Most student loans issued today are never going to be paid off

The student debt crisis has gotten wide attention over the last several years. Democratic Sens. Elizabeth Warren and Chuck Schumer have called for canceling $50,000 in student debt for each borrower, while others have argued this would be unfair because college graduates generally make more money than the average.

The truth is the question of whether student debt should be canceled is largely irrelevant. Most student debt will be canceled sooner or later, because an ever-growing share of borrowers cannot possibly repay their loans. Ever. The only question that matters is whether President Biden and Democrats in Congress can grapple with reality and fix America’s colossally stupid system of funding higher education.

Economist Marshall Steinbaum has been studying the structure of student loans in detail, and produced some eye-popping results. The headline fact from his most recent study is that a large fraction of borrowers are not making any progress on paying off their loans, and that fraction has grown steadily over time. This chart shows the percentage of student loan accounts that had increasing balances over the period from 2008-2019.

Two things immediately jump out: First, the fraction of student loans with an increasing balance steadily grew for all loans. For loans issued in 2008, the next year less than 30 percent of them had an increased balance – but in 2019, 46.2 percent of them did. Second, the problem is getting worse. Each year a greater share of loans started out with increasing balances, and by 2018 almost two-thirds of them were like that. (Note also there is a kink at 2016 in which increasing balances start rising strongly, I will return to that later.)

As Steinbaum writes, student debt is like a bathtub that is overflowing because too much debt is pouring in and not enough is being paid off. Loans are getting steadily older over time, because more and more are not being paid off (in 2019, over 22 percent of loans were more than 10 years old, which is the entire traditional repayment period), and a much greater share of borrowers are making tiny or no payments. There is also a marked racial bias – the share of loans in majority-minority zip codes with rising balances was 61.6 percent, as compared to 49.5 percent in majority-white ones.

The roots of the crisis go back decades. Public colleges and universities used to be very cheap for students, funded mostly by land grants and state subsidies. But starting in the 1970s during the neoliberal turn, families and students started shouldering more and more of the burden – paying high tuition often funded through loans, which were subsidized by the federal government. Both schools and students started thinking about higher education as a business proposition. More and more institutions charged as much as they possibly could in tuition, while many students came to think of high prices as being an indicator of quality (after all, you get what you pay for).

The secret truth of the student debt crisis

Instead of providing a good education at a reasonable price, colleges and universities became more like country clubs, hiring ever-more administrators with ill-defined jobs and stocking themselves up with incredibly fancy amenities.

The trend accelerated after 2008, when state tax revenues cratered during the recession, and most state governments slashed higher education funding to compensate. Meanwhile, the weak ensuing recovery meant that a higher education credential was a practical requirement to get a job in many fields, and so more and more people piled into schools. Those facts were part of the reason why Democrats nationalized most student debt as part of the ObamaCare law in 2010, cutting out some of the private sector middlemen who had soaked student loan borrowers with high fees. Today Uncle Sam owns about 95 percent Lebanon money payday loans of all student loans.