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Everything you need to know about student debt

Libby Nelson is Vox's policy editor, leading coverage of how government action and inaction shape American life. Libby has more than a decade of policy journalism experience, including at Inside Higher Ed and Politico. She joined Vox in 2014.

What is a student loan?

A student loan is money that banks or the federal government lend to students or parents to pay for higher education. Student loans can be used to pay tuition, fees and room and board, and they can also be used for living expenses and books. Student debt refers to the total amount of outstanding student loans from students, graduates, and dropouts.

The majority of students — more than 70 percent of all bachelor's degree recipients — now borrow money to pay for college, a higher proportion than ever. Those students owe $29,400 on average at graduation. Student debt drew public attention and concern as the recession hit and graduates fell behind on their loans. There's now a growing consensus among economists that student debt is a drag on the economy, too, because indebted graduates and dropouts have less money to spend on other things.

The federal government has by far the largest share of the student loan market. Until 2010, the federal government lent money to students by guaranteeing and subsidizing loans from banks like Sallie Mae. In 2010, the Education Department cut out the middleman and became the sole student lender.

How much student debt is out there?

The Consumer Financial Protection Bureau, a federal agency, estimated in May that total student debt is nearly $1.2 trillion, and that federal student loans alone make up more than $1 trillion in outstanding debt. (Private loans make up the remaining $165 billion.)

But actual debt from paying for college is probably higher. Some students or parents use credit cards, loans from retirement plans, or home equity lines of credit to pay tuition, fees, and living expenses. Those financial products aren't included in the $1.2 trillion estimate.

How much debt does the average student have?

The average graduate who took out loans (and 7 out of 10 do) and graduated in 2012 borrowed $29,400 for a bachelor's degree. That's a monthly payment of $312 on a standard, 10-year repayment plan. For an associate degree, it's $17,158, or a monthly payment of $182.

Average debt varies greatly by state and by the type of college students attend. Students at for-profit colleges borrow the most, and students at public colleges borrow the least. Average debt for students with a bachelor's degree ranges from just under $18,000 in New Mexico to more than $33,000 in Delaware.

It's not just students who graduate who end up with debt. Among college students who enrolled in 2003, 36 percent hadn't earned a degree or certificate by 2009. The majority of dropouts at all colleges, except for community colleges, had at least some debt: $10,400 among students who borrowed at private nonprofit colleges, $9,300 at public colleges and $7,500 at for-profit colleges.

Why has student debt increased so much?

The total amount of student debt in the US has more than tripled in the past 10 years, from $363 billion in 2005 to more than $1.2 trillion today. It's increasing for a few reasons: More students are going to college than they used to, a higher proportion are taking out loans, and they're borrowing more than students did in the past.

Lots of factors go into why tuition prices are rising much faster than inflation. But in short, students are paying a greater share of the costs at public universities than they used to because states are subsidizing public education less. Tuition prices are rising at private colleges and universities, too, for a variety of reasons.

With more people attending colleges charging ever-higher tuition, the number of borrowers has increased 70 percent in 10 years. So has the amount that the average student borrows. In 2004, 23 million people had student loans, and the average balance was $15,651. By 2013, 39 million people had student loans, and the average balance was nearly $25,000.

What kinds of student loans are there?

There are two general types of loans: federal loans and private loans. Federal loans are issued by the Education Department. Private loans come from banks. Federal loans have some protection that private loans don't, including more flexible repayment options and the possibility of eventual loan forgiveness. Neither kind is dischargeable in bankruptcy.

The Education Department makes the vast majority of student loans itself, directly to students, so they're called direct loans. Since 2013, interest rates have been based on the 10-year Treasury bond rate, so they fluctuate from year to year.

Students are limited in how much they can borrow in federal loans. Dependent students can borrow no more than $31,000 during their college careers in direct loans, and no more than $23,000 of that amount can be subsidized. Independent students are limited to $57,500 total.

Direct Subsidized Loans for undergraduates. These loans are offered based on financial need and don't accumulate interest while the borrower is enrolled in college. Interest rate for 2014-15: 4.66 percent.

Direct Unsubsidized Loans for undergraduates. These loans are available to undergraduates regardless of financial need, but interest accumulates while borrowers are in college, making the loan more expensive in the long run. Most subsidized loan borrowers also have unsubsidized loans. Interest rate for 2014-15: 4.66 percent.

Direct Unsubsidized Loans for graduate students. Same deal as for undergrads, but at a higher interest rate. For 2014-15: 6.21 percent. Graduate students can borrow up to $20,500 per year.

Direct PLUS loans. Graduate students and parents of undergraduate students can borrow up to the cost of attendance, which includes living expenses, at a higher interest rate. For 2014-15: 7.21 percent.

Perkins loans. These loans for undergraduates are based on financial need and are administered by colleges. Interest doesn't accumulate while borrowers are in school. Interest rate for 2014-15: 5 percent.

How are federal student loan interest rates calculated?

From 2006 until 2013, federal student loans had fixed interest rates. Now the rate varies from year to year for new loans, but is locked in over the life of the loan.

For undergraduate loans, the Education Department adds 2.05 percentage points to the rate on 10-year treasury bonds. For graduate loans, they add 3.6 percentage points. And for PLUS loans to parents and graduate students, they add 4.6 percentage points.

This means that student loan interest rates rise along with interest rates in the broader economy. But the rates are capped: 8.25 percent is the highest for undergraduate loans, 9.5 percent for graduate loans and 10.5 percent for PLUS loans.

What colleges have the most student debt?

Among undergraduates, students at private nonprofit colleges borrow more than students at public colleges. Students at for-profit colleges borrow the most.

This is partly a reflection of tuition, which are higher at private non-profit and for-profit colleges. And it's partly a reflection of students' own resources: students at nonprofit colleges are in general much less likely to come from low-income families than students at for-profit colleges.

If you're hoping to name names, data on borrowing at individual colleges paints an incomplete picture. Colleges aren't required to report the average debt per student borrower to the federal government. About half do so voluntarily to another survey, the Common Data Set, which is used for some college rankings. The Institute for College Access and Success uses that data to make a list of high-debt public and private nonprofit colleges.

student debt chart

What happens if you don’t pay back a student loan?

Defaulting on a student loan — which happens if you don't make a payment for more than nine months — is a very, very bad idea, particularly if it's a federal student loan.

Getting rid of a student loan by declaring bankruptcy is nearly impossible, and most people don't try. A student needs to sue the lender themselves, and prove in court that there's no way they can repay the loans. When the federal government is the lender, this is particularly tough. The federal government can confiscate wages, tax refunds and even Social Security checks until the loan is repaid. Defaulting can also ruin a borrower's credit for years.

There are ways out of default. Borrowers can pay the full balance, of course, but that's rarely a realistic possibility. The federal government does allow borrowers to rehabilitate their loans. In that case, the borrower and the Education Department must agree on a reasonable and affordable payment plan, and then the borrower has to make nine on-time payments. Collection costs of up to 18.5 percent of the principle and interest can also be added on to the outstanding loan balance — so no matter what, defaulting on a loan is expensive. Another way out is consolidating all of a borrower's student loans at one interest rate after making a few on-time, voluntary payments.

The best way out of default, though, is not getting there in the first place. Advocates for programs that allow borrowers to repay loans based on income hope these programs will cut default rates because if you're not making money, you don't need to repay your loan.

How many people aren't paying back their student loans?

A surprisingly high proportion of the $1 trillion in outstanding federal student debt — more than half — isn't currently being repaid. That's partly because students don't have to make payments while they're still enrolled in school or for six months after they graduate.

But plenty of student debt isn't being paid back for tougher reasons. About 30 percent of the $1.2 trillion is in deferment, forbearance or default. Deferment and forbearance are ways to avoid making payments without entering default. Borrowers don't need to make payments, but in some circumstances interest accumulates and capitalizes, meaning it's added to the principal.

When a loan is in default, a borrower hasn't made a required payment in at least 270 days and hasn't arranged for a deferment or forbearance. The entire balance is due immediately, and if it's a federal loan, the government can take wages, Social Security payments, or tax refunds. As of August 2014, 8 percent of Direct Loan borrowers and 21 percent of borrowers from the now-discontinued Federal Family Education Loan program are in default.

The Federal Reserve Bank of New York, which issues quarterly reports on household debt that include both private and federal student loans, estimates that about 11 percent of the balance of outstanding student loans is at least 90 days delinquent. And unlike delinquencies on other forms of household debt, delinquencies on student loans are still rising.

student loan delinquency

Why can't student loans be discharged in bankruptcy?

Student loans are almost never dischargeable in bankruptcy, unlike credit card debt, mortgages, car loans, and most other forms of consumer debt. But this is a relatively recent development.

Restrictions on discharging student loans in bankruptcy have gradually tightened over the years. Until 1998, federal student loans that had been in repayment for at least seven years could be discharged in bankruptcy. Until 2005, some private student loans could also be discharged. But getting rid of student loans now entails suing the lender (often, the federal government) and proving to a judge that circumstances are so dire there's no way the loans will ever be repaid, even under income-based repayment programs. Fewer than 1,000 people, out of more than 32 million student loan borrowers, try this each year.

There are a couple of reasons for this: some people are concerned that college graduates could decide it's better to declare bankruptcy while they're young and take the hit to their credit for several years, rather than repay tens of thousands of dollars of student debt. Federal student loans also offer consumer protections and repayment flexibility that credit card bills and auto loans generally do not.

Some people think these restrictions should be relaxed: Senate Democrats have proposed legislation that would make private loans dischargeable in bankruptcy again, and the Center for American Progress has called for a two-tier student loan system that would make some loans dischargeable.

What is income-based student loan repayment?

Usually, a student loan payment is like a car payment: borrowers pay the same amount every month for 10 years, until the loan is paid off. Under the income-based repayment program for federal loans, borrowers pay a percentage of their discretionary income every month, until the loan is paid back or forgiven. The idea is that payments are lower for borrowers who might not be able to afford the standard repayment plan.

Income-based repayment, also known as IBR or Pay As You Earn, is only for federal loans. Some kind of income-based plan is available for all federal loans. Payments are based on a borrower's discretionary income, which is determined based on family size using the federal poverty guidelines. If a borrower has a household of one and an income of $25,000, discretionary income is determined by subtracting the 150 percent of the poverty guideline for that household size ($17,505). That borrower's discretionary income is $7,495.

The exact repayment terms depend on when you took the loan out: Some borrowers pay 10 percent of their discretionary income, others pay 15 percent. If you work for a nonprofit or government agency, the loan is forgiven after 10 years. If you don't, you pay for either 20 or 25 years, or up until the loan is paid off. (But watch out — if you don't work for the government or a nonprofit, the forgiven loan could eventually be taxed as income.)

The concept of repaying federal loans based on income in the US dates from 1992, but expanded after the federal government became the only lender for student loans in 2010. About 11 percent of borrowers are paying back their loans this way.

Why wouldn't people choose income-based repayment? For a couple of reasons. First, lower monthly payments mean that you could end up paying the Education Department much more in interest than you otherwise would. If you can afford to make higher payments, and if you don't plan to work at a nonprofit or government agency in order to be eligible for public service loan forgiveness, you probably should pay the loan off more quickly.

Second, many borrowers complain that the enrollment process for income-based repayment is complicated. Borrowers must submit documentation every year, or otherwise will be put back on the standard repayment plan. You can choose to switch into or out of income-based repayment at any point.

Some policy experts think that income-based repayment should be the automatic way to pay back a student loan.

What effect does student debt have on the economy?

There's a growing agreement among economists that student debt is a drag on the economy, even though having more college-educated workers is an economic boon overall.

Economists don't see this as similar to the subprime mortgage crisis, where people took out loans they couldn't afford and became delinquent. That's not a great comparison because, unlike mortgages, almost 90 percent of student loan debt is held by the government, not by financial institutions. And the government has lots and lots of power to ensure that loans are repaid.

The Education Department has the power to garnish wages, tax refunds, and Social Security if loans aren't repaid. That's not an ironclad guarantee against ever losing money on student loans, but the risk is to the federal government's fiscal integrity, not the banking system.

What economists and policymakers worry about is that student debt is dragging down an economic recovery. Student loan borrowers are less likely to buy a car or a house, in part because they can't save for a down payment. They have less disposable income for consumer spending. Their credit scores are worse. All that, former Federal Reserve Chair Ben Bernanke has said, isn't helping the economy.

Does the government make money on student loans?

Right now, using the federal government's own accounting method, yes. The Government Accountability Office projects that the government will make $66 billion on loans disbursed between 2007 and 2012. But the word projects deserves the emphasis here.

Those projections change from year to year, sometimes dramatically. One cohort of loans — in other words, all federal student loans made in 2008 — was projected in the 2011 budget to turn a 9 percent profit. By the 2012 budget, those loans were expected to instead cause a small loss of about 0.24 percent. The variation from year-to-year in the projections is based both on whether the loans are actually being paid back and on the government's cost of borrowing. The upshot of all this is the government won't know for sure whether it's made money on student loans until all the loans are paid back.

This edges into a very technical debate about how the government counts its money. The current accounting method compares the amount of loans the federal government makes now to the amount it expects to get back when those loans are repaid. That method was required by the Federal Credit Reform Act, and it shows the government making about $715 million on student loans over the next 10 years.

Some budget experts argue that the government should use another form of accounting, called fair value, that generally makes government lending programs look less profitable. Fair-value accounting assumes that broader market risks — like another recession or financial instability — carry a cost that counts against revenue. Under fair value, the federal student loan program might turn a smaller profit or a much bigger loss (it's hard to say, because the last fair-value estimate was for student loans with higher interest rates than are in effect right now).

What's the case for student debt?

Research is pretty clear on this: even people who go to college and end up with thousands of dollars of student debt are better off — financially and in other ways — than their peers who didn't go to college at all. That's because the value of a high school diploma has steadily declined. College graduates aged 25 to 32 are the most indebted ever, but they're also earning $17,500 more per year than people their age who didn't go to college at all. They're also much less likely to be unemployed, and 86 percent believe their degrees are or will be worth the debt they incurred.

Economists generally argue that student loans are a good thing overall: they make it possible for students to afford college who wouldn't have been able to otherwise, and going to college has a range of positive effects, not just on how much people earn but on their health, happiness, and civic participation. Most students are not borrowing more than they can afford to pay back, they argue, but students need to take their likely future earnings, as well as their probability of graduating, into account when taking out a student loan.

What are some proposals for reducing student debt?

One possibility is allowing student loan borrowers to refinance their loans at a lower interest rate. A few private-sector companies are starting to offer this, and Sen. Elizabeth Warren (D-MA) has proposed a bill to allow people with both federal and private loans to refinance their debt at a lower rate. President Obama supports this idea. Making student loans dischargeable in bankruptcy again would also help those who are struggling the most with making payments.

But reducing student debt in the long term will require making college more affordable up front. There are many ways to do this. States could reverse some of the decline in support to public higher education, covering a larger share of the costs per student. The federal government could increase grants to low-income students to cover a larger share of higher education expenses. Colleges could shift their financial aid away from students with high grades and test scores and base grants exclusively on students' financial need.

Some states have proposed requiring colleges to develop and market a four-year degree for which students would pay no more than $10,000 total. Texas Gov. Rick Perry has been the strongest advocate for those degrees, which are now available (with caveats) at some Texas public colleges.

Another school of thought holds that higher education needs to be "disrupted" in order to become cheaper and more efficient. They say that online courses and other new technology will be able to lower costs for colleges and prices for students. Instead of going to one college for four years, students can cobble together a combination of online classes, traditional college courses, badges for specific skills, and other resources to accomplish their goals.

You didn't answer my question!

This is very much a work in progress. It will continue to be updated as events unfold, new research gets published, and fresh questions emerge.

So if you have additional questions or comments or quibbles or complaints, send a note to Libby Nelson:

Where can I learn more about student debt?

The Institute for College Access and Success puts out an annual report on the indebtedness of the previous year's graduating class. Here's the report for the class of 2012, the most recent edition.

The New America Foundation released a report in March 2014 on graduate student debt, arguing it accounted for dramatic increases in borrowing.

Suzanne Mettler's Degrees of Inequality argues that rising student debt, particularly from for-profit colleges, is undermining education's ability to create social mobility.

ProPublica has investigated various aspects of the federal student loan program, including problems with relieving the loan burden of disabled borrowers and for the families of borrowers who died, problems with debt collection agencies and loan servicing changes, and the growth of lending to parents. They've also looked at college policies that can worsen student indebtedness, such as offering more aid to middle-class and wealthy students.

The New York Times' Degrees of Debt series begins with the story of a true outlier — a young woman in six-figure debt from an undergraduate degree — but goes on to explore the bankruptcy process, colleges' attempts to cut costs and prices, and work colleges for low-income students, among other topics.

How have these cards changed?

This is a running list of substantive updates, corrections, and additions to this card stack.

  • April 9: Card 1 was corrected to reflect that 70 percent of all bachelor's degree holders (not undergraduates) borrow to pay for college. Slight changes and corrections were made to interest rates on card 6 and the description of income-based repayment on card 11.
  • April 9: This card was changed to correct its original title, "How have these chards changed?" (Oops! To atone, here's a recipe for Swiss chard.)
  • August 27: Edits made to several cards to reflect updated data, including student loan interest rates for 2014-15 and new data on student loan delinquency and default.

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