Personal Finance

Despite the economic recovery, student debtors' 'monster in the closet' has only worsened 

Key Points
  • The student loan default rate more than doubled between 2003 and 2011, and 40 percent of borrowers are expected to fall behind on their loans by 2023.
  • "It's going to be very consequential for the future of the country," says Barmak Nassirian, director of federal relations at the American Association of State Colleges and Universities.
Student debt protest
David McNew | Getty Images

In many ways, Daniel Strong is happy with his life. He owns a three-bedroom ranch-style house in Charlottesville, Virginia, where he lives with his wife and 3-year-old son, Benjamin. He recently made the last payment on his silver, Toyota Tacoma. He likes his job.

But there's one problem that won't go away.

Strong and his wife owe more than $350,000 for their bachelor's and master's degrees.

"The huge monster in the closet for me are these student loans that keep getting bigger and bigger," said Strong, 36. When they graduated, they were faced with monthly bills of around $800 each and have since struggled to keep up.

"It's so stressful to think about the fact that you're probably going to have to work until you drop dead at work because of your student loans," Strong said.

Ten years after the 2008 financial crisis, there are headlines of record low unemployment and a booming economy. Yet one area has only worsened over the decade and threatens that recovery: student debt. Average debt at graduation is currently around $30,000, up from $10,000 in the early 1990s. The country's outstanding student loan balance is projected to swell to $2 trillion by 2022, and experts say a large portion of it is unlikely to ever be repaid; nearly a quarter of student loan borrowers are currently in a state of delinquency or default. Because of these loans, many Americans are unable to buy houses and cars, start businesses and families, save or invest.

Borrowing is unlikely to slow any time soon, as the cost of an education in this country is only rising. State funding for public colleges fell by $9 billion between 2008 and 2017, and schools have filled the gap with tuition hikes. Last year, for the first time, half of all states relied more heavily on tuition than on government appropriations to fund higher public education. On average, Americans now spend $30,000 per student a year, twice as much as the average developed country.

Has the student loan market become a bubble? That's a fair question, said Barmak Nassirian, director of federal relations at the American Association of State Colleges and Universities.

"Cost escalation, which would normally be met with consumer resistance, is being facilitated by the easy availability of credit," Nassirian said. "It's disturbingly similar to what happened to tank the mortgage market."

Defaults on the rise

In his mid-50s, Claude Richardson returned to college in the hopes of finding himself a new career. He attended two for-profit schools — the University of Phoenix online, and the New England Institute of Art. He said the education at both schools proved disappointing, and he never found a job in his field of study, information technology.

Instead, the 65-year-old man works 60 hours a week as a driver for a transportation company. He makes $8 an hour. He can't remember the last time he took a vacation. He doesn't pay for cable, since he has no free time to relax in front of a television.

He feels helpless when he looks at his student loan balance of more than $160,000. He has defaulted multiple times. "If I could pay, I would," Richardson said.

It's disturbingly similar to what happened to tank the mortgage market.
Barmak Nassirian
director of federal relations at the American Association of State Colleges and Universities

The student loan default rate more than doubled between 2003 and 2011, according to Education Department data. Forty percent of student borrowers are expected to default on their loans by 2023, according to the Brookings Institute.

"There's over 8 million people who are currently in default on their federal loans — it continues to be a large number, despite other improvements in the economy," said Persis Yu, director of the Student Loan Borrower Assistance Project at the National Consumer Law Center, a nonprofit advocacy group.

In a recent study, two researchers sought to understand why the student loan default rate has risen so sharply. Half of the uptick, they found, could be explained by the simultaneous rise in nontraditional students, like Richardson — or those who attended for-profit institutions. Many for-profit colleges have come under scrutiny for their high costs and poor outcomes, and half of their student loan borrowers default.

The share of nontraditional students rose by 17 percent from 2006 to 2009. Meanwhile, the percentage of federal financial aid going to for-profit colleges nearly doubled between 1996 and 2012. Today, these schools take in around 15 percent of the government's financial aid, down from a high of 19 percent.

"Predatory colleges target the same low-income populations that the subprime mortgage boom targeted by offering a similar promise of white picket fences and higher education as part of the American middle class dream," Toby Merrill, director of the Harvard Law School's Project on Predatory Student Lending, said in a recent interview.

The Obama administration cracked down on for-profit schools, but the Education Department under President Donald Trump has taken a friendlier approach. The current administration's proposals include making it harder for former students who claim they've been defrauded by their schools to get their debt canceled and relaxing the standards for-profit schools must meet to keep their federal funding.

The result of rolling back rules meant to protect borrowers and drive better value is predictable, said James Kvaal, president of The Institute for College Access & Success. "Defaults will go up," he said.

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Schools of questionable quality are hardly the only problem driving the rise in defaults. Also to blame is an unfortunate confluence of rising tuition and wage stagnation, said Mark Kantrowitz, publisher of

"Family income has been flat, so their ability to pay for college has not changed even as college costs have increased," he said. As a result, more families take on loans to cover the bills.

"Starting salaries have not grown as fast as average debt at graduation," he said. "This causes debt-to-income ratios to increase, a sign that more borrowers are graduating with more debt than they can easily afford to repay."

Distrust and interest

Colette Simone borrowed $200,000 in private and federal loans to attain her doctorate degree at the Michigan School of Professional Psychology in the early 2000s.

After graduation, her student loan bill was around $1,600. She tried to make those payments, but with entry level salaries it was difficult. She repeatedly postponed the loan payments, causing the balance to grow even more, thanks to interest. At one point, her bill was as high as $5,000 a month. She eventually stopped paying her private loans. "They wouldn't negotiate beyond a certain amount," Simone said, "which I didn't have."

She has paid around $90,000 of the debt by now, but it has ballooned to more than $400,000. The 65-year-old woman fears the government will soon garnish a portion of her Social Security.

She says the whole ordeal has left her disillusioned with the country. "If you want to get ahead, you have to go into debt," Simone said. "And then the whole debt structure is rigged to make sure you're never going to get out of it."

Many student loan borrowers today express resentment and distrust toward their lenders and the companies that administer federal loan programs.

A recent government report found that some schools hire companies that don't present student loan borrowers with their best options. Meanwhile, one of the largest student loan servicers — Navient, is being sued by five states and the Consumer Financial Protection Bureau for allegedly misleading borrowers. The bureau accuses Navient of steering struggling borrowers toward multiple postponements of their loans instead of into income-driven repayment plans, which cap monthly payments at a percentage of the borrower's income. (Navient disputes all allegations.)

The whole debt structure is rigged to make sure you're never going to get out of it.
Colette Simone
student loan borrower

"Navient's conduct is estimated to have added $4 billion to the national student loan debt," said Attorney General Jim Hood of Mississippi, one of the states suing the loan servicer. "Students are the future of our state, and the presence of companies in Mississippi that knowingly take advantage of students who need the money to continue their education will not be allowed under my watch."

National Consumer Law Center's Yu said the distrust borrowers express is often well-founded.

"Servicing issues is something that is very much similar to the mortgage crisis," Yu said. "In both circumstances we have consumers getting bad information."

Slow, simmering consequences

There is some math that haunts Dallas Benson, a 48-year-old mother of two.

The monthly rent for her two-bedroom house in Zebulon, North Carolina, is around $1,100. She has lived there for just four years, and has already paid her landlord about $50,000. She recently checked the home's value: it's only worth about $100,000. "It's heart-breaking," Benson said. "If that could have gone into me owning the house, life would be incredibly different."

But with $600,000 in student loans, finding a landlord who would rent to her was hard. Benson and her ex-husband's student debt, which started at around $150,000 in the 1990s, has ballooned from interest and late fees. She studied sociology at the University of Texas at San Antonio and now is a government property manager.

The massive debt has pushed her credit score down to the low 400s. (The lowest possible score is 300). And it has harmed more than just her chances at home-ownership, she said.

"Buying a car is too difficult. I have nothing saved up for retirement at all," Benson said. "I look to the future, and I feel like I'm going to be that 80-year-old woman saying 'Hi, welcome to Walmart.'"

The fact that we're not going to have a Lehman Brothers' moment doesn't mean that there aren't tremendously important effects of student debt on the broader, macro economy and on growth.
Constantine Yannelis
University of Chicago

The damage of the financial crisis in 2008 reverberated across financial institutions and triggered the failure of major banks. The damage of student debt is more personal and insidious, said Constantine Yannelis, assistant professor of finance at the University of Chicago's Booth School of Business.

"The fact that we're not going to have a Lehman Brothers' moment doesn't mean that there aren't tremendously important effects of student debt on the broader, macro economy and on growth," Yannelis said.

Earlier this year Federal Reserve Chairman Jerome Powell said, "as student loans continue to grow and become larger and larger, ... it absolutely could hold back growth."

A growing body of research examines how student debt hinders people financially. A recent analysis by the Urban Institute found that a 1 percent increase in student debt decreases the likelihood of owning a house by 15 percentage points. As student debt rises, young entrepreneurship is also falling. By the time college graduates reach age 30, the ones without student loans are predicted to have double the amount saved for retirement as those with them, according to a study by the Center for Retirement Research at Boston College.

"This goes beyond the simple matter of family finances for a small subset of the population," said Nassirian, at the American Association of State Colleges and Universities. "It's going to be very consequential for the future of the country."

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