Are Student Loan Payments Too Broken To Bring Back?

One borrower paid $93,594.44, and all but 90 cents of it went to interest

Figurative custom illustration showing woman in graduation cap with a scale and question marks.

The Balance / Alice Morgan

Over the past two years, at least 37 million people with federal student loans have glimpsed a reality they may never have imagined: A world without loan payments or mounting interest. 

It’s a world that Vanji Unruh, a 59-year-old child welfare attorney from Exeter, California, could get used to. The roughly $26,000 in student loans she took out to go to college in the 1980s has haunted her ever since, ballooning into a balance of $132,174 because of a 9% interest rate.

Even more unbelievably, since 2007 (as far back as her loan servicer’s records go) she has paid $93,594.44 and all but 90 cents of it has gone to interest, according to records she showed to The Balance.

Key Takeaways

  • More than two years ago, the clock stopped for at least 37 million people with federal student loans. Their stories reveal why many are now questioning the entire lending system.
  • Before the pandemic triggered a freeze on payment obligations, interest accrual had many borrowers falling farther and farther behind. 
  • Without obligations on their student loans, some borrowers have paid off debts, but others have bought houses, had kids, or invested in the stock market. 
  • The money freed up has likely contributed somewhat to rising inflation, according to experts.
  • The White House is reportedly preparing to wipe out some portion of every borrower’s balance. Critics say it would be an unfair subsidy penalizing those who didn’t borrow or go to college.

“Since 18, my life has had this heaviness of student loan debt,” she said. “It is woven into my being. The shame of paying monthly for a debt that keeps increasing is horrible. I feel at fault, but I know I am not.”

Unruh is one of more than 9 million borrowers enrolled in an income-driven repayment (IDR) plan, where you pay a portion of your income (or even nothing, if you’re not earning enough) rather than a fixed amount. While this can help by keeping monthly payments manageable, the reduced payments can be a double-edged sword: They’re often not enough to cover the monthly interest amount, so loan balances can continue to grow even when borrowers are making all their payments.

When the government froze all obligations on federal loans at the start of the pandemic two years ago, it was the first time Unruh’s interest rate couldn’t inflate her balance. She was able to “chisel down that interest,” she said, paying a total of $62,000 over the two years and even letting herself crank up her home air conditioner in heat that sometimes reached 110 degrees. 

The unprecedented break from payments and interest accrual has been life-changing by many accounts, whether borrowers were in IDR plans or not. Unruh made headway on her balance, another borrower paid his off. Others said they bought houses, invested in the stock market, had children, or just made the rent with less stress. Not only that, but the reprieve has added momentum to proposals to actually wipe some portion of every borrower’s balance away. President Joe Biden recently suggested he may use his executive authority to do just that.

“It definitely did have a huge effect on people’s lives,” said Evan White, executive director of the California Policy Lab at the University of California Berkeley. The research organization estimated the pause freed up an average of $210 a month for affected borrowers, reducing the average monthly debt obligations (for things like mortgages and auto loans) by about a third.

Meanwhile, the longer the freeze goes on, the more questions arise about the student loan system: What cost is the rest of the country paying for the reprieve? What changes should be made to the student loan system while it’s in suspended animation? And is the system even worth saving? The freeze, an automatic forbearance period, has now been extended six times, most recently through Aug. 31.

Benefiting the Wealthy and Adding to Inflation?

Opponents of both the lengthy freeze and proposals to forgive some debt argue the policies are fundamentally unfair and disproportionately benefit higher-income White Americans who are more likely to have student debt, perhaps because they chose more expensive schooling (or were simply more likely to go to college) or decided not to work while studying.

They also consider any broad cancellation of debt a bailout taxpayers shouldn’t have to pay, and argue any money not going to paying down debt during the freeze has instead exacerbated inflation that shot up to a four-decade high earlier this year.

“The federal government is flooding the economy with so much money (via handouts, subsidies or payment pauses) that demand is growing too fast for production to keep up,” Americans for Tax Reform wrote in a commentary in March.

While that argument has merit, according to experts, the forbearance period is not the biggest contributor of additional money into the economy, they noted.

Marc Goldwein, senior policy director at the Committee for a Responsible Federal Budget, estimated that the suspension, assuming it ends in August, will have added somewhere around $200 billion to the economy. That’s a significant amount but relatively small compared to the trillions the government spent in response to COVID-19, including $867 billion for three rounds of stimulus checks and $953 billion on the Paycheck Protection Program.

Goldwein estimated the freeze is responsible for perhaps 0.2 percentage point per year of the increase in the PCE inflation rate, which rose to 6.3% from 1.9% during the two years.

“Any increase in spending is going to help contribute some to inflation, but this is such a small part of it, I don’t see that as the driver,” said William Chittenden, an associate professor of finance at Texas State University. Supply shortages and bottlenecks stemming from the pandemic and the war in Ukraine are the main culprits, he said.

Houses, Children

While people like Unruh took advantage of the freeze to pay down their debt, other borrowers did in fact redirect the money they would have used for student loan payments to other expenses, legitimizing both the concerns about inflation and the arguments in favor of loan forgiveness. 

Advocates of forgiveness say student debt is an unfair burden many have no choice but to take on: As state and local funding of higher education has dwindled, the average tuition at four-year colleges has at least doubled over the past 30 years (though the pace of increase did dip during the pandemic), and that’s after adjusting for inflation.

Plus, the student loan system is systemically flawed, advocates say, noting how many borrowers can’t get out from under their loans, let alone do many of the other things associated with the American Dream. 

Indeed, Lauren Hall of Oklahoma City, Oklahoma, said the reprieve from her $800-a-month payments enabled her and her husband to buy a house. She quit her job as an allergy specialist to become a stay-at-home mother to her then 6-month-old son, and then had another child.

“The pause basically started this domino effect in our financials,” Hall said in a social media direct message. “We took what we would have paid in loan payments and daycare payments (which basically took up my entire income), and put that in a savings account to finally stop renting and buy a house.”

If and when her payments resume, she would likely be forced to go back to work and would put her kids in daycare costing $2,000 a month.

"Student loans resuming is the only thing that would require a second income in our home,” she said.

A Broken System?

The federal student loan system has ballooned over the past few decades. In 2017, $96 billion in new federal student loans was disbursed to 8.6 million students, compared with $36 billion (in 2017 dollars) disbursed to 4.1 million students in 1995, according to a 2020 report from the Congressional Budget Office. In those 22 years, total outstanding balances increased more than sevenfold, from $187 billion to $1.4 trillion (in 2017 dollars).

As evidence that the system is broken, advocates for loan forgiveness point to how many borrowers weren’t paying their loans before COVID-19 triggered the forbearance period.

At the end of 2019, 41% of the federally managed student loans that you’d expect to be repaid (in other words, not the loans taken out by people still in school or within the grace period that follows) were in default, deferment, or forbearance, according to the National Student Loan Data System. And that’s not even counting the millions estimated to be in an IDR plan requiring no payment.

“The lending system is failed,” Alan Collinge, founder of Student Loan Justice, said in a Facebook message conversation. 

Because Black borrowers were more likely to be in default or otherwise unable to pay their loans, they may have benefited more from the suspension, said Fenaba Addo, an associate professor of public policy at the University of North Carolina at Chapel Hill. In a Center for American Progress analysis of data through 2017, 32% of Black or African American students who graduated in 2011-2012 were in default, compared to 13% of White graduates. 

What’s more, falling further into debt is far too commonplace even when payments are being made. In December 2019, then-Education Secretary Betsy DeVos said borrowers for only one in four federal student loans were paying down both principal and interest. 

And the 2020 CBO report estimated that 56% of borrowers who entered their repayment period between 2010 and 2014 had their balance increase at some point between then and 2017, either because they had defaulted, were temporarily skipping payments, or had an IDR plan. 

Unruh, for example, doesn’t see any way she’ll be able to pay off her entire balance, let alone retire with any money saved, even though her job pays more than $70,000 a year. 

While loans in IDR plans—first offered in 1994—are eligible for forgiveness after 20-25 years of payments (and Unruh’s job in public service should make her eligible for forgiveness under a different path, she said), there have been a host of complications and dead ends, she said.  Between the loan servicer’s lack of records before 2007, Unruh’s past periods of forbearance or default, and the government’s seemingly ever-changing rules, she’s discouraged, to say the least. 

“I’m going to go the route of the death discharge, where your loans are discharged when you die,” she said.

'Until I Can't Defer Anymore'

It’s never a good sign when borrowers don’t expect to be able to repay their loans. One reason Bobbie Goodrum, an assistant school superintendent in Farmington, Michigan, went back to school—earning her doctorate in educational leadership—was to avoid having to resume student loan payments, she said.

Although Goodrum makes an enviable six-figure salary, she and her husband owe more than $200,000 in student loans, she estimated, and “life is super-expensive, especially with children,” she said. Most of their student loans are in deferment of one kind or another, meaning they’re able to temporarily skip payments, she said.

“The amount is so enormous, you get anxious just thinking about it,” she said. “I plan on deferring until I can’t defer anymore.”

The pandemic forbearance period, authorized first by the CARES Act and then extended by President Donald Trump and later Biden, was initially meant to give student borrowers some breathing room at a time when businesses were shutting down and laying off employees in droves. But now the unemployment rate is nearly back to pre-pandemic levels and workers in many sectors find themselves in high demand amid a persistent labor shortage. 

Other emergency pandemic measures, such as expanded unemployment benefits, are a distant memory, giving opponents reason to criticize the repeated extensions. 

“There's no economic justification,” said Goldwein of the Committee for a Responsible Federal Budget.

Longstanding Failures

Biden’s latest explanation for continuing the pause seemed to expand from the initial intent. In his April announcement extending it for a sixth time, he said he wanted to not only help borrowers avoid financial distress—a recent study by the Federal Reserve Bank of New York indicated many borrowers would fall behind on their student loans and other debts if payments resumed as originally scheduled in May—but give the Education Department more time to improve some of the loan programs.

Two weeks later, the department said it was embarking on a series of changes to address longstanding problems with two programs, the IDR program (the one Unruh is in) and the Public Service Loan Forgiveness program. Both have denied borrowers their rightful chance at loan forgiveness because of bureaucratic tie-ups, bad record keeping, and mismanagement by the companies that service the accounts, according to the department. 

But suspending payments because the student loan repayment system is problematic doesn’t make sense, according to Goldwein.

“Should we stop collecting tax payments until we reform the tax code?” Goldwein said. “Pausing everything that's a mess would be a disaster. Fix the train while it's moving.”

Broad Loan Forgiveness

When student loan payments will resume, and what the system will look like when they do, remain open questions. 

The Biden administration hasn’t ruled out extending the forbearance again, and Biden implied in late April that he might authorize blanket forgiveness of $10,000 per federal student loan borrower within weeks. More recently, the Washington Post reported that he had decided on $10,000 for borrowers under certain incomes, citing three people with knowledge of the matter.

Reactions to a potential $10,000 of debt forgiveness are mixed. 

Alisha Bell, a county commissioner in Michigan who estimated she owes roughly $20,000 some 20 years after taking out about $30,000 in loans, said reducing her balance by $10,000 would give her a “light at the end of the tunnel.” 

Goodrum, the assistant superintendent who owes 10 times that, said it would be a “drop in the bucket” for her but a step in the right direction for society. 

Michael Lingberg of Bishop, California, a public information officer for the state’s department of transportation, wouldn’t begrudge others getting forgiveness even after he took advantage of the interest-free period to pay off his entire $60,000 debt during the pause, throwing every dime he could at it. He used government stimulus checks, tax refunds, the $800 he earned from photographing a wedding, and even the $50 he earned from pulling weeds.

“I don’t care about what the government may or may not do. I’ve washed my hands of it,” he said in a social media direct message. “If other people get some of their loans forgiven, good for them.”

Have a question, comment, or story to share? You can reach Diccon at dhyatt@thebalance.com.

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