Understanding the Rise in Student Loans

Author: Forrest Kim, Graphics: Rose Lee


Total student loan debt sits at the highest it has ever been at approximately $1.6 trillion,  increasing 107% in this decade alone. The average student debtor owes $32,731. Accordingly, student debt has been widely reported by the media and has been a focus among policymakers. While statistics regarding this topic are loosely thrown around, the potential causes must be examined for a more holistic understanding, which is a prerequisite to solving this issue.

The website studentdebtcrisis.org allows people to publish their student loan horror stories. It’s distressing, reading through the endless list of accounts detailing their tremendous debt. One single mother of five describes working tirelessly for a year to obtain her GED, studying nine more years to complete a four-year bachelor’s degree, before finally attaining her master’s after another three years — all while providing for her children. Her commitment to education and setting an example is respectable; however, through the process, she incurred $179,550 in student loans. The weight of her debt is palpable.

While these horror stories do not accurately depict the average debtor, they have become increasingly common as student loan debt balloons. Total student loan debt sits at the highest it has ever been at approximately $1.6 trillion, increasing 107% in this decade alone. The average student debtor owes $32,731. Accordingly, student debt has been widely reported by the media and has been a focus among policymakers. While statistics regarding this topic are loosely thrown around, the potential causes must be examined for a more holistic understanding, which is a prerequisite to solving this issue. 


State Funding Cuts

In the past decade, tuition and fees hiked by 26% for private four-year colleges and 35% for four-year public colleges. This mammoth increase in the cost of going to college outpaced wages by almost eight times, since the 1980s. 

State funding cuts are often blamed for this unproportionate increase in tuition for public colleges. From 2008 to 2018, state funding in all fifty states dropped by 13% at two-year and four-year public colleges, and in nineteen of those states, funding was cut by over 20%, adjusting for inflation. In response, public colleges were forced to choose between cutting campus budgets, admitting students based on their financial background, or raising tuition, according to Michael Mitchell, a Senior Director at the Center on Budget and Policy Priorities. Cutting campus budgets would clash with macroeconomic trends of expanding higher education. Admitting students based on their financial background would exacerbate already-existing inequality. Therefore, public colleges had no choice but to opt for the last option: raising tuition. The reasoning behind this decision was that the well-heeled could pay full tuition, and the financially disadvantaged, on the other hand, would receive financial aid through scholarships, grants, loans, and the like. 

Bennett Hypothesis

It seemed as if the need for aid increased in parallel with tuition; however, many are suspicious that there is a causal relationship between the two. In his controversial statement made decades ago and still relevant today, US Secretary of Education William J. Bennett stated, “If anything, increases in financial aid in recent years have enabled colleges and universities blithely to raise their tuitions, confident that Federal loan subsidies would help cushion the increase.” This idea became known as the Bennett Hypothesis, stating that universities take advantage of financial aid by accordingly increasing the cost of tuition. Whether or not this phenomenon exists is heavily debated. Nevertheless, it does offer one possible explanation for the rise in tuition prices and, as a consequence, student loans.

Increased Demand For College

In 2000, the percentage of Americans who graduated from college was 25%; this increased to 36% in 2019. With a wealth of literature confirming the financial benefits of education, going to college has become the norm. Though what has spurred this trend is up for debate, the increased demand for college is clear. As demand increases, higher education institutions gain leverage in setting prices. While most universities are nonprofit, extra funding is always welcomed for amenities to attract students, expansion and renewal, and popular programs. Colleges are in a position to demand more money as college graduates continue to increase.

It has been widely accepted that pursuing higher education is a sound financial decision for most. However, the return on investment for education has been decreasing in the past couple of decades. While higher education can still be considered a good investment, one cannot deny that income premiums (extra income earned from a college degree) have been decreasing. This does not necessarily mean that higher education is becoming less useful, per se. Students in general are taking longer to graduate, making the cost of college more expensive. It should be noted that this isn’t inherently a problem because longer graduation rates may be caused by higher low-income and minority enrollment. Still, more years in college translates to more annual tuition to be paid, increasing student loan debt. 


Policy Actions to Alleviate Student Loan Crisis

Amidst the coronavirus and campaign season, student debt has been a large part of the political discourse. President-elect Joe Biden has made several campaign promises about shrinking student debt. His proposals include making two-years of community college free, forgiving $10,000 in federal student loan debt for all borrowers, and forgiving all student loans to those who attended public colleges and earn less than $125,000. Along with making sound financial decisions, student debtors should keep their eyes peeled for policy the Biden administration pursues. 

Student Loan Forgiveness Programs

Instead of waiting for the next bill to pass, there are still many things debtors can do to tackle their student loans. Similar to applying to scholarships, debtors can apply to student loan forgiveness programs dedicated to those in certain careers with need. For instance, a medical doctor could qualify by offering his services in an underserved area or a teacher could teach at a public school for a couple of years. Qualifying for one of these programs can take thousands, sometimes even tens of thousands, off one’s student loans. 


Refinancing is another powerful tool for paying off student loans. A private company buys your debt, consolidates them into one loan, and usually offers a better payment plan. However, refinancing is not for everyone. If you’re applying for a federal loan forgiveness program, refinancing will transfer your debt to a private company making the program unavailable. Additionally, if a debtor has bad credit, their refinancing options will be limited and they may end up paying more than had they not refinanced their loans. On the other hand, if a debtor has a stable income and good credit and he has multiple large loans, refinancing may be a good option to lower interest rates.


The previously mentioned tools are all great for alleviating student loan debt; however, the most important matter is to practice good financial literacy. Maximizing income and minimizing expenses goes a long way in chipping away at not only just student loans but all types of debt. 

One has to think critically about expenses to practice sound financial literacy. One of the major purchases someone decides to make is attending college. As cynical as it may sound, majoring in a profitable subject is the best choice from a simple financial perspective. However, people are not robots and to live a life where one’s only goal is to maximize their wealth is depressing. There are compromises one has to make. Maybe an art student can supplement their studio classes with one business class a semester. Maybe the aspiring musician can minor in economics. Ultimately, higher education is not yet a right in the United States; therefore, students must think wisely before making their $122,000 investment. 


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