Until Debt Do Us Part: College Students and Loans

September 08, 2020

Education has become a powerful tool for improving human capital; it is truly a passport to the future. It allows many to pull themselves up by their bootstraps, or, for the bootless, by their shoelaces.

At the same time, the price of such an education has proven to be crippling for many. Rising tuition and room and board costs have led many to turn to student loans for education. Student loan debt is a commitment millions find themselves unprepared for upon leaving college.

In this post, we’ll look at some stages of tying the knot with college debt:

  • Stage 1: The Attraction of Attending College
  • Stage 2: Financial Aid Viewed through Rose-Colored Glasses
  • Stage 3: For Debtor or Worse
  • Stage 4: Hindsight Is 20/20

We’ll also offer a little premarital counseling to students considering getting hitched to student loans.

Stage 1: The Attraction of Attending College

Children are constantly asked about their dreams and what they want to be when they become older. It soon becomes obvious to youngsters that many of their dream careers and professions require a college degree.

Data suggest that success is tied to education level. In 2013, the Georgetown University Center on Education and the Workforce predicted that nearly two-thirds of all jobs would require education beyond high school by 2020. Workforce education levels grew faster than predicted, with the workers in such jobs reaching 70% by 2018, according to a Chronicle of Higher Education article published in January.

Many students experience an initial attraction stage when they are beginning to research which college is best for them. But, as we noted in a previous Open Vault Blog post, teenagers today are much more wary of debt than previous generations. They watched their parents maneuver through the last decade’s subprime mortgage crisis and the negative effects that followed.

While they try to be more frugal and aware of debt, the price tag on degrees is steadily increasing. Including room and board and fees, the 2019-20 average annual cost of college was $21,950 for public four-year in-state colleges and $49,870 for private colleges, according to Trends in Higher Education data published by the College Board. That means a four-year bachelor’s degree could cost an average of at least $87,000 to upwards of $200,000.

It is not too surprising that over half of students end up taking on some debt to go to college, per findings from the Report on the Economic Well-Being of U.S. Households in 2019, released by the Federal Reserve Board in May 2020. They may have decided that the opportunity cost of not attending college—missing out on bigger salaries and more job options—is far too great. Scholarships might not be an option or might not fully cover costs.

Stage 2: Viewing Financial Aid through Rose-Colored Glasses

Eager to experience college life, millions of students each year click the Free Application for Federal Student Aid button: “SUBMIT MY FAFSA NOW.” Those four seemingly innocent words start them on a path that can lead them to a long contract and a commitment to terms and conditions which they may not have carefully considered.

What it takes to pay back thousands of dollars may be obscure to the average student.

Just a few years ago, in the 2015-16 academic year, over half of the students attending college were first-generation students. See Fact Sheet 1: First-generation College Students: Demographic Characteristics and Postsecondary Enrollment, which was produced in 2019 by RTI International. That means their parents wouldn’t have knowledge to pass on from first-hand experience in financing college.

Also, data from the National Center for Education Statistics show the most important factors to high school students when choosing a college are:

  • Quality/reputation
  • Having desired program of study
  • Job placement potential

The cost of college and the resulting debt is not the first thing students are thinking about.

Stage 3: For Debtor or Worse

Students typically set out to earn a degree they believe will lead to a long and fulfilling career. After graduating, and typically six months of forbearance, however, students can begin to feel the weight of the vows they made. They may have to make payments for up to 30 years, depending on their repayment plan. And those who never complete a degree must pay the debt just the same.

Some simple math paints a picture. In 2019, the typical amount of education debt (among those with any outstanding debt from their own education) was between $20,000 and $24,999, according to the Report on the Economic Well-Being of U.S. Households. That number mainly consists of student loan debt, but also includes credit card and other types of debt used to finance college.

The interest rate varies depending on a loan’s type and (for most types of federal student loans) the first disbursement date of the loan. The interest rates on different types of federal student loans for the 2020-21 school year ranges from 2.75% to 5.30%.The 2.75% rate can translate to upwards of $6,000 in interest over the 20-year life of a $20,000 loan. (See box.)

Sample Interest on a Student Loan

$20,000 loan (lower range of typical amount of education debt)

2.75% interest rate on undergraduate federal student loan

20-year length of loan

$6,023 total interest paid over 20 years

SOURCES: Report on the Economic Well-Being of U.S. Households; Federal Student Aid at the U.S. Department of Education; Nerd Wallet Student Loan Calculator

The student debt situation can be bleaker for those who attend for-profit institutions. Compared with students at other types of colleges, students who attend the more costly for-profits take on more debt, default on the debt at higher rates and have lower post-enrollment earnings. That’s according to a research paper published by the New York Fed in 2017 and revised in 2020. See Armona, Luis; Chakrabarti, Rajashri; and Lovenheim, Michael F. Student Debt and Default: The Role of For-Profit Colleges. Federal Reserve Bank of New York Staff Report No. 811, April 2017, revised February 2020.

Stage 4: Hindsight Is 20/20

Simple facts: Hold your breath!

  • The total amount of student loan debt in the U.S. was nearly $1.7 trillion as of mid-2020, according to Fed data.
  • Of those with education debt, 17% were behind on their payments in 2019, according to the Fed report on household economic well-being.
  • The number of federal student loan borrowers as of mid-2020 totaled 42.6 million, according to the U.S. Department of Education’s Federal Student Aid Portfolio Summary.

Premarital Counseling

Student debt can be a heavy burden. It behooves students to examine the options available to them before selecting a school and accepting loans. It’s vital that students understand they shoulder some responsibility as consumers.

They should carefully weigh the cost of the schools they are considering and the potential earnings with their expected degrees as both factors will affect their ability to repay student loans.

It’s also more important than ever to encourage financial literacy and personal finance knowledge, and the St. Louis Fed is a leading provider of excellent resources for economics, personal finance and other subjects for pre-K through adult audiences. Find videos, podcasts, online modules and more.


1 See Fact Sheet 1: First-generation College Students: Demographic Characteristics and Postsecondary Enrollment, which was produced in 2019 by RTI International.

2 See Armona, Luis; Chakrabarti, Rajashri; and Lovenheim, Michael F. Student Debt and Default: The Role of For-Profit Colleges. Federal Reserve Bank of New York Staff Report No. 811, April 2017, revised February 2020.

Peter Joseph served as an economic education intern at the St. Louis Fed’s Little Rock Branch during summer 2020.

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