has been largely driven by expanded eligibility for these types of plans. Research shows that borrowers on IDR plans are less likely to default. The Congressional Budget Office (CBO) recently estimated that use of IDR plans grew from 11% of undergraduate borrowers in 2010 to 24% in 2017.
Most borrowers also have had their federal student loan payments paused for almost the entirety of the pandemic—relief not extended during the last recession. However, it is still too early to know the longer-term impactthat this temporary relief will have on borrowers once the pause is lifted, especially for those who have continued to struggle throughout the pandemic.
Policymakers also are exploring further changes that could vastly reshape the student loan landscape, such as broad student debt forgiveness policy proposals that, if enacted, could further distinguish repayment outcomes from the last recession.
Many may face continued difficulties
Despite these differences, other factors suggest that the impact of the pandemic on student loan repayment could linger for many borrowers.
For example, one current enrollment trend does echo the Great Recession: an increase in students attending for-profit colleges. This institution type saw the largest rise in enrollment this fall, growing by more than 5% overall. Just as in the last recession, adult students are driving this growth. First-time enrollees over the age of 24 at for-profit schools were up more than 13%, despite a 30% decline in this age demographic attending any institution type. However, enrollment at for-profit institutions decreased slightly this spring from the previous spring, so it is unclear whether the fall growth suggests a persistent pattern.
This rise could foreshadow future loan repayment challenges, as those who attend for-profit schools have historically borrowed at higher rates and had higher levels of default than those who attend other types of institutions. Although graduation rate data for the most recent cohort will not be available for several years, the latest available data shows little to no improvement in for-profit completion since 2008.
And although forecasters anticipate a strong economic recovery overall, they also highlight the disparate economic impact of the current recession, noting that the recovery is likely to leave many workers behind. In its latest projection, CBO cautioned that “the unemployment rates for younger workers, workers without a bachelor’s degree, Black workers, and Hispanic workers are expected to improve more slowly than the overall unemployment rate.”
The economy is coming out of a deep hole and may need time to get back to pre-pandemic unemployment levels. For context, the jobless rate reached nearly 15% in April 2020 as the pandemic shut down much of the nation, surpassing the peak during the Great Recession by almost 5 percentage points. About 6 million people left the labor force entirely between the first and second quarters of 2020.
The unemployment rate has come down significantly and quickly to about 6% but remains well above the 3.5% pre-pandemic level. Labor force participation also still lagged pre-pandemic levels by 1.5 percentage points as of April 2021, according to data published by the U.S. Bureau of Labor Statistics. The latest summary of economic projections from the Federal Reserve suggests that the rate will gradually fall to pre-pandemic levels by the end of 2023.
Finally, beyond these similarities, an end of the payment pause on student loans could create havoc for borrowers and challenges for student loan servicers in helping them navigate re-entry into repayment. All of these factors foreshadow possible repayment difficulties for many borrowers in the months and years to come.
Phillip Oliff is a director and Ilan Levine is an associate with The Pew Charitable Trusts’ student loan research initiative.
FAQs
Other Potential Solutions
These include streamlining existing student loan forgiveness programs, reducing interest rates, expanding Pell Grants, offering tuition-free college for students at the associate degree level, and allowing student loan debt to be discharged in bankruptcy.
What is the problem with student loan debt? ›
Loan Debt Is an Economic Drag
According to a CNBC report, “85 percent of student loan borrowers say difficulty in saving has delayed their ability to buy a house,” and other research indicates that “Those with student loan debt also are less likely to have taken out car loans. They have worse credit scores.
Will my student loans be forgiven? ›
To be eligible for forgiveness, you must have federal student loans and earn less than $125,000 annually (or $250,000 per household). Borrowers who meet that criteria can get up to $10,000 in debt cancellation. If you also received a Pell Grant during your education, you can qualify for up to $20,000 in forgiveness.
Why is it so difficult to pay off student loans? ›
But often with student debt, the interest is so high and the borrower's income so low, that payments only cover the interest, causing the balance to increase even as borrowers send money to their student-loan company every month.
Why should the government forgive student debt? ›
Student loan debt is slowing the national economy. Forgiveness would boost the economy, benefiting everyone. Student loan debt slows new business growth and quashes consumer spending.
What can we do about student loans? ›
- switch your repayment plan to lower your monthly payments,
- consolidate multiple federal loans into one loan which may result in a lower monthly payment, or.
- apply for deferment or forbearance to temporarily postpone or reduce your payments.
Student loan debt burdens more than 44 million Americans, and prevents millions from buying homes, starting businesses, saving for retirement, or even starting families. This debt is disproportionately affecting Black families, and Black women in particular.
How do people feel about student debt? ›
Nearly three-quarters (73%) of undergraduates with student loans are at least somewhat worried about repaying their debt, with women (77%) more worried than men (68%). However, 82% of borrowers don't know what their monthly loan payment will be — something that could better help them consider their repayment options.
What are the effects of student loan debt on the economy? ›
Less Consumer Spending
Borrowers with student loans have less disposable income than those without student loans. That can have a huge impact on the economy because these borrowers have lower rates of consumer spending than consumers without student loans.
Who qualifies for the student loan forgiveness program? ›
To be eligible, your annual income must have fallen below $125,000 (for individuals) or $250,000 (for married couples or heads of households). If you received a Pell Grant in college and meet the income threshold, you will be eligible for up to $20,000 in debt relief.
Under the federal program, eligible borrowers can have their loans discharged after 10 years if they meet eligibility requirements.
Are student loans forgiven after 20 years? ›
Any outstanding balance on your loan will be forgiven if you haven't repaid your loan in full after 20 years (if all loans were taken out for undergraduate study) or 25 years (if any loans were taken out for graduate or professional study).
When did student loans become a problem? ›
Signs of trouble with student borrowing began to appear by the late 1980s. In 1986, parents and students had incurred nearly $10 billion in federal student loans – then considered an outrageous amount.
Why are student loan rates so high? ›
Student Loans Have Longer Terms
For example, car loans tend to have repayment terms between two and seven years. But student loans have repayment terms as long as 20 years. Because the loan term is so much longer, lenders charge higher rates on student loans.
How difficult is it to pay back student loans? ›
The average student borrower takes 20 years to pay off their student loan debt. Some professional graduates take over 45 years to repay student loans. 21% of borrowers see their total student loan debt balance increase in the first 5 years of their loan.
Should student loan be eliminated? ›
Cancelling student debt is good for the economy
Research has shown that cancellation would boost GDP by billions of dollars and add up to 1.5 million new jobs, reducing the unemployment rate.
What happens if student loans are forgiven? ›
If you qualify for forgiveness, cancellation, or discharge of the full amount of your loan, you are no longer obligated to make loan payments. If you qualify for forgiveness, cancellation, or discharge of only a portion of your loan, you are responsible for repaying the remaining balance.
Would Cancelling student debt cause inflation? ›
Similarly, Mark Zandi, Moody's Analytics chief economist, says the effect on inflation is “largely a wash.” He estimates that student debt forgiveness starting at $10,000 will increase inflation by 0.08%, as measured by the consumer price index (CPI), another commonly used measure of inflation.
Does the government control student loans? ›
The Federal Government Owns 92 percent of Student Debt.
How would free college reduce student debt? ›
Most student debt finances expenses other than tuition at public institutions, such as living costs, enrollment at private institutions, and graduate degrees. At four-year institutions, students eligible for free college who currently borrow are likely to reduce their average annual borrowing from $8,000 to $3,400.
Forty-five million Americans have student loan debt — that's about one in 7 Americans (13.5%), according to an analysis of January 2022 census data. Those ages 25-to-34 are the most likely to hold student loan debt, but the greatest amount is owed by those 35 to 49 — more than $600 billion, federal data show.
Is there really a student loan crisis? ›
According to a Department of Education analysis, the typical undergraduate student with loans now graduates with nearly $25,000 in debt. The skyrocketing cumulative federal student loan debt—$1.6 trillion and rising for more than 45 million borrowers—is a significant burden on America's middle class.
How did the student loan crisis start? ›
Starting in 2010, the federal government started directly lending money to student borrowers. In the wake of the Great Recession, the amount of student debt began to increase rapidly. Colleges were seeing increased enrollment as people left the workforce to go back to school.
How student loans cause stress? ›
A survey by Policygenius found that 64 percent of Americans went into 2022 feeling anxious about their finances. Toss in the added weight of having student loan debt to pay off, and financial pressures can lead to stress, worry, fear, and frustration, says Friedman.
How does student debt affect students mental health? ›
The burden of debt also contributes to acute mental health issues, including prolonged stress, anxiety, and feelings of shame.
How does financial stress affect students mental health? ›
Mental Health Issues
For instance, The National College Health Assessment2 found that students experiencing financial stress were more likely to experience: Sleep problems. Hopelessness. Feelings of being overwhelmed.
What are three ways that student loan debt has affected borrowers? ›
Student debt impacts borrowers over time by raising debt burdens, lowering credit scores and ultimately, limiting the purchasing power of those with student debt. Because young people are disproportionately burdened by student debt, they will be less able to participate in — and help grow — the economy in the long run.
Why are student loans better than other loans? ›
In general, private student loans have lower interest rates than personal loans. They can also offer the choice of a fixed or variable interest rate. A personal loan usually only offers a fixed interest rate, which can impact the amount of your payment.
How many people currently have student loans? ›
Americans owe nearly $1.75 trillion in student loan debt, spread out among about 48 million borrowers. That's about $412 billion more than the total U.S. auto loan debt.
...
STUDENT LOAN DEBT STATISTICS BY LOAN PROGRAM.
| Direct loans | $1.38 trillion | 37.2 million borrowers |
|---|
| FFEL loans | $225.7 billion | 9.9 million borrowers |
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Defaulted federal student loans either fall off seven years after the date of default, or seven years after the date the loan was transferred from the Federal Family Education Loan Program (FFEL) to the Department of Education.
There are legitimate government programs, such as Public Service Loan Forgiveness, that can reduce or eliminate federal student loans after a certain amount of time. However, only some individuals qualify for the programs.
Do I qualify for student loan forgiveness if I paid off student loans? ›
If you made student loan payments during the payment freeze to take advantage of the 0% interest waiver and paid off your loans, you could be eligible for a refund of those payments and still qualify for loan forgiveness.
How much is the student loan forgiveness for? ›
Borrowers can qualify for up to $10,000 in student loan forgiveness, and recipients of Pell Grants are eligible for an additional $10,000 in forgiveness.
Is student loan forgiveness automatic? ›
Will student loan forgiveness be automatic? The Biden administration announced that forgiveness will be automatic for nearly 8 million borrowers whose income data is already recorded with the U.S. Department of Education.
Will Navient loans be forgiven? ›
Under income-driven plans, payments can be as low as $0 per month. Monthly payment amounts are based on family size and income. Income-driven plans also offer the possibility of loan forgiveness after 20 or 25 years of qualifying payments and can provide valuable interest subsidies.
What age does student loan get wiped? ›
It could be either when you're 65 years old or anywhere between a duration of 25 years or 30 years.
What happens if you don't pay off student loans in 25 years? ›
So what happens to student loans after 20 years or after 25 years? Any remaining loan balance that remains unpaid at the end of your repayment period will be forgiven and you will no longer have to repay it.
Why does my student loan Says Paid in Full 2022? ›
Here's what those statuses probably mean: Paid in full – the loans were recently consolidated or were commercially held Federal Family Education Loans that defaulted and were sold to the guaranty agency that owns the debt. Closed – the loans were sent to a new servicer. *
Who profits from student loan debt? ›
Most student loan lenders are large institutions, such as international banks or the government. Aside from federal loans, most student loans are held by the lender, a quasi-governmental agency like Sallie Mae, or a third-party loan servicing company.
What will the interest rate for student loans be in 2022? ›
Federal student loans for undergraduates currently have an interest rate of 4.99 percent for the 2022-23 school year, while graduate students have interest rates of 6.54 percent or 7.54 percent for unsubsidized loans or Direct PLUS loans, respectively.
Your loan payments will remain suspended, and your interest rate will remain at 0%, until the end of the COVID-19 payment pause (that is, through December 31, 2022).
Why do my student loan payments keep increasing? ›
As interest rates rise for all loans, student loan rates typically go up, too. Federal student loans have fixed interest rates, so the rate you have now will stay the same for the life of the loan. If you need a new federal loan, though, you may end up with a higher interest rate.
What's the average student loan payment? ›
The average monthly federal student loan payment for recent undergraduate degree-recipients is $234. People generally borrow more and have higher interest rates for graduate degrees. Therefore, their monthly payments are higher. Average federal student loan payments for master's degree-holders are about $570 a month.
How much is the payment on a 60000 student loan? ›
The monthly payment on a $60,000 student loan ranges from $636 to $5,387, depending on the APR and how long the loan lasts. For example, if you take out a $60,000 student loan and pay it back in 10 years at an APR of 5%, your monthly payment will be $636.
How can we fix the rising cost of college tuition? ›
10 Ways to Reduce College Costs
- Consider dual enrollment. ...
- Start off at a community college. ...
- Compare your housing options. ...
- Choose the right meal plan. ...
- Don't buy new textbooks. ...
- Earn money while in school. ...
- Explore all of your aid options. ...
- Be responsible with your student loans.
Most student debt finances expenses other than tuition at public institutions, such as living costs, enrollment at private institutions, and graduate degrees. At four-year institutions, students eligible for free college who currently borrow are likely to reduce their average annual borrowing from $8,000 to $3,400.
What else can universities and governments do to decrease the debt burden on students? ›
Eliminate federal government's profiting on student loans. Cut interest on student loans. Allow students to refinance loans at today's interest rates. Allow low-income students to use financial aid to cover room, board, books and living expenses.
Why is student debt a crisis? ›
In the simplest terms, student borrowers are in crisis due to a rise in average debt and declining average wage values. In other words, a significant portion of indebted college graduates and non-graduate borrowers are unable to repay their debts.
How does rising tuition affect students? ›
The Effect of Rising Tuition on Students and Graduates
Student loan debt increased 76% since the class of 2000, exceeding the inflation rate by 41%. As of 2021, student loan debt stands at about $1.7 trillion. Graduate student debt contributes a disproportionate amount.
How can the government lower the cost of college? ›
Lowering barriers to entry, increasing price transparency, and imposing sense onto federal financial aid programs will all help reduce the cost of college for students.
There are a lot of reasons — growing demand, rising financial aid, lower state funding, the exploding cost of administrators, bloated student amenities packages. The most expensive colleges — Columbia, Vassar, Duke — will run you well over $50K a year just for tuition. That doesn't even include housing!
Why are people against free college? ›
If College is Free, More Lower Income Students Might Graduate. Some students drop out because they do not have the ability to pay for tuition all four years. In fact, over 50% of students drop out of public universities because they can't afford it!
What are the benefits of free college? ›
The Pros and Cons of Free College
- Pro #1: Free college would expand access to education. ...
- Pro #2: A more educated population would have economic and social benefits for the country. ...
- Pro #3: Students would be free to follow their passions and abilities. ...
- Pro #4: Free college would help repair historic inequities.
For the past two decades, student debt has risen, illustrating how big this social problem has become. The reason student debt is a significant social problem is because of how much it can effect a person's life, and their families lives, that can carry over to their future.
What are 3 things you think you can do to minimize the amount of student loan debt you have to pay back? ›
- Enroll at a community college.
- Consider attending a no-loan school.
- Estimate college costs.
- Maximize other funding sources.
- Start a side hustle or get a part-time job.
- Limit living expenses.
- Borrow only the amount needed.
- Understand the payments.
Less Consumer Spending
Borrowers with student loans have less disposable income than those without student loans. That can have a huge impact on the economy because these borrowers have lower rates of consumer spending than consumers without student loans.
Who is most affected by student debt? ›
Forty-five million Americans have student loan debt — that's about one in 7 Americans (13.5%), according to an analysis of January 2022 census data. Those ages 25-to-34 are the most likely to hold student loan debt, but the greatest amount is owed by those 35 to 49 — more than $600 billion, federal data show.
Why do people have so much student loan debt? ›
Some of the main drivers of that growing debt are rising tuition costs and increased federal loan availability — further exacerbated by corresponding wage stagnation. Tuition costs are a crisis of their own, something former Secretary of Education William J. Bennett foresaw decades ago in 1987.
Who is at fault for student loan debt? ›
While economists are divided on who to blame for the student loan crisis, nearly all experts agree the primary fault does not lie with student borrowers. Some instead blame colleges, pointing to tuition rates at private institutions that skyrocketed from $17k in 1988 to nearly $36k three decades later.
