UW Retirement Association

December 13, 2019

Student Debt Crisis and Possible Solutions

By Bob Roseth

Federal student loans are the only consumer debt segment with continuous cumulative growth since the Great Recession.

Student loans have seen almost 157 percent in cumulative growth over the last 11 years. All told, there’s a whopping $1.4 trillion in federal student loans out there. Experts and analysts worry that the next generation of graduates could default on their loans at even higher rates than in the immediate wake of the financial crisis.

Federal student loan debt currently has the highest 90+ day delinquency rate of all household debt. More than 1 in 10 borrowers is at least 90 days delinquent, while mortgages and auto-loans have a 1.1 percent and 4 percent delinquency rate.


Students attending for-profit universities and community colleges represented almost half of all borrowers leaving school and beginning to repay loans in 2011. They also accounted for 70 percent of all defaults. As a result, delinquencies skyrocketed in the 2011-2012 academic year, reaching 11.73 percent.

Those most at risk of delinquency tend to be, counter-intuitively, those who’ve incurred smaller amounts of debt. Graduates who leave school with six-figure degrees that are valued in the marketplace—like post-graduate law or medical degrees—usually see a good return on their investment. Zip codes with higher population percentages of racial minorities had far higher delinquency rates, and that the correlation of delinquency with race was actually most extreme in middle-class neighborhoods.

Undergraduates saw interest on direct subsidized and unsubsidized loans jump to 5 percent this year—the highest rate since 2009—while students seeking graduate and professional degrees now face a 6.6 percent interest rate, according to the U.S. Department of Education.

Student debt has delayed household formation and led to a decline in home-ownership. Sixteen percent of young workers age 25 to 35 lived with their parents in 2017, up 4 percent from 10 years prior.

Recent Congressional Budget Office estimates indicate that the federal government will make $81 billion off of student loans over the next decade.


The Student Loan Fairness Act, sponsored by Sen. Elizabeth Warren, would do the following:

  • The Student Loan Forgiveness act proposes to tie interest rates to the federal reserve discount window rate. Student Loan Borrowers are currently paying 9x higher than the banks are able to borrow for.  These rates would apply to Federal Subsidized Stafford Loans.
  • The Student Loan Fairness act would offer borrowers the 10/10 loan repayment plan, which limits the payment on student loans to 10% of discretionary income.  Though this is already currently offered with the Income Based Repayment, one of the big differences is that the proposed 10/10 repayment also offers a maximum capitalization of 10% of interest over the loan that was taken out.  This means that your loan balance will never surpass your original balance plus 10%.
  • The Student Loan Fairness Act would allow borrowers a year in which they would be able to convert their private student loans into federal loans if they qualify. Even if you do not qualify for the conversion, the mere fact that this option exists will force private lenders to work with their borrowers and offer programs to parallel what is offered in federal programs.
  • The Student Loan Fairness Act offers forgiveness to public sector employees after only 60 months.

The Levy Institute recently published a proposal for cancelling all outstanding student debt. The federal government would write off the debt for which it itself is the creditor (the majority of outstanding student loans), and it would assume payments on behalf of borrowers for those loans that are held by private lenders. The population’s student loan balance would be reduced to zero—a radical solution to the student debt crisis, but one that deserves serious attention, given the radical scope of the problem.

Economists believe that student debt cancellation would be modestly stimulative to the macroeconomy, increasing annual GDP by $86 to 108 billion per year. It would increase the demand for labor and therefore slightly reduce the unemployment rate. They argue that student debt worsens household balance sheets, and that weakness is one of the key mechanisms holding back economic growth. They go on to say that “it amounts to around the same size in net dollar costs to the government as the recent tax giveaway to the rich, although with a very different beneficiary population.”

“Free College”

Sen. Bernie Sanders was first with a proposal to make college free. The key elements are:

  • Free tuition at public colleges and universities
  • 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

Several states and institutions have adopted variations of the “free college” program. More than a dozen states now offer grants, often called scholarships, promising to help qualifying students pay for some or all of their college education.

The University of Michigan has created the High Achieving Involved Leader Scholarship, promising qualified low income students will have a four-year education without paying tuition and fees. Research has shown that the program’s guarantee was instrumental in doubling the number of low-income students at the university.

Tennessee Promise, adopted in 2014, offers two years of tuition-free community college or technical school to all high school graduates. The program, which had bipartisan sponsorship and was touted as a way to stimulate economic development, has proven to be very popular.

However, this program and others have been criticized for not doing enough to reduce affordability barriers for low-income students: Nationally, tuition and fees account for just 20 percent of the cost of community college.

The Education Trust has created a “scorecard” for programs based on the following criteria:

  • Covers at least four years of tuition and covers a bachelor’s degree at a four-year institution
  • Helps low-income students cover living expenses and covers fees in addition to tuition
  • Includes adults and returning students
  • No college G.P.A requirement above 2.0, or a C-average
  • Allows students to enroll half-time
  • Grant does not convert to a loan if criteria isn’t met

No state program meets all criteria, but Washington’s College Bound Scholarship comes the closest.

Since most of the programs are relatively new, it is premature to evaluate their effects. But an article by the Hechinger Report points out that most programs do not give low-income students four years of free college, and, failing that, “it’s increasingly clear that ‘free college,’ as it is often currently implemented, may be more of a marketing message than a policy that will boost the education level of the future American workforce.”