Smart Money Podcast: How We Got to $1.75 Trillion in Student Debt

by Ann deBruyn

Welcome to NerdWallet’s Smart Money podcast, where we answer your real-world money questions.

This week’s episode is a Nerdy Deep Dive into the history of student loans.

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Our take

Today more than 43 million Americans hold student loans , which altogether total over $1.75 trillion. This mammoth amount of student debt is the result of many factors, including the cost of college rising; state and federal governments reducing funding for higher education financial assistance programs; and stagnant wages.

The crisis as we know it today accelerated in the past two decades. By the end of 2010, student loan debt had reached $855 billion, according to data from the Federal Reserve Bank of St. Louis. It would nearly double by the start of the 2020s. A number of factors led to the surge in student loan debt. Women, as well as Black and Latino students, began attending college in greater numbers. Because this cohort has historically earned less than male, white or Asian graduates, they had greater difficulty paying off their student loans.

And all the while, college was getting more expensive. From 2001 to 2020, the cost of college — that’s tuition, fees, room and board — rose drastically. According to a 2021 report from the College Board, the rise in cost (in constant dollars) was 66% at public nonprofit four-year schools and 43% at private nonprofit four-year schools. The past decade also saw an increase in the number of students who defaulted on their loans.

Have a money question? Text or call us at 901-730-6373. Or you can email us at podcast@nerdwallet.com . To hear previous episodes, go to the podcast homepage .

Episode transcript

Sean Pyles: Welcome to the NerdWallet Smart Money podcast, where we typically answer your personal finance questions to help you feel a little smarter about what you do with your money, except for this episode, where we are doing something pretty different.

I'm joined by our student loans pro, Anna Helhoski, for a Nerdy Deep Dive into how student loans became a debilitating burden for many Americans.

Anna Helhoski: In this two-part series, we're going to explore how taking on huge amounts of student debt has become the norm in America, and what's now shifting in today's student debt conversation.

Sean: OK. You've been NerdWallet's student loan authority for a while now, and the burden of student loans has become something that you feel pretty passionately about. Can you talk with us about how you got to this point?

Anna: I come from a firmly middle-class family, but it was made clear to me, by the time I was applying to schools, that there was absolutely no way I was attending college, even a public college, without student loans. Like nearly 68% of college students, I couldn't possibly afford college without taking on debt.

Sean: And today, more than 43 million Americans have student loan debt — that's 1 in 8. And most of that debt is federal, meaning that the government issues the loans. The typical amount that students borrow isn't in the six figures; it's around $38,000.

But the most astonishing number of all is the total federal and private debt owed by Americans. It's nearly $1.75 trillion.

Anna: And this unfathomable amount of debt doesn't just affect new grads. It spans generations, including parents who now carry their own student debt and debt for their children.

Student loans are disproportionately held by more women than men. It's debt that is more difficult for Black and Latino borrowers to pay off, compared with white and Asian borrowers. And it affects adults in most age brackets, since parents now take on so much more debt than they used to.

The amount of student debt held by American households has ballooned to the point where lawmakers and advocates are now calling for sweeping cancellation of that debt.

Sean: Right. But before we get into cancellation, let's explore how this $1.75 trillion crisis came to be, because it wasn't always like this.

Anna: No doubt someone in your life has said to you, "I worked my way through college." And for decades, that was a real possibility.

What are the differences between then and now? In a nutshell, college became more critical to getting a well-paying job, so more people started going. In the decades that followed, college became a whole lot more expensive, but wages didn't keep up. In 1973, the average cost of tuition at a four-year school, for example, was around $2,800 at public colleges and under $11,300 at private schools, both in today's dollars. Now it's around $9,350 at public colleges and just under $32,800 at private colleges.

That's a 233% increase at public schools and a 190% increase at private schools. And that's just tuition. We're not even talking about room and board costs.

Sean: Yeah, which can also be extremely expensive. So prior to the post-World War II years, to attend a college, you most often had to be wealthy, and more than likely you were a white man, with a few exceptions here and there such as the Seven Sisters schools attended by white women and colleges for Black students, such as Shaw University and Howard University, and those specifically for Black women, like Spelman College.

Anna: Right, it really wasn't until after World War II that the higher education landscape in the United States started making its first toddling, unsteady steps toward becoming accessible to non-elites.

The GI Bill was an effort to help veterans return to civilian life through government-backed home loans, assistance finding jobs and funds for education. Veterans could receive up to $500 toward an education or training program, which opened doors to so many new students that by 1947, nearly half of all who attended college were veterans.

Sean: The GI Bill set the stage for a few changes to come. It made government-backed loans a possibility through its home loan program and grossly expanded the demand for college education beyond the wealthy.

The GI Bill's array of social benefits also helped veterans become homeowners and democratized access to professions they otherwise may have been excluded from. This led to income growth, and ultimately helped create the American middle class.

Though, it's worth noting that the benefits of the GI Bill were not equally accessible. Black veterans faced difficulty securing benefits. And even when they did, they had trouble finding training programs that they were eligible for. Those who did get educated via the GI Bill had fewer opportunities to secure skilled jobs, which were typically given to white workers.

Anna: For many white Americans, the socioeconomic mobility messaging was also becoming clearer. How do you enter the middle class in mid-century America? You get educated.

Now let's get into how the college and university system that we take for granted today got started. And as we'll get into, this moment in time led to the beginnings of cost spikes and our modern era of student lending.

The demand for education continued through the 1950s, and states were swift to accommodate by establishing or expanding their university systems. Folks might be surprised to learn that up until the late 1950s, student loans didn't exist beyond what individual colleges chose to make available to their student bodies.

Sean: Enter the National Defense Education Act in 1958. This was the first federal program to offer student loans, including grants, scholarships and loans to students in specific fields: science, engineering, math, education and foreign language. Folks may know this program by another name, the Perkins Loan Program, which ended in 2015.

The act had an interesting provision that was the precursor to loan forgiveness programs that we have today. It enabled students to be eligible to have 50% of their loans canceled over time if they went into teaching. There are still teacher debt cancellation programs today, in addition to the Public Service Loan Forgiveness program.

Anna: Demand for college was rising, but it still wasn't fully affordable for students. Loans were the only option, but banks saw students — usually a bunch of 17- or 18-year-olds — as risky investments.

Along comes President Lyndon B. Johnson. He wants a national investment in education, which he viewed as an essential tool for combating income and racial inequality. He assigned the Higher Education Act of 1965 that guaranteed student loans made by banks.

As Josh Mitchell writes in his book “The Debt Trap,” this move put all the risk on taxpayers rather than banks. The new law made federal loans available to students with financial need. Through these first loans, state schools were provided with federal funds to be used for low-interest loans, but the loans weren't widely available to middle-class borrowers until 1978. The prevailing attitude now was borrowers could invest in themselves and their future income through loans.

Sean: And here is why this period was important: It proved monumental in providing free aid to students to attend college based on their financial situation. President Johnson viewed the college degree as a necessity, not a luxury, and envisioned a GI Bill for everyone.

A Senator from Rhode Island by the name of Claiborne Pell shared that vision and spearheaded a program that would offer grants to low-income students who couldn't afford college. These grants would eventually be named — you guessed it — Pell Grants, and it's a program that is still going today.

Anna: The 1970s also marked the beginning of the student loan bureaucratic infrastructure. One example is Sallie Mae, which was created in 1973 to service federal loans.

Sean: So we're beginning to see how the student loan world we know today came into being. The government is making programs to offer money to students and building up the infrastructure for managing this money.

Meanwhile, the 1950s to the 1970s saw a huge boost in college attendance and states expanding their university systems to accommodate this influx. And by the 1970s, the cost of attending college began to go up as well.

Schools saw a lucrative opportunity in this educational endeavor, so they started enrolling even more students in order to maximize profits through raising tuition and fees. And now there were loans that students could use to pay for their education, but there were no checks as to whether or not students would be able to complete degrees or repay their debts.

Anna: Incidentally, it's also when the government made sure students couldn't discharge their debts and bankruptcy to allay the fears that students would take on a bunch of debt and then declare bankruptcy. Now borrowers had to prove undue hardship, which it turns out is much harder than you'd think.

Restrictions on student debt and bankruptcy continue to tighten all the way up to 2005, when it was made even more difficult to do through the Bankruptcy Abuse Prevention and Consumer Protection Act.

Sean: So now we have more students than ever, more loans being distributed than ever and higher college prices than ever. The cycle would continue for decades.

Anna: So the scene is set. Students are borrowing more. Colleges are growing and raising prices. Meanwhile, the nature of how people worked began to change too. A college degree became more of a necessity to get a good job.

Sean: And this is largely due to a few trends that came out of the 1970s, namely wage decline among working-class jobs.

Anna: Meanwhile, colleges at this time are churning out graduates who are able to get jobs, and college is now viewed as a golden ticket. Between 1970 and 1990, the number of bachelor's degrees granted increased by 30%, and the cycle continues.

More students were attending colleges during the 1980s, and college costs were getting higher. Up until the pandemic, tuition has grown at a faster rate than inflation.

Sean: It was also during this time that President Ronald Reagan came into office, and he declared that the state, quote, "should not subsidize intellectual curiosity." There is a 25% reduction in the higher education budget from 1980 to 1985, including Pell Grants and other student assistance programs.

Reagan's administration also limited student loan eligibility. Subsidized federal loans through the guaranteed student loans program were now limited to only those with the greatest financial need, which meant those with family incomes less than $32,000 for any size household.

Anna: On its own, this would be a problem for college affordability, but the disinvestment trend in higher education was just getting started.

State support also started on a dangerous cycle of cuts and raising tuition. During the 1980s, states passed restrictions that limited the amount they can tax or spend, which meant state-subsidized public colleges raised tuition, handing some of the costs over to the consumer, rather than leaving it with the state.

For the next three decades, the cycle would continue. States cut higher education funding, colleges increased tuition, states increased higher education funding, but colleges don't cut tuition. So tuition continues to build with every budget cut, but doesn't decrease when states pour more money into their colleges.

At this point, it was clear that the burden of higher education, namely who pays for college, had shifted onto the consumer.

Sean: We've now painted the broad strokes that led to a big increase in college attendance and the reasons why colleges started hiking their prices. And unlike the earlier part of the century, those who aren't independently wealthy can go to college, but they'll need financial aid, namely loans, to do it.

That takes us to the 1990s, where we see big changes to federal student loans. In this decade, we get the introduction of a new student loan — one that charges interest while borrowers are in school. And the government starts a new direct lending program. Remember, up until then, the government guaranteed student loans issued by private institutions, and the government also subsidized student loan interest.

The government also decided it was high time to reinvent how students access federal student aid, hence the Free Application for Federal Student Aid, better known as FAFSA, was created. It remains the only way students can be eligible for federal aid as well as state and institutional aid.

Anna: Back to the new loan that came into the picture. That was the unsubsidized Stafford loan, which meant students now would pay interest on their loans instead of the government — although subsidized loans were and still are available in limited quantities based on your family income.

Let's also talk about parent loans. Because up until this point, it seems like students were primarily the ones taking on debt to pay for college, but that's not entirely true. Since the 1980s, parents were able to borrow money to fund their children's education, but that amount was capped at $3,000.

In the early '90s, that cap was removed, which meant parents could take on more debt than ever before, up to the total cost of attendance, minus any other federal aid.

Today, parent PLUS debt is one of the fastest growing types of federal student loan debt, largely because undergraduate federal loans are capped, and PLUS loans aren't. All of these changes together mean that in the 1990s, we started to see some problem areas popping up.

During this time, income-based repayment also became an option for certain borrowers having difficulty repaying their loans, as well as some other aid-related changes.

Sean: The other thing that starts to happen is that the expectation of the college experience shifts. Gone are the Spartan dorm rooms and Raisin Bran for dinner. In come apartment-style facilities, vegan restaurants on campus and lazy rivers. OK, only one school has a lazy river, but colleges do start bringing in more comfort to campuses, which spawns a dozen think pieces about college campuses as all-inclusive resorts. But colleges did start building out customizable dorm experiences and bringing in more eateries.

And all of the four-year schools, both public and private, are competing with each other, and this race to compete for students ends up increasing room and board costs across all institutions.

Anna: That brings us to the dawn of the 21st century. College prices are continuing to rise, the demand for college is continuing to increase. But wages aren't keeping pace, so college is becoming increasingly less affordable for American families.

Picture it: It's the early 2000s, I — as a typical American teen, straight girl, most preoccupied with finding a boyfriend, the Iraq war, bummer music and low-rise jeans — was dreaming of getting out of my small town and going to college to study journalism, maybe a little political science, and student loans were the only way I was going to do that.

But little did I know, when I was about to enter college in the mid-aughts, I and other millennials would be attending school during the bleakest economic period in recent history: the Great Recession.

Sean: Along with many of the country's other financial institutions, a key student lending program, the Family Federal Education Loan Program, in which the government guaranteed private loans, begins to collapse. By 2010, the program was eliminated.

That meant the system was changing, and the government would now issue loans, and private companies would be contracted to service these loans. It's a huge shift, but honestly not one the borrowers would've even noticed.

Something else borrowers might not notice: States also started disinvesting from student loans due to the recession and have yet to return to pre-2008 levels.

Anna: So not only are there changes in how student loans are issued, but the trends of the previous decades are continuing. College is getting more expensive, and students are borrowing more.

By the end of 2010, the year I left college and started repaying my loans, student loan debt had reached $855 billion. It would nearly double by the start of the next decade. The next 10 years would see some attempts to Band-Aid the growing student debt problem without solving the two biggest related causes of climbing student debt: College costs are too high, and wages are too low.

A few shifts started in the 2000s that accelerated student debt into crisis levels. There is too much nuance to unpack it in the next few minutes, but we'll try to break it down by some of the major trends.

Let's start with changing demographics of the typical undergraduate population. Women started outstripping men in degrees, but not in earnings after graduation. So you have an entire group of borrowers who make less than their male counterparts, and so they have less ability to repay their debt, and they hang onto their debt longer as a result.

At the same time, the typical age of an undergraduate student has changed. They were getting older, often working part-time and perhaps needing child care. When you're a working adult with bills to pay and potentially children to take care of, it's easier to fall into a debt trap; that is, taking on more debt to offset living expenses and fund your education, or don't finish a degree at all, which means missed earnings and potentially debt that you have less of an ability to repay.

More Black and Latino students began to attend college than in previous decades. These borrowers also tend to earn less than their white and Asian counterparts after graduating, so they too hang on to debt longer.

And finally, students began taking longer to complete their degrees — up to five or six years instead of four.

Sean: And this was also a period when expensive for-profit career colleges like DeVry or University of Phoenix started rising and attracting more students into their doors.

Several of them, like ITT Technical Institute and Corinthian Colleges, have since been shut down for shady practices and misleading students, and those students have seen their debts forgiven. But plenty of bad actors still exist.

Anna: Beyond undergraduate credentialing, more students were also heading for grad school than ever before. And remember those PLUS loans that parents had been taking on since the early 1980s? In 2006, they became available to graduate students, too.

Graduate degrees are shorter than undergraduate degrees, and they can get really expensive. And we're not just talking about master's degrees, I also mean professional and Ph.D. programs.

So this entire group of students who are going on to get even higher levels of education can also take on more debt, because, remember, PLUS loans don't have the limits that other loans do. They also have higher interest rates than undergraduate and other graduate loans.

Sean: At the same time, the other thing that really ramped up during the early 2000s was parent debt. Federal financial aid forums started including parent PLUS loans right on the financial aid award letters, which made it easy to access. And parents signed on the proverbial dotted line to help their children get a degree.

But the paradox of parent debt is this: Undergraduate loans quote-unquote "pay off" because students get a degree that gets them a job that nets them higher lifetime earnings. But parents are often past the peak of their earnings, since they're closer to retirement, and they don't reap any of the financial benefits of the degree their children have.

Anna: And all the while, the demographics are changing; and more students are taking on graduate debt and attending pricey for-profit colleges; and parents are taking on more of the debt burden. College is also getting more expensive.

From 2001 to 2020, the cost of college — that's tuition, fees, room and board — rose 66% at public nonprofit four-years schools, and 43% at private nonprofit four-year schools, in constant dollars.

The Obama administration pushed more enrollment among students and increased Pell Grants. But the more students who attended, the more who took on debt.

The administration also ushered in a few Band-Aids for those who already had debt, including additional income-driven repayment plans that were now open to all direct student loan borrowers; instituted federal student loan forgiveness programs that have had mixed results; and exercised greater oversight over college outcomes, bad-actor schools and student loan servicers.

Sean: However, much of that oversight was rolled back during the Trump administration, and approval of loan forgiveness applications was at a standstill. Student loan defaults also grew, and it was worse among those who never finished their program, those who attended for-profit colleges and those who were low-income heading into college.

By March 2020, 7.2 million people were in default on their loans. And then COVID hit.

Anna: We're nearly to the present, and the question still remains: Why can't student loan borrowers seem to get out of debt? Stagnated wages are one thing — they haven't kept up with inflation — but generally, a college degree leads to higher earnings.

There are several reasons, but one of the most obvious obstacles has been interest. I originally borrowed $23,156 for college, but because of interest, that total nearly doubled the amount I repaid over 10 years. In February 2020, I submitted my final student loan payment. The next month, the Department of Education hit the pause on federal student loans.

Sean: However, debt has continued to grow, because even though enrollment has slowed down during the pandemic, the students who are attending still need to take on loans to help pay for school. By the end of the first quarter of 2020, student loan debt was approaching $1.7 trillion.

Anna: Hopefully you can now see how student debt arrived at that number. We traced the roots of college access and financial aid and how decades of increasing prices and stagnated wages led to our current state.

The payment pause has been extended multiple times by both Trump and Biden, which means payments have remained frozen since March 13, 2020. The pause has given borrowers time to attend to other financial needs, from paying down credit card debt, funding home repairs, spending more on child care, and yes, even paying down loans while interest hasn't accumulated.

It was during the initial pause under the backdrop of the 2020 presidential election that momentum on the "cancel student debt movement" started to gain steam. In progressive circles, activists, legislators, politicians and even one former secretary of education began to call for student loans to be forgiven en masse.

Sean: In the next episode on student loans, we'll dive into both sides of the student loan forgiveness debate and what borrowers should expect. We'll also hear from a few listeners about what student debt forgiveness would mean for them.

Anna: That's all we have for this episode. I'm Anna Helhoski; he's Sean Pyles. Music for this episode is by TradeWinds.

If you have a money question for us, including about how to manage student loans, turn to the Nerds, and call or text us your questions at 901-730-6373. That's 901-730-NERD. You can also email us at podcast@nerdwallet.com. Also, visit nerdwallet.com/podcast for more info on this episode, and remember to subscribe, rate and review us wherever you're getting this podcast.

Sean: And here is our brief disclaimer, thoughtfully crafted by NerdWallet's legal team. Your questions are answered by knowledgeable and talented finance writers, but we are not financial or investment advisors. This nerdy info is provided for general, educational and entertainment purposes and may not apply to your specific circumstances.

Anna: And with that said, until next time, turn to the Nerds.