Is the Federal Student Loan Program is in its Death Throes?
The Pandemic was the Nail in the Coffin. It must be ended and replaced.
Lending systems fail from time to time. Sometimes spectacularly. The federal student loan program, by all rational metrics, has failed. Spectacularly. Frankly, this happened during the Pandemic.
Before the pandemic, the Brookings Institute estimated that student loan defaults for the Class of 2004 would reach 40%. This is double the default rate for subprime home mortgages. These borrowers, however, were borrowing less than a third (roughly $13,000) of what is borrowed today (roughly $39,000). Given only modest growth in wages since ’04, it is no stretch to say that defaults for all current student loan borrowers were going to be at least 50% (if not higher)…before the pandemic. Recently passed legislation (The “Big, Beautiful Bill”)- which greatly limits deferments and forbearances and generally makes the loans more punitive and predatory- ensure a far higher default rate still.
In 2019, Education Secretary Betsy DeVos acknowledged that 75% of all federal student loan borrowers were “unable to pay down their loans”. Wayne Johnson, the Federal Student Aid Director, said that this was closer to 80% in the first months of 2020, and more recently claimed that 85% of all borrowers were never going to be able to repay their student loan debt.
Department of Education data from before the pandemic shows that more than half of all borrowers (58.9% when including $0 payers in Income Driven Repayment plans) weren’t paying at all. As of January 2025, with federal student loan repayment resumed, the overall non-payment rate has screamed up to 75%, and that is likely to rise over time.
More disturbing: Older people now significantly outnumber younger people with student loans. Well over half of all borrowers are now over 35 years old, not under 35, and people over 50 with student loans now outnumber people under 25. For both of the older groups, they owe far more than their younger counterparts, despite having borrowed far less many years or decades ago. This disparity is increasing with time.
Equally disturbing: student loan debt in over half of U.S. States now exceeds their state budgets. This is most prominent in historically red, conservative states, with student debt in 5 southern states now more than double the state budget.
Analysis of the average student loan debt/borrower vs. average earnings for the various states yields a similar map. While student loan debt is not good in any of the states, southern, red states are being hit exceptionally hard.
The Department of Education is now taking more interest-essentially profit- out of the states than many of their major industries bring in, totaling around $110 Billion nationally. More interest is taken out of the State of Maine than all the lobsters produced every year. More interest is taken out of the State of Florida than Disneyworld brings in in annual revenue. There are many more examples of this for nearly every state.
The social harms this debt is causing the citizens is increasingly shocking, tragic, and has increased significantly over the past two years. This includes a family suicide in Oklahoma where the family had attempted to discharge their student debt in bankruptcy, and even a brutal murder where a student loan borrower literally declared war on the federal government after losing a lawsuit against the Department of Education. These sorts of tragic outcomes will surely proliferate going forward.
A default rate 3–4 times higher than the subprime rate. 75% of borrowers not paying. 85% of all borrowers underwater. Older borrowers outnumbering younger borrowers, and owing far more despite having borrowed far less. People fleeing the country, committing suicide, and even murder as a result of their student loans. This is indisputable, clinching evidence of a catastrophically failed- and nationally threatening- lending system that cannot be allowed to continue.
The 45 million borrowers have obviously inculcated this. They had over 3 years of non-payment during the pandemic to reflect. They saw trillions in economic stimulus (including $1 Trillion in PPP loans that don’t need to be repaid) thrown out to the country. Much of this stimulus has gone to millionaires, billionaires, and even colleges, who have never been in a stronger financial position than they are right now.
They saw the Biden Administration bungle a half-hearted cancellation effort after initially refusing (despite a pre-election pledge to “eliminate” the student debt of people who had attended public colleges or HBCU’s). They saw key Democrats like Nancy Pelosi play a key role in killing the feeble attempt.
Most recently, they saw many more trillions handed out to the wealthiest in the country in “Big, Beautiful” tax cuts, while student loans were made even more predatory and painful. They also saw the Republicans promise to “eliminate” the Department of Education, only to see it remain fully intact, and in fact see an increase in its funding as a result of the bill.
And of course, while claiming to be intent on “dismantling” the Department of Education, Trump shoe-horned yet another layer of bureaucracy into the already dysfunctional/non-functioning student loan program by “moving” the loans to the Small Business Administration, which has never administered a loan program even a small fraction of the size or complexity as the federal student loan program. Even beltway NGO’s are now acknowledging this publicly.
This is essentially like taking a sledgehammer to a broken clock. The lending system is toast, and everyone in Washington HAS to know it.
Critically: The borrowers have largely come to understand- viscerally if not intellectually- that the loans are a predatory scam. There simply are no loans from which bankruptcy rights, statutes of limitation, Truth-in-Lending laws, and other fundamental consumer protections have been removed.
This wholesale stripping of rights has weaponized the lending system, and led to widespread, often life-long abuse of the borrowers at the hands of the colleges, lending companies, and especially the Department of Education, which fights tooth and nail to keep bankruptcy rights gone from its massively predatory cash cow. People know when they are being abused, and this is reflected in the repayment data.
The damage this vicious predatory loan scam has caused the citizenry to date has been massive. The damage it is poised to inflict upon the nation is incalculable. The people will no longer tolerate it. The loans will not be paid. The lending system is finished.
Conservative Grover Norquist (who hilariously now fights for this big-government loan program), once said that government should be small enough that if needed, it could be “taken to the bath, and drowned in the tub”. This is precisely what is needed for federal student loans.
The President should immediately suspend the lending program, and (with Congress) implement a temporary (1–2 year) direct funding plan for the colleges at significantly reduced funding levels. During this hiatus, the Department of Education, Congress, Executive Branch and other stakeholders (which must include/emphasize affected citizens) should develop and deploy a new funding model that maximizes educational attainment and minimizes cost. If loans are to be retained in such a model, they must have all of the standard consumer protections (i.e. bankruptcy rights, statutes of limitations, etc) as other commercial loans, and be free, or nearly free of interest, as originally intended when the Higher Education Act was passed in 1965.
Congress should repeal 11 USC 523(a)(8) entirely, and remove the essentially-impossible-to-prove criterion of “Undue Hardship” from consideration in bankruptcy proceedings for student loan borrowers. This will ensure that student loans are treated in the same, uniform manner as all other loans.
Until such legislation is passed, the President should immediately order the Department of Education to suspend its “new” bankruptcy process, and instead simply stop opposing student loan borrowers’ Undue Hardship claims in bankruptcy court, “Undue Hardship” is sufficiently vague/ill-defined to justify this action.
For discharged debt, the colleges, collectively, should be compelled to reimburse the government for at least half of the amounts originally borrowed, with wealthier colleges assuming a proportional share of the financial burden.
Finally, the President should be prepared to invoke section 1082 of the Higher Education Act- with or without Congress, and regardless of restrictive language passed in the Big, Beautiful Bill, and cancel federally owned student loans as deemed necessary, depending on the volume of bankruptcies that result.
President Trump can spend the next 3 years pretending that the federal student loan system is viable, and preside over a painful, messy, probably civilly-unrestful unwinding. Or, he (or his successor) can toss this train wreck on the scrapheap of failed U.S. policy experiments, and spend that time creating an efficient, fair, and un-corrupted higher education financing system that actually works.
Below are just a few examples of the tens of millions of citizens who have been decimated by this shameless, government profiteering. They are willing to be interviewed.
