Why student debt will keep rising despite loan-forgiveness programs lawmakers are proposing in Congress

student loan debt college — A graduating student wears a money lei, a necklace made of US dollar bills, at the Pasadena City College graduation ceremony, June 14, 2019, in Pasadena, California.
ROBYN BECK/AFP via Getty Images

US lawmakers are debating student debt-relief proposals, seeking help for people saddled with loans.
But the proposals on the table right now are not a comprehensive solution, experts say.
The problem is a cycle of student loan accumulation, and little education about how this debt works.
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It's a familiar sight each year: a sea of soon-to-be college graduates, seated in their caps and gowns, with families and friends watching proudly as they march, one-by-one, across the stage to receive their hard-earned degrees.

But for many of the 35 million student-loan borrowers in the US, the celebration is short-lived. Months out of college, their debts become due and payable, and for some, it will be a heavy burden.

Since entering office, President Joe Biden has encountered immense pressure to aggressively address the student-loan crisis.

Democratic Sens. Elizabeth Warren and Chuck Schumer in February announced a plan to wipe out up to $50,000 in student loans per borrower. But Biden dismissed it.

"I will not make that happen," he said. "I'm prepared to write off $10,000 in debt, but not 50," he said. "I don't think I have the authority to do it."

There is support for student debt relief across party lines. According to a national survey conducted by the Harris Poll in December, 55% of Americans favor total student loan forgiveness. And around 64% of respondents said they support writing off a fixed amount, like $10,000.

Education debt has been rising steadily for about a decade, experts told Insider. It's also been holding people back.

"Students who graduate with debt may put off life milestones such as buying a car, owning a home, getting married, or entering certain low-paying professions like teaching or social work," a 2006 report from the American Association of State Colleges and Universities says.

The problem persists, and has only gained momentum during the COVID-19 pandemic, which has shuttered businesses across the US and canceled out millions of jobs in the last year.

"Former students have not been able to get rid of their debt," said Andrew Pentis, a certified student-loan counselor at Student Loan Hero by LendingTree. "So it grows with interest, sometimes multiplying over years, if not decades."

Poor education about the dangers of debt

Too often, families of first-generation Americans reviewing financial-aid packages from colleges and universities don't realize the loans they see being offered must be repaid with interest.

Other times, families think of education loans as "good debt." They view it as "the price to pay for investing in your future, sometimes by getting a degree from a prestigious, but more expensive, school in order to climb the social ladder, Pentis said.

The government also doesn't do enough to explain its federal student-loan options. "A large cohort of borrowers leave school without fully understanding the weight of their debt, or their options for repaying it," Pentis said. "The government needs to take a more direct role in educating students about how to avoid federal student loans, not just offering them without explanation."

High schools also tend to gloss over the topic, he said.

"The family that's dead-set on paying six figures to send their child to the prestigious university," he said, "might not have considered that spending two years at a community college before transferring to that better four-year school could cut their overall costs and borrowing significantly."

Student debt is on the rise because college education is an industry in the United States, experts told Insider.

"Higher education operates as a free market," said Chris Mullin, strategy director of data and measurement at the Lumina Foundation, an organization committed to expanding higher-education access.

"As a result," Mullins said, "the cost a student pays can be set at what the market will bear."

college student — Peter Cade/Getty Images

The cost of tuition depends on a number of factors

College tuition is not regulated federally, and there are distinctions between the way private and public universities set them, which directly affects how much money students and their families will pay. Private university tuition costs are decided by the institutions themselves, student debt experts told Insider.

"Private schools obviously have more leeway when it comes to setting tuition and fees," Pentis said.

That's one of the reasons private institutions like New York University set much higher "sticker prices" on their tuitions than public colleges do. The sticker price is the tuition cost a student can expect to pay before grants, loans, and other types of financial aid kick in, which means not everyone pays the full or same amount for higher education.

And because private institutions have more leverage in setting tuition costs, the decision-making process behind it varies from one institution to another. This can lead to differences between the sticker price and the net price of tuition, with the net price being what a student ultimately pays for their education after financial aid has been applied.

Donna Desrochers, principal researcher at the education program run out of the American Institutes for Research, says higher-cost private universities may simply set those prices with the intention to subsidize the cost of tuition for students receiving financial aid.

"It may be that [for] NYU, or any other school, the higher price is taking some of those full-pay dollars from full-pay students, and trying to reallocate to provide aid for other students," Desrochers said.

Meanwhile, public-university tuition, which is typically more affordable, is set by individual states.

"Perhaps they have a lower sticker price, and maybe they're not reallocating as much aid to students," Desrochers said.

Sticker prices are a type of "complex marketing," according to Desrochers

"It's kind of like an airline, right? And people compare it to that, sometimes. You're paying different prices for different seats, depending on when you purchased it. And so, it's quite similar," she said. "They're trying to attract the class that they want."

Sticker prices also help institutions maintain their costs of operation, Desrochers said. Public colleges benefit from raising sticker prices, especially when states are contributing less money to higher-education budgets.

"That pays for less of the institution's costs," Desrochers explained. "It actually ends up shifting those costs onto students." Because of the recession brought on by the coronavirus, Desrochers expects to see states investing less in higher education, leading to institutions shifting those costs onto students instead of trying to minimize their spending.

"We see it every time after a recession," she said.

A good chunk of students do not pay the full sticker price for college tuition. According to a study from the National Association of College and University Business Officers, tuition on average was discounted by 46.3% for all undergraduates from 2018 to 2019.

This means, overall, institutions "give substantial grant aid," said Mullin, the Lumina Foundation strategy director.

Student debt-relief measures are still needed

Collectively, student-loan borrowers in the US owe more than $1.7 trillion. Trillion with a T. So conversations about how to address that debt will continue.

They will go a long way in helping borrowers "who don't have much of a chance to end their debt on their own," Pentis said.

But no relief measure will address the source of the problem: brand-new student loans.

If students and family members don't recognize the dangers of accumulating large amounts of debt at high interest rates, the pattern of rising student debt will continue, experts warn.

While tuition costs are not a federal decision, the government has two levers to pull to encourage colleges to alter tuition rates, Mullin said.

The government can change the amount of money it makes available to a single student or change who is eligible to get financial aid. That way, students will have fewer restrictions like part- or full-time status to receive federal aid. Schools might then give larger aid packages to students, Mullin said.

Additionally, the government can "provide consumer information" with the goal of disclosing data and supplying comparison points intended to help students make informed decisions about their college education.

"It can inform the public by effectively placing a warning on institutions, like the US Surgeon General's warning on a pack of cigarettes," Mullin said.

"This kind of 'warning' can take the shape of a requirement, for example, that institutions make public the workforce outcomes of their programs," he said, effectively showing students what kind of return on investment they can expect after graduating college.

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