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How U.S. Got $1.6 Trillion in Student Loans Debt

We’re breaking down the origins and structure of student loan debt — and how it’s affecting millions of Americans today.

The student loan crisis is a hot topic of conversation in Washington because student debt is felt by a lot of us, 45 million of us to be exact, for a total debt of 1.6 trillion dollars. We often break our pink piggy bank that says student loan on it, in an attempt to pay back our debts. But sometimes we fall short and they follow us around everywhere we go.

So how did we get here?

The history of student loans

To fully understand student loans, we have to go back and find out where they came from. So I interviewed Melanie Lockert. Lockert is an award-winning author who climbed her way out of $81,000 in student debt.

Lockert: “Though student loans originally were created as part of the National Defense Act, there was this idea that we need to become an educated society and so we can create student loans as part of that. Later on, Lyndon B. Johnson created the Higher Education Act of student loans in 1965 to make it more accessible to everyone. There have been lots of different changes in the student loan landscape since then.”

Privatized student loans

There sure has been. In the 70s, Richard Nixon created Sallie Mae in response to the high demand for higher education. The program used U.S. Treasury money to buy government-backed student loans from banks, so they could lend more. But in 2004, Sallie Mae privatized, which meant it can now make student loans not guaranteed by the federal government and carry much higher interest rates. Soon, a slew of other private lending companies followed suit, which brings us to where we are today.

There are two choices of loans available to borrowers. Federal loans, which are government-backed loans with lower interest rates. And there are private loans which are loans not guaranteed by the government, with much higher interest rates.

Lockert: “You know, there's always a recommendation that you should take out federal student loans first because they have robust and generous benefits for the borrowers. They have fixed interest rates, they have income-driven repayment.”

But federal loans have lower caps than private loans. Undergraduates can only borrow up to $12,500 annually and $57,500 total. However, the average cost of tuition is $35,720 annually. Getting federal loans can be like getting a gift card for $25 dollars to Prada, which is why you'll need another gift card.

Why private student loans are bad for you

This is where those private loans come in. You'll usually use these to cover whatever federal loans couldn't. They're a bit of a last resort, given their aggressive repayment plan and fees. The amount you can borrow varies by lender. But usually, you can't take out more than your school's total cost of attendance. Interest rates on private loans are much higher and begin accruing immediately and don't stop until they're paid in full. And within loans are an even wider array of loans.

Lockert: “So there are subsidized loans which covered some parts of interest while you're in school. It's typically need-based. There are unsubsidized loans which do not cover your interest.”

So for subsidized loans, you must demonstrate financial need. There are lower caps for borrowers and the interest is paid by the Department of Education. For unsubsidized loans, you don't need to demonstrate financial need. There are higher caps for borrowers but the interest accrues while you're enrolled and you need to pay that back.

Lockert: “And so if you, you know, make a $500 or even $900 payment, but $300 of that is going to interest, you're not having that much going towards your principal balance. And whatever you don't pay in interest it's capitalized onto your principal balance, which means that it gets added to the principal balance and so you're basically paying interest on interest, which is why you see these situations where student loans balloon, they get to crazy amounts, and it feels impossible to get ahead.

The frightening cocktail of private lenders giving institutions cause to increase tuition, mixed with wages remaining relatively stagnant over the years is much of why it's so impossible to get ahead. In 1978, it was feasible to earn enough money to put yourself through a year of college by working a summer job that paid minimum wage. Today, it would take a minimum wage employee an entire year to cover the annual in-state tuition at a public university.

I’m never going to pay these dang loans off, am I?

Lockert: “As we've seen over the past 10, 20 years, tuition costs have skyrocketed far more than inflation, far more than other sectors and so we've created this bubble that we're in right now when ideally student loans were to help people to afford college and you'd be able to get a great job and graduate and pay it back. But we've created kind of an unsustainable situation with student loans in the student loan marketplace.”

This unsustainable situation has pushed an average of 15% of student loans into default, meaning they will become past due.

Lockert: “After 270 days, and so, by the time you're in default, your loans will become due immediately. And the government has several different ways that they can try to make this happen. So they can garnish your wages up to 15% and they can also garnish your social
security payments.

But if you default on private student loans —

Lockert: “It’s a bit of a different process. Your lender could potentially sue you. And aside from all of this, your credit will tank. So your credit score will go to the floor. And while that might not seem like that big of a deal, your credit score is used to get approved for an apartment, for a mortgage, for a car loan.”

And unfortunately, marginalized communities feel the brunt of these consequences more than anyone else. 2019 data from the New York Federal Reserve indicates that the default rate for black students is now about 17.7%, compared with 9% for white students. This is due to a number of factors, including discrimination in the job market contributes to black graduates earning a substantially lower return on investment on their degree.

Lockert: “There's a lot of you know communities of color that have higher rates of taking out student loans. There's also a higher rate of default. And I think a lot of that has to do with kind of everything else that we see. So there's the generational wealth gap. There's the racial wealth gap. So you know, if people of color are already earning less, they're you know not passing as much wealth down. They're not going to have as much money to pay for college.”

Not all hope is lost

While student debt impacts the economy makes it harder to plan for retirement and worsens existing inequalities, all hope is not lost.

Lockert: “You know, debt is not a death sentence. And you are not alone and you are not a loan.”

For the first time in recent history, student loan debt and helping borrowers out has been bandied about in Washington. And we might be closer to some type of student loan forgiveness than we've ever been before. But talk is cheap, and student loans are not. So what do we do?

The burden isn't on the borrower to fix the problem. It's up to the job market to tweak their antiquated ideas of what qualifies one for a job. It's up to the government to put legislation in place to protect borrowers and work to tie a school's finances to the outcome of its students.

Until American society unsubscribes to the school of thought that higher education is a commodity, demand will continue to rise, and so will our debt.

Common Cents is a finance show that answers everything schools didn't. Watch more episodes of Common Cents.

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