How did the US reach $1.6 trillion in student debt?

Published on November 4th 2019

Forty-two million people, or one in six American adults, currently carry a federal student loan. The nation’s overall student debt reached $1.6 trillion in June 2019. What’s behind this large number?

According to data from the Department of Education National Center for Education Statistics (NCES), in 2017, approximately 46% of all full-time, first-time undergraduate students had student loans. Students attending public institutions, which have lower tuition on average, were less likely to be awarded loans, whereas more than 60% of students at private for-profit and non-profit institutions were awarded loans.

Percent of students awarded student loans

The average student loan awarded for the 2016-17 school year was $7,238, including loans for both private and public institutions. But when broken out by institution type, private institutions have a higher loan average than public institutions. Since 2000, the average loan amount has increased 35% after adjusting for inflation while the percentage of enrolled students awarded loans has only increased about 5 percentage points.

Average amount of student loans awarded Constant 2017-18 Dollars

What types of loans do students receive?

The federal government awards most student loans. During the recession, however, the percent of students receiving loans from non-federal lenders increased to 20%. It fell back to 6% in 2016.

Percent receiving student loans by type

The Department of Education offers three major types of direct federal student loans: subsidized loans, unsubsidized loans, and PLUS loans. Subsidized loans help students who demonstrate financial need, with the government subsidizing the full cost of the loans by paying interest on the loan while the student is still in school. Unsubsidized loans are made to students regardless of financial need but do not offer subsidized interest payments while in school. PLUS loans are for eligible parents, for the education of their dependent undergraduate children, or graduate/professional students. According to the Department of Education, for the most recent date of first disbursement, federal direct subsidized and unsubsidized loans had a fixed interest rate of 5%, and direct PLUS loans had a fixed interest rate of 8%

Students seeking a federal loan must complete the Free Application for Federal Student Aid (FAFSA) to determine their eligibility. Eligibility is based on the estimated cost of attending the student’s institution as well as the expected contribution from the student’s family.

What does this mean for student debt?

Many students graduated in 2016 with higher debt than they did in 2009 — the height of the recession. Overall, students at public and private non-profit institutions graduated with more debt, however, students at private for-profit institutions graduated with less debt on average.

Distribution of universities’ median debt for students who completed their degree

Note: Median student debt data is for students receiving some form of federal aid — including federal grants, loans, or work-study aid — and does not represent students not receiving federal aid.

Who repays student debt the soonest?

While students at private non-profits typically take on more debt than students at public institutions, students who graduated from private non-profits are more likely to re-pay their debt sooner than their public institution counterparts. Less than two-thirds of students who had taken on debt to graduate from a for-profit school had repaid it within seven years, compared to over 80% of students who attended non-profit schools.

Average re-payment rate of borrowers by period of repayment and institution type

Institution Type3 Year5 Year7 Year
Public68.8%75.5%80.6%
Private Non-Profit73.6%78.5%82.1%
Private For-Profit53.8%57.1%64.3%

Note: Repayment data is for students receiving some form of federal aid — including federal grants, loans, or work-study aid — and does not represent students not receiving federal aid.

Of the borrowers who graduated and began repaying loans in 2015, 11%, or 531,653 students, defaulted within three years. To break that down, this rate was lower at public and private non-profit institutions — 10% (269,876 borrowers) and 7% (78,706 borrowers), respectively. It was higher at for-profit institutions — 16% (182,686 borrowers) (Department of Education). Nationally, the default rate has decreased since peaking at 15% in 2010.

How important is student debt to the country overall?

The Federal Reserve estimates that national student loan debt reached $1.6 trillion in June 2019. The Department of Education holds $1.48 trillion of the total student loan debt as of June 2016 (Department of Education).

However, it’s also useful to understand the size of student debt in comparison to other forms of debt Americans take on. The Federal Reserve Bank of New York – which estimates student loan debt using credit bureau data rather than lender data (more details what this distinction means — estimates that there is $1.5 trillion in student loan debt, which is about 15% of all mortgage debt. However, student loan debt outgrew both auto loan and credit card debt between 2009 and 2010. Student loan debt is now 70% larger than credit card debt.

Overall US debt composition

As student debt grows, it touches more Americans than ever before. According to the Federal Reserve Bank Survey of Consumer Finances, the percentage of families holding student loan debt increased from 8.9% in 1989 to 22.3% in 2016. After adjusting for inflation, the average amount of student loan debt for student loan borrowers has more than tripled in that time, from $10,260 to $34,290. In 2016, the average amount of student debt for families with student debt was almost double the average amount of auto loan debt, and more than six times the average amount of credit card debt. In other words, student loan debt has become the most significant form of non-residential debt for many American families.

Debt holdings by debt type

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Percent holding debt by type
Debt amount for debtholders

Several Democratic presidential primary candidates propose eliminating almost all American student debt, a proposal that could cost more than a trillion dollars. Who would benefit most from this? Among lower-income families, 1 in 5 would benefit. Among higher-income families, that increases to 1 in 4 families who would benefit.

Student loans held by income group

Income Group% with Student LoanAvg. Student Loan (among those with loans)
All Families23.2%34,844
Bottom 20% ($0 to $8K)19.2%36,476
Second 20% ($8 to $33K)20.9%27,858
Middle 20% ($33 to $66K)24.5%31,759
Fourth 20% ($66 to %121K)26.8%35,283
Top 20% (Above $121K)24.5%42,184
Top 1% (above $745K)7.5%71,044

Want to learn more about the changing cost of college behind student loan debt? Read the USAFacts analysis of college costs.

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Sources

Department of Education, National Center for Education Statistics, Digest of Education Statistics

Department of Education, College Scorecard

Federal Reserve Survey of Consumer Finances

Federal Reserve Bank of New York Consumer Credit Panel