What Went Wrong with Federal Student Loans?

40 Pages Posted: 14 May 2024

See all articles by Constantine Yannelis

Constantine Yannelis

University of Chicago

Adam Looney

University of Utah - David Eccles School of Business; Brookings Institution

Multiple version iconThere are 2 versions of this paper

Date Written: May 13, 2024


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.

Keywords: Student Loans, Education, Household Finance, Loan Default

JEL Classification: D14, G28, H52, H81

Suggested Citation

Yannelis, Constantine and Looney, Adam, What Went Wrong with Federal Student Loans? (May 13, 2024). University of Chicago, Becker Friedman Institute for Economics Working Paper No. 2024-60, Available at SSRN: https://ssrn.com/abstract=4826794 or http://dx.doi.org/10.2139/ssrn.4826794

Constantine Yannelis (Contact Author)

University of Chicago ( email )

1101 East 58th Street
Chicago, IL 60637
United States

Adam Looney

University of Utah - David Eccles School of Business ( email )

1645 E Campus Center Dr
Salt Lake City, UT 84112-9303
United States

Brookings Institution ( email )

1775 Massachusetts Ave NW
Washington, DC 20036
United States

HOME PAGE: http://www.brookings.edu/experts/looneya.aspx

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