Student Loans

In 2020, Americans owed $1.5 trillion in outstanding student loan debt, second only to mortgage debt. Although younger people hold most of this debt, older Americans increasingly find themselves saddled with student loan debt as well. Over 22 percent of this debt, or $341 billion, is held by people age 50 and older. 

Impact on retirement savings: Carrying student debt later in life makes it harder for people to save for retirement. The Consumer Financial Protection Bureau (CFPB) found that heads of household age 50–59 with outstanding student loan debt had a median of $55,000 in an employer-based retirement account such as a 401(k). This compares with $65,000 for those with no outstanding student debt. Similarly, those with outstanding student debt had a median of $31,000 in an individual retirement account, compared with $56,000 for those without outstanding student debt. And student debt can directly affect retirement income, as those who default on federal student loans are subject to Social Security offset (similar to garnishment). The number of people whose Social Security was offset to pay off a defaulted federal student loan more than quadrupled between 2005 and 2015. Offsets increased from 8,700 to 40,000 over the decade. 

Older Americans who borrow student loans to help finance the cost of college for others primarily use two types of loans: Parent PLUS loans and cosigned private student loans. 

• Parent PLUS Loans: These are offered directly to parents of undergraduates from the federal government. To qualify, a borrower undergoes a credit check and cannot have a prior adverse credit history. Credit scores and income are not considered. Due to the limited underwriting of these loans, Parent PLUS borrowers sometimes lack the ability to repay the loan. Moreover, there are no official income-driven repayment plans for Parent PLUS borrowers. 
• Cosigned private student loans: Financial institutions usually will not make a loan directly to a student alone. Instead, they require a cosigner. Often, parents, grandparents, and other family members serve as cosigners. Many cosigners do not understand that they are legally responsible for repaying a loan if the student fails to do so. 

In 2017, AARP surveyed people age 40 and older who had taken out loans to help others go to school or had repaid such a loan in the prior five years. It found that 40 percent of Parent PLUS borrowers who have reached the repayment stage have shown signs of payment distress. These include making at least one late payment (20 percent), making at least one partial payment (20 percent), contacting the loan servicer about lowering the monthly payment (15 percent), and missing at least one payment (15 percent). The AARP survey found that 14 percent of cosigners whose loans have reached the repayment stage have had to make payments on the loans because the primary borrower did not pay. 

Role of the high cost of higher education: The cost of attendance at colleges and universities has risen much faster than inflation and wage growth. This is one factor that has led to the high level of debt among older adults. Today, the amount of federal student loans and grants available to students covers a much lower proportion of the overall cost of college attendance. For example, the maximum federal Pell Grant award, offered to students from families with low incomes, covered 79 percent of the cost of attending four-year public colleges in 1975. In 2020–2021, it covered 28 percent. The maximum federal Pell grant—which, unlike loans, does not have to be repaid—was just $6,345 that academic year. Students increasingly must rely on parents, grandparents, and others to help fund their education. 

In order to expand the opportunity to attend college to people with low and moderate incomes, some states are offering new tuition-assistance programs that lower the cost of attendance. At least 11 states offer free tuition for community colleges after considering Pell and other grants. For example, New York offers a program that will pay the cost of in-state tuition for students from families with low and moderate incomes. The Excelsior Scholarship Program offers free undergraduate tuition (after Pell and other grants are applied) to students whose families make less than $125,000 per year. Although these students still must pay fees and other expenses, which can be substantial, this is a positive step toward reducing the debt burden on students with low and moderate incomes. In exchange for free tuition, these students must take at least 30 credit hours per year and agree to live in New York for the length of time they are in the program. As another example, since 2014, the Tennessee Promise program has offered two years of tuition-free community college or technical school to all recent high school graduates as a last-dollar scholarship (utilized after other aid funds are applied). In 2018, the Tennessee Reconnect program extended this benefit to all adults who had not attained at least an associate degree. Other states’ programs have similar work, service, or residency requirements. 

Impact on race and ethnicity: Student loans pose disproportionate burdens on people from nonwhite racial and ethnic groups. They take out more student loans. For example, 90 percent of Black and 72 percent of Hispanic/Latino undergraduates take out student loans, compared with 66 percent of white undergraduates. In addition, Black and Hispanic/Latino borrowers are more likely to default on those loans. One analysis of federal student loans found that Black Americans typically owe more than they borrowed 12 years after taking on that debt, with nearly half of these borrowers defaulting. A 2017 AARP survey found that among people age 40 and older who were carrying debt to help others go to college or had repaid such debt within the past five years, Black and Hispanic/Latino Americans were more likely to still have outstanding student debt of their own. The widening wealth gap between white and nonwhite people can help explain both this higher propensity to take out loans and the higher rates of loan default. 

Problems with for-profit colleges: For-profit colleges claim to expand educational opportunities for underserved populations, who are more likely to attend them. This includes historically disadvantaged racial and ethnic groups, people with low incomes, single parents, and older students seeking new skills. But for-profit colleges are expensive and often do not offer valuable educational opportunities for students. This makes them especially risky for the vulnerable students who typically enroll. More than half of them ultimately drop out. One study of data obtained through a Freedom of Information Act request with the Department of Education found that for-profit colleges accounted for 99 percent of fraud claims filed by students. At the same time, for-profit colleges only enrolled 10 percent of students yet accounted for 18 percent of outstanding federal loan dollars. 

One study found that the vast majority of for-profit college students experience higher debt and lower pay than they did before. In addition, a Senate investigation found that for-profit colleges had more than 2.5 times the number of recruiters for each employee providing support services. In 2010, for-profit colleges employed more than 35,000 recruiters but just over 3,500 career services staff and just under 12,500 support services staff, according to the Senate Health, Education, Labor, and Pensions Committee. 

Given the high cost and negative outcomes of for-profit colleges, these institutions sometimes use aggressive sales tactics, such as highlighting false program graduation and employment rates, to attract students. According to a Senate investigation, recruiting at these schools is “essentially a sales process,” focused on enrolling vulnerable students without regard to whether the school will provide educational opportunities for them. Some have been shut down for fraud. For example, several large chains of for-profit colleges were shuttered after the schools lost their accreditation and the federal government announced that new students would not qualify for financial aid. Because for-profit colleges receive the vast majority of their funding from students who receive federal student aid (including federal loans, Pell grants, and GI bill benefits), they typically shut down when their students can no longer receive that aid. The federal government plays a large role in the proliferation of for-profit colleges. For example, the Senate Health, Education, Labor, and Pensions Committee found that federal taxpayers invested $32 billion in for-profit colleges per year and that for-profit colleges receive 86 percent of their revenues from taxpayers. 

Income share agreements: In recent years, some colleges and noncollege training programs have started offering income share agreements (ISAs) as an alternative or complement to traditional student loans. ISAs provide students with up-front educational funding in exchange for a percentage of future income. They may substitute for parent borrowing or private student loans. But ISAs also have the potential to be a more expensive and riskier option than other forms of financing. ISAs currently are not subject to the consumer and civil rights laws that normally apply to credit products, and their repayment provisions are generally less generous and less flexible than federal student loans. While participants are only required to make payments when their incomes are above a minimum threshold, ISAs do not have loan forgiveness provisions. Therefore, borrowers may continue to owe obligations over an extended period of time, regardless of their future circumstances. Particularly when combined with federal or private student loans, borrowers who take out ISAs may have highly unaffordable repayment obligations. 

Abuses in servicing and debt collection: Regardless of the program's quality, once a borrower is required to repay a student loan, other potential problems can arise. Student loan servicers are companies that collect debt payments on behalf of lenders. Servicers have often been accused of engaging in deceptive practices. According to the CFPB, nearly two-thirds of complaints they receive about student loans relate to servicing problems. For example, borrowers complain that servicers are not putting them into income-driven repayment plans that would substantially lower their monthly payments even though they meet eligibility requirements. Instead, servicers simply suspend payments for struggling borrowers, which increases the interest owed over the life of the loan. Other borrowers complain about improperly applied payments. 

Student loan borrowers who default on their debt face additional problems because of the abusive practices of some debt collection agencies. The Federal Trade Commission has taken enforcement action against debt collectors for illegally harassing student loan borrowers. Older federal student loan borrowers have complained to the Consumer Financial Protection Bureau that debt collection account errors have led to improper Social Security garnishment. 

In response to servicing challenges, several states have established student loan ombudsmen to monitor and address borrowers’ concerns. Some now also license student loan servicers for both federal and private loans. This enables states to ensure that minimum standards are met and that servicers can be held accountable if they fail to adequately meet borrowers’ needs. 

Unlike other consumer debts, both federal and private student loans are largely ineligible to be discharged in bankruptcy under current law (see also the Bankruptcy section of this chapter). Bankruptcy discharges for student loans are only available in very limited circumstances, often requiring the borrower to prove a higher standard of financial distress than what is necessary to discharge other types of debt. However, federal loans can be discharged administratively outside of bankruptcy in cases of death, permanent disability, or a small number of other scenarios. 

Federal repayment plans: The Department of Education offers income-driven repayment plans for students who take out loans but cannot afford the standard payment amount. Payments can be as low as 10 percent of discretionary income. But federal Parent PLUS borrowers cannot directly enroll in income-driven repayment plans. Those wishing to do so must first consolidate their federal loans, then apply for the least generous income-driven repayment plan. This could still leave them in debt for 25 years. In addition, federal student loan borrowers who are in default cannot enter into an income-driven repayment plan until they “cure” the default. Yet, they may be in default because their required payments were never affordable, and they did not know that they could enroll in income-driven repayment plans prior to defaulting. 

Right to redress: Students at some institutions—including 98 percent of students at federally funded for-profit colleges—are prohibited from going to court to settle disputes. Instead, they are required to go to arbitration and may not pursue class claims even in arbitration (see also Pre-Dispute Mandatory Binding Arbitration). This is true even though some of these for-profit institutions have engaged in fraud or have not provided a return on the substantial investment a student may have paid. Students can suffer high financial damages in these situations and end up without a degree and with credits that cannot be transferred to other institutions. 

Repayment during declared emergencies: Borrowers may have difficulty repaying loans during declared emergencies, such as pandemics and natural disasters. Government action can help them stay afloat. For example, the COVID-19 pandemic in 2020 spurred a deep recession in part because many businesses were forced to close, and people lost their jobs. In response, Congress and the Department of Education provided relief for borrowers of student loans owned by the federal government. Relief included automatically deferring payments, waiving interest accrual, and suspending collections. This provided temporary payment relief to millions of borrowers facing financial uncertainty, who still had the option of making payments if they chose. Other loans, including federally guaranteed student loans owned by private companies or higher education institutions, as well as private student loans, did not have automatic relief. Some servicers of these non-federally held loans, as part of a negotiated agreement with state attorneys general, voluntarily provided limited relief to borrowers.