Why are federal student loans a problem?

In the 1960s, in an attempt to make college more accessible, the government started guaranteeing student loans. Predictably, this fueled demand and incentivized institutions of higher learning to charge higher tuition, even for degrees with questionable track records for placement in high-paying jobs. Over the same time period, a cultural narrative emerged that one must have a college degree to be successful, inducing even higher demand, and even higher tuition. In order to protect itself from pending destructive rates of default, the government made it practically impossible to discharge student loan debt through bankruptcy. Default rates did increase, predictably, as people either (1) didn't graduate or (2) couldn't find a well-paying job in their field of study, often because they had entered a labor market in which the relative advantage of a 4-year degree had been deflated. Meanwhile, stigmatized jobs in the trades continued to offer reliably good salaries at significantly lower educational cost. The problem grew until demands for trillion-dollar student loan forgiveness become mainstream on the political left.



Average annual tuition at a 4-year public college costs $2,078 after being adjusted for inflation.1 (In 1963-dollars it costs $243/year!) 2.96% (5.92m of 199.73m) of the U.S. population is enrolled in college.


Higher Education Act is passed, meaning that the federal government started guaranteeing loans made by private lenders to students through the Federal Family Education Loan (FFEL) program.2


Foreseeing an issue with defaults on guaranteed student loans, the law is changed so that education loans are not dischargeable by bankruptcy.3

Between 1980 and 2018

the average price of tuition increases 8 times faster than wages.4


College enrollment rates have more than doubled since 1963, rising to 6.5%.5 That same year, Congress passes a bill, which is signed into law, eliminating the old FFEL program. This "cut out the middleman", leaving the government's Direct Loan program to make 100% of federal student loans from that date forward.6


The Federal Reserve estimates that there is $1.5 trillion in student loan debt.7


Brookings Institute analysis suggests that by this time, student default rates may reach 40%.8 The problem disproportionately affects different demographics, particularly minorities in for-profit institutions.

Proposed solutions

  1. Parents and high schools should teach economic literacy, so that the risks of taking on student loan debt (or any debt for that matter) are better understood. If the choice were made as explicit as, "graduate with a lot of debt and some expected (based on field of study) subsequent lifetime earning," versus trade school, the family business, the military, etc. then candidate students would likely make better decisions.
  2. Americans should destigmatize trade schools, family businesses, etc. and cultivate a cultural shift that encourages high school graduates to make thoughtful and independent decisions.
  3. Student loan programs should be reformed. One promising option involves Income Share Agreements (ISAs). Another is to simply stop the federal government from handing out un-bankruptable loans to anyone for anything. This should have a reversing effect, causing institutions to tighten their belts, shed bloated administrative bureaucracy, and (in the case of predatory for-profits) go out of business. It would also hopefully pressure points (1) and (2) to happen, incentivizing students and their parents to think twice before taking out a massive loan for a 6-year gender studies degree.


  1. Average Total Cost of College, educationdata.org
  2. How Government-Guaranteed Student Loans Killed the American Dream for Millions, FEE
  3. Why Can’t You Discharge Student Loans in Bankruptcy?, TIME
  4. Price Of College Increasing Almost 8 Times Faster Than Wages, Forbes
  5. Consumer Credit - G.19, federalreserve.gov
  6. Student Loan History, newamerica.org
  7. College Enrollment Statistics, educationdata.org
  8. The looming student loan default crisis is worse than we thought, Brookings Institute
  9. Student Loan Fallacies--and Fixes, City Journal
  10. Federal Student Loans: What Happens If You Don't Pay?, Federalist Society (YouTube)