Student Loans

In the second quarter of 2024, Americans owed $1.6 trillion in outstanding student loan debt. Although younger people hold most of this debt, older Americans increasingly find themselves saddled with student loan debt as well. Approximately 25 percent of this debt, or $391 billion, is held by people age 50 and older.

Impact on retirement savings: Carrying student debt throughout one’s working years makes it harder for people to save for retirement. Moreover, student debt can directly affect retirement income, as those who default on federal student loans are subject to Social Security offset (similar to garnishment). Up to 15 percent of their monthly Social Security checks can be offset to repay federal student loans.

Older Americans who obtain student loans to help finance the cost of college for others primarily use two types of loans.

• Parent PLUS loans: These are offered directly to parents of undergraduates from the federal government with limited underwriting. As such, 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.

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. 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 32 states offer tuition-free college programs. Many offer this after considering scholarships, Pell, and other grants.

Student loan impact by race and ethnicity: Student loans pose disproportionate burdens on people from nonwhite racial and ethnic groups. They take out more student loans. For example, 81 percent of African American and 60 percent of Hispanic/Latino undergraduates take out student loans, compared with 59 percent of white undergraduates. In addition, Black and Hispanic/Latino borrowers are more likely to default on those loans. 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 racial and ethnic groups that are discriminated against, 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 found that the vast majority of for-profit college students experience higher debt and lower pay than they did before.

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. Over the past several years, the federal government provided $28.7 billion in loan forgiveness to more than 1.6 billion borrowers who were cheated by their schools, saw their schools close, or were covered by court settlements.

Income-share agreements (ISAs): In recent years, some colleges and noncollege training programs have started offering 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.

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. A 2024 CFPB report on consumer complaints found that servicers made a range of costly errors that led to consumer hardship. These included miscalculated billing statements, miscredited payments, credit reporting errors, and delays in discharging loans. Sometimes, servicers are not placing borrowers into 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.

Highlighting problems in the servicing industry, in 2024, the CFPB filed a proposed order against Navient “for years of failures and lawbreaking.” Navient illegally steered borrowers into more costly repayment options by preventing them from enrolling in affordable income-driven repayment plans. The order would ban Navient from continuing to service or acquire federal student loans in the future. It would also require Navient to pay $100 million in redress for harmed borrowers and $20 million in penalties.

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.

For many years, both federal and private student loans have been largely ineligible to be discharged in bankruptcy, unlike other types of consumer debts. However, federal regulators made this easier in 2022 (see also Bankruptcy). Bankruptcy discharges for student loans historically were 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. Federal loans could be discharged administratively outside of bankruptcy in cases of death, permanent disability, or a small number of other scenarios. In 2022, however, the Justice Department and the Education Department issued guidance to help borrowers seeking hardship discharges. This made it easier to discharge student loan bankruptcy debt. As of this writing, it is unclear whether this guidance will remain in place.

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. Typically, borrowers who make all payments on time have the rest of their debt forgiven at the end of the loan period. However, federal Parent PLUS borrowers cannot directly enroll in these plans. Those wishing to do so must first consolidate their federal loans and then apply for the least generous such plan. This could still leave them in debt for 25 years.

Redress for harms: 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. In these situations, students can suffer high financial damages and end up without a degree and with credits that cannot be transferred to other institutions.