The official creation of the federal student loan system can be attributed to the Higher Education Act of 1965. What began as a noble endeavor to guarantee access to higher education for students from all economic backgrounds quickly turned into a complex situation of financial obligation. The 1990s saw the introduction of unsubsidised loans, leading to increased borrowing limits and sowing the seeds of the crisis facing the U.S. today. The subprime mortgage crisis of 2008, rooted in lax mortgage lending practices and a belief in perpetually rising house prices, bears striking similarities to the student loan issue. In both cases, a system based on optimistic premises was confronted with the harsh realities of economic dynamics.

While the amount of debt is alarming, the trajectory of this crisis has seen some fluctuations. Initiatives such as the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) and subsequent executive orders have brought tempo-rary relief to borrowers throughout 2021. These measures, while laudable, are akin to putting a band-aid on a deep wound. They have reduced the proportion of borrowers in arrears, but without tackling the root causes or proposing long-term solutions. Private institutions and federal loans play distinct roles in this story. Billions of dollars worth of student loans are being bundled and sold as Student Loan Asset-Backed Securities (SLABS) to large investors. This securitisation process, designed to spread and reduce the risk of default, comes with its own set of challenges and concerns. Experts have drawn parallels between SLABS and the subprime mortgage-backed securities of the 2008 crisis, highlighting the potential systemic risks they pose to the US economy, particularly if a significant number of borrowers simultaneously default. According to Bloomberg, 45% of students believe they will not be able to pay their student loans on time or at all.

This delay in home ownership not only affects individual financial trajectories, but also has wider implications for the housing market and associated indus-tries. In addition, the resumption of student loan repayments is expected to lead borrowers to cut other expenses, which could amount to more than $100 billion a year, as reported by the Washington Post. Such a significant reduction in discre-tionary spending could impact and weaken economic growth. In fact, some estimates suggest that U.S. GDP could fall by 0.1% due to the resumption of student loan repayments.

Beyond the financial results, the psychological burden of student debt is significant. The constant pressure of payments and the challenges of managing expenses create stress and anxiety. 54% of adults with student loans regret and feel their loans aren’t worth it, especially those earning less than $50,000 a year, underlining the disproportionate pressure on low-income earners.

Reducing interest rates on student loans is one proposed solution. This would lighten borrowers’ overall debt burden, making it easier to manage repayments. Some also suggest capping interest rates to keep them below a specified threshold. Income-based repayment plans, adjusting monthly payments according to the borrower’s income, are gaining in popularity as a potential solution. Although they may seem unfair in penalising success and its challenges, some believe that tying repayments to income will relieve the financial pressure on low-income borrowers. In addition, a consensus is emerging in favour of systemic reforms to higher education funding, including increasing public funding for public institutions, expanding financial aid programs, and exploring alternative financing models to reduce dependence on loans.

From an economic point of view, the relationship between the student loan crisis and broader economic trends will be crucial. Factors such as wage growth, employment opportunities and housing market dynamics influence borrowers’ ability to manage and repay their debts. In addition, the potential systemic risks posed by SLABS will be closely monitored by financial experts and regulators.