Journal of Economic Perspectives
ISSN 0895-3309 (Print) | ISSN 1944-7965 (Online)
What Went Wrong with Federal Student Loans?
Journal of Economic Perspectives
vol. 38,
no. 3, Summer 2024
(pp. 209–36)
(Complimentary)
Abstract
At a time when the returns to college and graduate school are at historic highs, why do so many students struggle with their student loans? The increase in aggregate student debt and the struggles of today's student loan borrowers can be traced to changes in federal policies intended to broaden access to federal aid and educational opportunities, and which increased enrollment and borrowing in higher-risk circumstances. Starting in the late 1990s, policymakers weakened regulations that had constrained institutions from enrolling aid-dependent students. This led to rising enrollment of relatively disadvantaged students, but primarily at poor-performing, low-value institutions whose students systematically failed to complete a degree, struggled to repay their loans, defaulted at high rates, and foundered in the job market. As these new borrowers experienced similarly poor outcomes, their loans piled up, loan performance deteriorated, and with it the finances of the federal program. The crisis illustrates the important role that educational institutions play in access to postsecondary education and student outcomes, and difficulty of using broadly-available loans to subsidize investments in education when there is so much heterogeneity in outcomes across institutions and programs and in the ability to repay of students.Citation
Looney, Adam, and Constantine Yannelis. 2024. "What Went Wrong with Federal Student Loans?" Journal of Economic Perspectives, 38 (3): 209–36. DOI: 10.1257/jep.38.3.209Additional Materials
JEL Classification
- G51 Household Finance: Household Saving, Borrowing, Debt, and Wealth
- H52 National Government Expenditures and Education
- I22 Educational Finance; Financial Aid
- I23 Higher Education; Research Institutions
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