The Volume and Repayment of Federal Student Loans: 1995 to 2017

The volume and number of federal student loans, which provide financing to make higher education more accessible, have grown over the past few decades. In 2017, the most recent year for which detailed information was available, $96 billion in new federal student loans was disbursed to 8.6 million students, compared with $36 billion (in 2017 dollars) disbursed to 4.1 million students in 1995. Between 1995 and 2017, the balance of outstanding federal student loan debt increased more than sevenfold, from $187 billion to $1.4 trillion (in 2017 dollars).

In this report, the Congressional Budget Office examines the factors that contributed to the growth in the volume of student loans and the effects of changes to student loan policy on borrowing and repayment. Because the report focuses on the period between 1995 and 2017, it does not cover the effects of the Coronavirus Aid, Relief, and Economic Security (CARES) Act, which was enacted on March 27, 2020.

How Do the Federal Student Loan Programs Work?

Between 1995 and 2017, students could borrow through two major federal student loan programs, the Federal Family Education Loan (FFEL) program, which guaranteed loans issued by banks and other lenders through 2010, and the William D. Ford Federal Direct Loan program, through which the federal government has issued loans directly since 1994. The two programs operated in parallel through 2010, either guaranteeing or issuing loans to students under nearly identical terms and conditions.

The direct loan program continues to offer various types of loans and repayment plans. Loans are limited to a maximum amount (which differs by type of loan) and are extended at an interest rate specific to loan type and year. After borrowers finish their schooling, they repay their loans according to one of the available repayment plans. Required monthly payments are determined by the amount borrowed, the interest rate, and the repayment plan. Borrowers who consistently fail to make the required payments are considered to have defaulted on their loans, at which point the government or loan provider can try to recover the owed funds through other means, such as by garnishing wages. Under certain repayment plans, qualified borrowers can receive forgiveness of their remaining loan balance after a specific amount of time—10, 20, or 25 years.

Why Has the Volume of Student Loans Grown So Much Over Time?

The volume of student loans has grown because the number of borrowers increased, the average amount they borrowed increased, and the rate at which they repaid their loans slowed. Certain parameters of the student loans—in particular, borrowing limits, interest rates, and repayment plans—changed over time, which affected borrowing and repayment, but the largest drivers of that growth were factors outside of policymakers’ direct control. For example, total enrollment in postsecondary schooling and the average cost of tuition both increased substantially between 1995 and 2017.

Much of the overall increase in borrowing was the result of a disproportionate increase in the number of students who borrowed to attend for-profit schools. Total borrowing to attend for-profit schools increased substantially, from 9 percent of total student loan disbursements in 1995 to 14 percent in 2017. (For undergraduate students who borrowed to attend for-profit schools, the share grew from 11 percent to 16 percent; for graduate students, it grew from 2 percent to 12 percent.) Moreover, students who attended for-profit schools were more likely to leave school without completing their programs and to fare worse in the job market than students who attended other types of schools; they were also more likely to default on their loans.

The parameters of federal student loans available to borrowers have changed periodically, and those changes have affected trends in borrowing and default. Between 1995 and 2017, policymakers introduced new types of loans and repayment plans (some of which allow for loan forgiveness after a certain time) and adjusted the parameters of existing loan types and repayment plans. This report focuses on changes in loan parameters that are most relevant to borrowers—borrowing limits, interest rates, and repayment plans—and the consequences of those changes on borrowing and default.

• Borrowing Limits. Federal student loans are subject to borrowing limits. All loans are limited by the student’s expected cost of attending a school, but most loans have more stringent annual and lifetime borrowing limits. For example, since 2009, dependent undergraduate students have not been allowed to borrow more than $31,000 in federal student loans for all of their undergraduate schooling. Borrowers have responded to those loan limits; when the limits increased, they tended to borrow more, which also increased their required monthly payment. After accounting for the borrowers’ and schools’ characteristics, CBO found that larger monthly payments were associated with a slightly increased likelihood of default.
• Interest Rates. The interest rates on federal student loans varied considerably between 1995 and 2017. Until 2006, loans were issued with variable interest rates, which were indexed to a market interest rate and changed in step with that market rate from year to year. After 2006, loans were issued with fixed interest rates, which were set in the year of disbursement and then remained constant for the life of the loan.

  Interest rates have had a small effect on the amount borrowed by graduate students, who were less restricted by borrowing limits than undergraduates. Higher rates were associated with a slight reduction in the amount of borrowing; lower rates were associated with a slight increase. For example, interest rates on student loans were lower during academic years 2014 to 2017 than they were from 2007 to 2013, slightly boosting graduate borrowing. Undergraduate borrowers did not appear to be sensitive to interest rates. After the borrowers’ and schools’ characteristics (such as the type or academic level of the school attended) were accounted for, higher monthly payments—which can result from higher interest rates—were associated with slightly higher rates of default.

• Repayment Plans. A borrower’s repayment plan, along with the amount borrowed and the interest rate, determines the monthly payment required on the loan. Under the standard repayment plan, loans are repaid over 10 years. A variety of alternative repayment plans are available. Some of those plans extend the repayment period to 25 or 30 years; others, called income-driven repayment (IDR) plans, tie required payments to borrowers’ incomes and provide loan forgiveness after a certain period. In the first few years after borrowers enter repayment, the required payments under IDR plans are often too small to cover the interest that accrues on the loan, which contributed to rising levels of debt.

  CBO found that repayment plans that lowered a borrower’s monthly payments tended to decrease the incidence of default. Because borrowers select repayment plans after deciding how much to borrow, CBO did not estimate the effects of repayment plans on the amount students borrowed.