How student debt became a $1.6 trillion crisis

How student loans became a $1.6 trillion problem
How student loans became a $1.6 trillion problem

Some 44 million Americans collectively hold over $1.6 trillion in student debt. And these numbers are growing. 

At the same time, advancements in technology, especially automation, are making it harder to earn a living wage without some type of advanced degree. Today, college graduates earn 80% more than those with just a high school diploma, on average. 

College is more expensive — and important — than ever before. And that dichotomy puts students in a difficult situation: do they risk going into debt they can't pay back or miss out on the benefits of a college degree? 

Experts have long labeled this dynamic a "crisis." But then, another kind of crisis hit: the coronavirus pandemic. And then, an economic crisis followed. 

In February, the United States officially entered an economic recession and between mid-march and June, over 42.6 million Americans filed for unemployment.

During the 2008 recession, many opted to go back to school and gain new skills. However, since then, the cost of a four-year college degree increased by 25% and student debt increased by 107% and many are less sure if college will be the solution to riding out a recession this time around.

CNBC Make It spoke with students, borrowers, historians and experts to learn how student debt became a crisis, how the pandemic will impact borrowers and who is to blame for putting students in an impossible position. 

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The history of student debt

Today, more than 20 million students are enrolled in American colleges, but "the foundations of the modern higher education system really started a long time ago — more than 100 years ago," says David Deming, professor of public policy at the Harvard Kennedy School and the Harvard Graduate School of Education. "The real formative period for U.S. higher education was more or less 1890 to 1940, when college started to be something that wasn't just a vocation for people going to school to get a religious education or for the few and the wealthy."

In 1919, an estimated 598,000 students were enrolled in American colleges. While historically Black colleges and universities and historically women's colleges have existed since the 1830s, the majority of American college students remained wealthy white men for decades. 

In 1944, the G.I. Bill was signed, giving millions of veterans, mostly white men, the chance to go to college for free.

In the 1954 Supreme Court ruling of Brown v. Board of Education, the court unanimously decided to strike down the "separate but equal" doctrine created by Plessy v. Ferguson, making school segregation illegal and paving the way for more Black students to earn a college degree. 

In 1958, the Cold War brought fears the U.S. was technologically falling behind, prompting congress to pass the National Defense Education Act, which offered students scholarships and loans to go to college. 

Lyndon B. Johnson's War on Poverty led to the Higher Education Act of 1965. Grants were now given to students based on their income which dramatically expanded the opportunity to receive a college education to students other than white men —adding to other legislative gains achieved by the Civil Rights Movement.

At the time, education costs were low and college enrollment grew; so did the U.S. economy. 

Then, during the Reagan Era and the Tax Revolt of the 1980s, states passed tax and expenditure limitations, restrictions that state governments create to limit the amount they can tax or spend.

"And that meant that state budgets came under threat," explains Deming. "And so states that used to basically highly subsidize a college education for many people started to cut back in various ways, either by raising tuition or by spending less." 

Reagan cut higher education funding and student aid, and college costs boomed as a result. 

The College Board estimates that during the 1980-1981 school year, on average, it cost students the modern equivalent of $17,410 to attend a private college and $7,900 to attend a public college — including tuition, fees, room and board. By 1990, those costs increased to $26,050 and $9,800, respectively. 

As costs grew, lawmakers scrambled for new solutions to expand access and cut costs for the government. 

"In the early 2000s, the Bush administration made it a lot easier for online education to grow," says Deming. "And that affected a lot of large for-profit institutions that expanded their enrollment by several orders of magnitude in the mid-2000s."

From 2000 to 2010, enrollment in private for-profit institutions increased by 329%

Then in December 2007, the Great Recession hit. Federal and state governments made deep cuts to higher education funding. 

"Many states made massive cuts to funding at public universities. This caused many of these schools to raise tuition in order to recoup the lost revenue. As the labor market weakened, more and more workers looked to higher education as a lifeline. Public and private college enrollments spiked and many were forced to turn students away. For-profit colleges welcomed those students with open arms," says Deming. "At its peak, the for-profit sector accounted for a little bit more than 10% of all enrollment, but about a quarter of Pell Grants, about a third of student loans and more than half of defaults." 

From the start of the Great Recession in 2008 to the relative economic stability of 2018, college costs and debt increased significantly, but state and federal funding for higher education, the biggest source of revenue for most schools, has not returned to pre-2008 levels. In 2018, state funding for two- and four-year public colleges was over $7 billion less than what it was in 2008.

During the 2019-2020 school year, the average cost of tuition, fees, room and board was $21,950 for in-state students at public universities, $38,330 for out-of-state students at public universities and $49,870 at private non-profit universities. 

The College Board estimates that today, college graduates with student loans leave school with $29,000 in debt, on average. 

As Deming puts it, the decisions of the past are having a significant effect on borrowers today. 

The intersectional impacts of student debt

But the impact of student debt is not equally felt among all college graduates. 

Nicole Smith is the chief economist at the Georgetown University Center on Education and the Workforce. She studies how education and debt impact worker outcomes — and how some Americans get a better deal than others. 

"People who went to school in the '70s and the '60s, they actually paid for college while working. They would take a summer job and they would pay their tuition," she says. "And by the time they graduated, they would be debt-free or just, a couple hundred dollars, a couple thousand dollars to get by, they pay that off in a couple of years and move on with their lives."

Today, more than 30% of student loan borrowers are in default, late or have stopped making payments six years after graduation.

Smith also points out that student debt holds some borrowers back from building intergenerational wealth — thus exacerbating the existing racial wealth gap. 

While the average white student loan borrower owes around $30,000 in student debt; the average Black borrower owes closer to $34,000. White borrowers pay down their education debt at a rate of 10% a year, compared with 4% for Black borrowers, in part because of a significant racial pay gap

"To build intergenerational wealth, a lot of that is bundled up in homeownership and having the ability to buy and own a home. If you're saddled with too much student loan debt, your ability to actually save up enough for your down payment is influenced by that," she says. "The average Black household has about 1/13th the wealth of the average white household. And if you view student loan debt as negative wealth, as money that could have been used to save for wealth or to purchase a home or to invest in the stock market to accumulate wealth, that potential wealth is now used to repay loans."

These dynamics hold Black families back from building wealth and saving to send their future children to college — further fueling the cycle. 

Additionally, student debt has a disproportionate impact on women says Smith, describing a "perfect storm" of inequality. 

According to the American Association of University Women (AAUW), about 56% of college students are women, but women hold roughly two-thirds of all student debt in the nationAs of 2019, women hold almost $929 billion in outstanding student debt.

"Women with master's degrees make on average what a man with a bachelor's degree makes and a woman with a bachelor's degree would make on average what a man with an associate's degree makes," she says. "So in terms of repayment of those loans, you have women who are taking out higher and higher loans and their ability to repay is influenced by their lower wages." 

How students are impacted

One of the most talked-about side effects of the student debt crisis is how it forces borrowers to delay traditional markers of adulthood. 

One survey found that 21% of borrowers have delayed getting married, 26% have pushed back having kids and 36% have put off buying a home. 

But student debt also has a significant impact on the everyday lives of current college students including the decisions they make about where and what to study, as well as their mental health. 

"I do have student debt and it is one of the reasons why I cannot even enjoy being a student here, because every semester I have to worry if I have enough money to go to school next semester," one Columbia University student tells CNBC Make It. "I'll have to join the military or marry rich. So chances are I'll probably join the military."

The sticker price at Columbia University is $83,293 (including tuition, fees, room and board) and the average price for a Columbia student who qualifies for financial aid is roughly $23,000.

"I was actually enrolled in University Maryland, which was much cheaper because it's a state school, and then decided to come back to Columbia because I just liked it more here," says another student. "If I wasn't studying something like computer science, or anything where I would've had to go to graduate school, I wouldn't have come here."

At the University of Maryland, College Park, costs total $28,479 and the average price for students who qualify for aid is closer to $18,000.

How coronavirus changed college for 14 million students
How coronavirus changed college for 14 million students

Student debt in the era of COVID-19

The coronavirus pandemic has now forced colleges to close their campuses and forced millions of students to take classes online. While the majority of colleges are still evaluating if they will hold in-person classes next semester, some students are evaluating if their new educational experience is worth the cost. 

Some students across the country are suing their schools for refunds and the government passed a $2 trillion economic stimulus package that included a six-month break on student debt payments.

In May, House Democrats passed a second economic stimulus package that would, among other things, cancel up to $10,000 worth of debt for some federal and private loan holders. The legislation is yet to pass the Senate. 

While actions such as these give borrowers hope that student debt forgiveness is closer than ever before, Betsy Mayotte, president and founder of The Institute of Student Loan Advisors, says widespread student debt forgiveness is still far off.  

"I'm not trying to disappoint anybody, but I don't think [forgiveness] is going to happen. I'd be very surprised if it happened," she says. "And what people have to remember is that the money that comes in from student loans is also used to pay for things like Pell Grants. If it wasn't for those grants, low-income people wouldn't be able to attend school."

Who is to blame?

As the consequences of the student de