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America's Student Debt Explosion: Understanding the Federal Government's Role

America’s system for financing higher education needs to be reformed. Too many students rely excessively on loans to finance their degrees, too few borrowers can afford to repay their loans once they leave school, and hundreds of billions of dollars in student debt are sitting on federal balance sheets.

Much of the current debate about higher education financing is focused on issues of access and affordability, including reducing college costs and expanding aid, especially to low-income and minority students. While these are important public-policy challenges, this paper examines a closely related but less-discussed issue: the role that the federal loan system has played in facilitating the rapid growth of student debt and the potential long-term consequences of that growth for the federal budget. A series of well-intentioned but flawed federal policies aimed at increasing the availability and attractiveness of student loans has, in part, encouraged systemic over-reliance on debt to finance higher education in the United States.

The federal loan system is increasingly strained, evidenced by swelling debt burdens and low repayment rates.

The federal loan system is increasingly strained, evidenced by swelling debt burdens and low repayment rates. The combination of these trends has the potential to create significant budget pressure, not only for students and their families but for the federal budget and, by extension, all American taxpayers. Unfortunately, the magnitude of taxpayer exposure is difficult to estimate, due to the uncertainty associated with federal budget forecasts. The federal student loan system, however, could clearly be improved to reduce both overall reliance on student loans and the budget risks associated with them.

This paper reviews the evolution of the federal role in financing higher education and how legislative actions and the federal budget process have led to heavy reliance on loans. It then analyzes trends in student borrowing and repayment, noting some of the potential implications for students, for the broader economy, and for the federal budget in particular, the difficulty of estimating the cost of student loans to the federal government.

The federal loan system could be improved to reduce overall reliance on student loans.

Furthermore, the paper examines some of the reasons why borrowing has increased and repayment rates have decreased over time, and it presents pros and cons for several possible policy approaches that may improve the efficiency and effectiveness of the student loan programs, reducing excessive reliance on debt and easing the federal government’s potential budgetary exposure.

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