Student loans have become a major source of worry for Americans during the pandemic. Student loan debt—the second largest category of consumer debt after mortgages—ballooned to $1.73 trillion in the second quarter of 2021. Forty-three million student borrowers had debts, at an average of $39,351, noted a September report by the Education Data Initiative, a team of researchers that seeks to make information about the U.S. educational system accessible.
To ease the burden, the federal government instituted a moratorium in March of 2020. During this pause, which will end on January 31, 2022, loans are interest-free and not subject to repayment or penalties for nonpayment. The Consolidated Appropriations Act, 2021, permits companies to pay up to $5,250 of an employee’s student loans on a tax-free basis through December 31, 2025. [Editor's note: On December 22, Biden extended the pause another 90 days from Jan. 31 to May 1.]
“Loan forgiveness programs have become increasingly popular, especially among states where there are shortages of workers that are needed to grow the economy.”
Outside of the federal government, “States are also addressing the challenges created by student debt because of the negative effects on individuals and the broader economy,” says Andrew Smalley, a policy associate in the education program at the nonprofit National Conference of State Legislatures. “Our tracking database, which is updated monthly, shows that by early October, 178 bills in forty-three states were introduced in the 2021 legislative session.”
Statistics collected by the Education Data Initiative paint an alarming picture: Student loan debt is growing six times faster than the nation’s economy. One out of every ten Americans has defaulted on a student loan. In total, more than one million student loans enter default each year.
“Young people cannot achieve landmark goals such as buying a home, establishing a business, or starting a family,” says Smalley. “Long-term goals like saving for retirement are put on hold, which can cause distress decades after individuals complete their education.”
A Federal Reserve study found that student loans prevented 400,000 young Americans from buying homes from 2005 to 2014. In 2005, 45 percent of twenty-four to thirty-two-year-olds owned their own homes, compared to 36 percent in 2014. Among twenty-five to thirty-five-year-olds who were not saving for retirement, 39 percent said they are prioritizing student loan repayment, according to research from TIAA and the Massachusetts Institute of Technology AgeLab.
“Student debt isn’t just crushing young people; 6.3 million borrowers ages fifty to sixty-four and nearly a million people over sixty-five are still paying for a loved one’s education or their own,” Senator Elizabeth Warren, Democrat of Massachusetts, told Insider. “Student debt is one of the biggest contributors to the rise in the amount of debt seniors hold.”
Unlike most forms of debt, student loans cannot be discharged, so the federal government can garnish borrowers’ wages and up to 15 percent of Social Security benefits. A 2016 report conducted by the Government Accountability Office for Senator Warren and then Senator Claire McCaskill, Democrat of Missouri, found that more than 70 percent of garnished Social Security benefits went toward fees and interest, leaving many seniors with a reduced standard of living and a downward cycle that they couldn’t overcome.
Loan debt among Black college students is at crisis levels, the Brookings Institution concluded in a 2018 report. The report showed that Black students took out larger loans and had more difficulty repaying them than white borrowers. They also owed $7,400 more than their white peers when they received a bachelor’s degree ($23,400 versus $16,000).
Four years after graduation, Black students on average owed nearly $53,000, almost twice as much as their white peers who had repaid their loans at a faster rate. In addition to accumulated interest, many Black students had taken out additional loans for graduate school.
To help residents overcome their debts, various states have passed three types of relief: forgiveness or repayment of student loans, new tax credits or deductions, and loan oversight, says Smalley of the National Conference of State Legislatures. “Oversight measures have become increasingly common because student loan terms and repayment options are often confusing for borrowers.”
“Since 2017, five states have created tax credits for student loan payments. Like loan repayment programs, the tax credits can be an important part of a state’s strategic plan for economic development and talent retention.”
In 2017 alone, the Consumer Financial Protection Bureau handled about 23,000 complaints. “Twenty-one states responded by passing twenty-three oversight laws from 2017 to 2020, the NCSL’s student loan bill tracking database shows,” says Smalley. “The measures included licensing of the companies that service loans, borrowers’ bills of rights, and ombudsman offices.”
In addition to helping borrowers understand their rights and responsibilities, an ombudsman investigates complaints and acts as liaison for borrowers seeking consolidation or modification of their loans. It also assists defaulting borrowers in rebuilding their financial footing.
“I spend much of my time instilling hope in borrowers who are worn out from trying to obtain the information they need from loan servicers to correct billing errors, misappropriation of payments, inaccurate interest rate calculations, and other problems,” says Scott Kemp, student loan advocate in the office of the qualified education loan ombudsman at the State Council of Higher Education for Virginia.
“The risk of default is especially high for those who took out loans and didn’t finish their degrees because they don’t get the benefit of increased income that comes with credentials,” Kemp adds. “Although post-secondary education is a good long-term investment, students and their families must approach loans carefully.”
Kemp also advises the legislature and other state agencies about the types and prevalence of various problems so that long-term solutions can be designed and implemented.
States like Pennsylvania and Illinois have adopted measures to prevent excessive debts. Pennsylvania now requires institutions of higher education in the state to inform students of their loan balances and repayment options each year.
Although private loans are a small part of the student loan market, they are growing in number. In turn, Illinois has developed oversight procedures to ensure that these borrowers receive information and guidance tailored to them.
“Loan forgiveness programs have become increasingly popular, especially among states where there are shortages of workers that are needed to grow the economy,” says Smalley. “From 2017 to 2020, forty-one states enacted sixty bills, which provide gradual relief for a period of years and usually cap the amount of forgiveness a single borrower can receive.”
Established nearly two decades ago, Colorado’s loan forgiveness program for teachers received a boost in 2019 when the legislature approved funds for up to 100 educators each year with up to a $5,000 repayment per year for five years. Teachers who work in high-poverty schools, rural areas, linguistically diverse programs, and special education are eligible. Mathematics and science teachers are also eligible because Colorado hopes to encourage more young people to pursue careers in its growing high-tech sector.
Like many states, Hawaii has experienced shortages of health care workers, especially in rural areas. For fiscal year 2019-2020, the legislature appropriated $150,000 for loan payments for physicians, nurse practitioners, psychologists, social workers, and marriage and family counselors. Although physicians often have debts totaling $200,000 or more after their residency training, they generally earn more than do other health care professionals who have less debt but cannot afford to remain in Hawaii and establish practices, especially in low-income areas.
Several states have enacted loan repayment programs for law enforcement workers. In 2019, Texas’s Republican Governor Greg Abbott signed a law authorizing the Peace Officer Loan Repayment Assistance Program to encourage Texans to pursue law enforcement careers and remain on the force.
The legislation includes thirty-four types of eligible workers: sheriffs, constables, and marshals as well as investigators in district attorneys’ offices, agents of the Texas Alcoholic Beverage Commission, and airport police. Officers may receive up to $20,000 in loan forgiveness over a period of five years. In addition to sixty credits at an institution of higher education in Texas, initial applicants must have one year of full-time service in law enforcement in Texas.
In July 2021, Florida created a loan repayment program for assistant state attorneys and assistant public defenders. Applicants must work full time and earn less than $65,000 a year. The state pays $3,000 a year toward repayment of federal and state loans for assistant state attorneys and assistant public defenders who have four to seven years of experience and $5,000 for those with ten years.
“Since 2017, five states have created tax credits for student loan payments,” says Smalley. “Like loan repayment programs, the tax credits can be an important part of a state’s strategic plan for economic development and talent retention.”
Minnesota offers student loan tax credits of up to $500 for an individual and $1,000 for a married couple making payments on qualified education loans. The amount of the nonrefundable credit for the payment of principal and interest on loans depends on the resident’s income, loan payments, and original amount of the loan.
“The program is part of a tax bill that passed the special session in 2017 with bipartisan support,” says Tracy Fishman, assistant commissioner of the Minnesota Department of Revenue who is in charge of tax policy.
“Legislators and Governor Tim Walz recognized that student debt must be addressed to ensure that everyone pays their fair share of taxes,” she explains.“The most recent data from 2019 indicates that 51,000 taxpayers have taken advantage of the program for a total of $23.2 million. The average credit was $455.”
Fishman believes that more taxpayers will seek tax credits because the pandemic has increased financial desperation. Surveys indicate that student debt weighs heavily in daily decisions of whether to buy food as well as major expenditures such as cars.
“There are lots of language and cultural factors that affect student debt, so we are developing new materials and reaching out to organizations that work with these individuals to get the word out,” she says.
The program has long-term value for graduates and for the state, Fishman says. “Individuals feel more psychologically secure because the state has come through for them so they are more inclined to continue to live and work in Minnesota [rather] than to take their skills to other states that are competing with Minnesota for key industries.”
Maryland also offers tax credits for residents who have incurred at least $20,000 in student loan debt and have a remaining balance of at least $5,000. The state gives priority to taxpayers who did not receive tax credits in previous years, were eligible for in-state tuition, have degrees from institutions of higher education in the state, and have a high debt-to-income ratio.
Smalley predicts that states will continue to pass legislation to decrease student loan debt because post-secondary education has become a necessity. “The majority of jobs in the twenty-first century require these skills,” he concludes. “The cost of higher education has skyrocketed, so for many people the only way they can afford to go to school is to take out loans.”