Student Debt and Financial Wellbeing: What Research Shows About the Burden and Its Consequences

Student loan debt in the United States has grown to approximately 1.7 trillion dollars, held by approximately 45 million borrowers. This figure, which has more than tripled since 2006, reflects decades of rapidly rising tuition and fees, stagnant grant aid relative to costs, and expanding access to federal loans that has allowed debt to grow without immediate consequence for borrowers at the time of enrollment. Research on the effects of student debt on borrowers' financial lives, on their behavior, and on the broader economy, as well as on the effectiveness of various policy responses, has grown alongside the debt itself. The distribution of student debt is unequal in ways that are important for policy evaluation. The borrowers who hold the largest debt balances, those with graduate and professional degrees, tend to have higher earnings potential and lower default rates. The borrowers who face the most financial distress are often those with relatively small amounts of debt who did not complete their degrees and therefore do not have the earnings premium that the degree was supposed to provide. Research on borrower outcomes finds that default rates are highest among those who attended for-profit institutions and those who left school without a degree, not among those with the largest balances. The financial consequences of student debt extend beyond the debt service payments themselves to affect a range of life decisions and financial behaviors. Research using survey and administrative data finds associations between student debt and delayed homeownership, lower rates of small business formation, reduced retirement savings, delayed family formation, and choices of lower-paying occupations. Identifying causal effects of debt on these outcomes, as opposed to the effects of income, education, and other characteristics correlated with borrowing, is methodologically challenging, but studies using quasi-experimental variation in debt levels find consistent evidence of effects on homeownership and other major financial decisions. Income-driven repayment plans, which cap monthly loan payments at a percentage of discretionary income and forgive remaining balances after a specified period of on-time payments, represent the primary policy mechanism for managing the burden of student debt. Research on income-driven repayment finds that participation substantially reduces financial distress and default rates among enrollees. However, enrollment in income-driven plans has historically been lower than would be expected given the potential benefits, reflecting complexity in the application and annual recertification process, lack of awareness, and administrative barriers. Simplification of income-driven repayment through automatic enrollment and streamlined processes is an evidence-based reform that receives broad support. Public Service Loan Forgiveness, which forgives remaining federal loan balances for borrowers who make 10 years of qualifying payments while working in public service or nonprofit employment, has been plagued by implementation problems that resulted in extraordinarily high rejection rates for initial applications. Research on PSLF and its effects found that many borrowers who believed they were on track for forgiveness were disqualified due to having the wrong loan type, wrong repayment plan, or non-qualifying employer, often after years of compliant payments. Administrative reforms have improved the program, but the experience eroded trust in federal loan program management. Targeted loan cancellation policies have been enacted for specific populations including borrowers who were defrauded by their institutions, borrowers with permanent disabilities, and borrowers whose institutions closed before they could complete their degrees. Broader loan cancellation proposals have been debated extensively. Research on who would benefit from broad cancellation, such as across-the-board cancellation of a specified dollar amount per borrower, finds that benefits would accrue disproportionately to higher-income borrowers who have more debt, though targeted cancellation for lower-income borrowers or those with specific distress indicators would have more equitable distributional effects. The macroeconomic effects of student debt on aggregate demand and economic activity are debated among economists. One view holds that debt service payments reduce consumption spending in ways that slow economic growth and that cancellation would release this suppressed demand. Another view holds that borrowers anticipated their debt burden when making educational decisions and that the effects on spending are smaller than simple debt-load comparisons suggest. Research on the consumption effects of student loan forgiveness using policy changes as natural experiments finds moderate effects on spending, particularly among borrowers with lower incomes and higher debt-to-income ratios. Addressing the student debt crisis requires attention to both existing debt and the structures that produce it. Expanding grant aid, particularly Pell Grants for low-income students, and controlling the rate of tuition increase at public institutions would reduce the debt accumulation of future students. Simplifying and expanding income-driven repayment would reduce the burden on existing borrowers without requiring large-scale cancellation. Accountability for institutions with poor student outcomes, particularly for-profit institutions with high debt and low completion and earnings, would protect future students from taking on debt for credentials that do not deliver promised labor market returns.