The Student Loan Problem Isn't What You Think

When Lisa Jones went back to school at age 43, she thought it would be worth it. The master’s and doctorate degrees she earned from the University of Minnesota helped her find a job she loves, at a nonprofit that works with school districts to improve student mental health. But now, at age 63, she still has $77,000 in student loan debt, and she worries that she’ll die before she pays it off.

Dying “just seems a dumb way to get out of a student loan,” she says. “It’s something I think about all the time. It weighs on me.” And she doesn’t think she should be barred from pursuing higher education just because she doesn’t come from an affluent background. “You’re telling me that the only people who should be able to go to college are those that have a lot of money and can pay cash for it?”

Struggling with student debt certainly isn’t unusual, and like Jones, millions of Americans have taken out college loans. During the pandemic, the government paused loan repayments and froze the accrual of interest. But now that’s over. The government has restarted efforts to collect unpaid loans, and borrowers who are behind could face serious consequences.

Collections are back

In early May, hundreds of thousands of borrowers started getting warning notices from the Department of the Treasury. If they don’t act soon, the department said, the government could start taking money from their federal benefits or Social Security checks as early as June. Later this summer, all 5.3 million people whose loans are currently in default will get a similar notice and could be subject to having their wages garnished.

The renewed emphasis on collections comes at a time when record numbers of people are behind on their student loan payments. As of February 2025, about one in five borrowers who owe on a student loan were more than 90 days late, according to the credit agency TransUnion. That’s the highest rate ever recorded. Before the pandemic in 2020, it was closer to one in ten.

In April, the Department of Education shared more numbers. Right now, 42.7 million people in the US owe student loans, totaling over $1.6 trillion. More than five million people haven’t made a payment in over a year, and nearly 10 million could be in default in a few months if nothing changes. That’s about one in four federal loan borrowers.

How did we get here?

Before the 1950s, most people who went to college were well-off enough to afford tuition. But WWII and the Cold War began to reshape college attendance. The GI Bill made college affordable for many more servicemembers, although racial discrimination still prevented Black Americans from accessing the full benefits of the GI Bill. During the late 1950s, the US government wanted to help more students get science and math degrees so that the country could compete with the Soviet Union. Congress passed a law called the National Defense Education Act, which created the first major student loan program.

Later, in 1965, the government made even bigger changes with the Higher Education Act. This law created more loan and grant programs to help more people go to college, especially those from low-income families.

Grants don’t have to be paid back, but loans have to be repaid with interest. And the terms of those loans – and the way they are serviced – are often less forgiving than you can imagine.

Student loan interest is calculated daily, and on a standard repayment plan, the borrower’s monthly payment includes all the interest charged for that month. But if you pause your payments via deferment or forbearance, the unpaid interest gets added to your loan balance every day. (There are different policies based on the type of loan – some loan types do not accrue interest during a deferral, others do, and when a loan is in forbearance, it is accruing interest.) The same can be true if you’re making low payments through a plan based on your income (an income-driven repayment, or IDR, plan). These plans can help people who face short-term losses of income. But over time, the unpaid interest adds up and can result in a much greater debt.

Say you borrow $60,000 at a 6.5% interest rate and then put your payments into forbearance. On the first day, you’re charged about $10.68 in interest, or $60,000 × (0.065 ÷ 365). But the next day, you’re charged interest on your new balance of $60,010.68. The day after that, it’s even more. Over a year, this process adds about $4,030 to your debt.

It becomes a snowball: more interest leads to a bigger balance, which leads to even more interest, which leads to a bigger balance. It means that people who think they are making progress on their loan and paying monthly can still see their loan balances go up, rather than down, despite their regular payments.

How the system becomes predatory

It’s easy for borrowers to get lost in the details. Many don’t understand their loans. And in some cases, student loan servicers — which contract with the government to manage repayments — even manipulate people into accepting bad terms.

Beginning in 2017, a group of 39 states sued Navient, a loan servicer, claiming it had steered holders of federal loans away from plans that had low monthly payments and would not have caused the loan amount to increase. Instead, Navient pushed them into loan forbearance. That was cheaper for Navient but worse for the borrowers, because it guaranteed that capitalization of unpaid interest would cause their debt to keep growing.

The lawsuit also claimed that Navient gave private subprime loans to students who planned to attend for-profit schools with low graduation rates. In 2022, Navient settled, agreeing to cancel $1.7 billion in private loan debt and pay $95 million in restitution to borrowers.

Then, in 2024, Navient settled a separate federal lawsuit filed by the Consumer Financial Protection Bureau (CFPB), which also claimed that Navient had improperly pushed borrowers into forbearance. In addition, it said that Navient had (among other abuses) misallocated payments, misled borrowers about the conditions in which cosigners of private loans could be released from their debt, and harmed the credit of borrowers. As a result, Navient was banned from ever handling most federal student loans again. It also had to pay $100 million in restitution and a $20 million fine to the government.

MOHELA (the Higher Education Loan Authority of the State of Missouri) is another example. It still manages federal student loans for the US government, and it also runs the Public Service Loan Forgiveness (PSLF) program, which helps public workers like teachers and social workers get their student loans forgiven after enough payments.

But in 2023, the US Department of Education said MOHELA had made a huge mistake when student loan payments restarted after the pandemic. It failed to send bills to 2.5 million borrowers. Because of this, over 800,000 people were marked as late, even though it wasn’t their fault. MOHELA was fined over $7 million for this error.

In 2024, the American Federation of Teachers sued MOHELA, accusing it of a long list of abuses. These include intentionally not staffing their call centers and directing people to a self-service online portal, which was then under construction and did not allow people to get help before their payment was late; deducting payments from borrowers’ bank accounts without their consent; failing to send bills on time; misinforming borrowers about paperwork deadlines for affordable repayment plans; failing to process applications for loan relief in a timely way; and not processing refunds as required. A separate lawsuit by student borrowers in California alleges that MOHELA did not discharge students from loans even after the Department of Education had determined that it should. Neither suit has been settled.

The system can seem especially stacked against those who need help the most, like students who belong to racial minorities. And it doesn’t help that college is really expensive. For the 2024–25 school year, the average cost of a public university (in-state) is around $27,000 a year, including tuition, room, and board. At a private college, it’s closer to $59,000 a year. That means a student could easily graduate with six figures worth of debt for a bachelor’s degree — and even more if they don’t finish in four years or go to graduate school.

What Biden did

When Joe Biden ran for president, he promised to do something about student loans. During the COVID-19 pandemic, his administration paused loan payments and stopped interest from building up. Later, Biden announced a plan to cancel up to $20,000 in federal student debt for many borrowers. His administration said a law called the HEROES Act gave him the power to modify federal loans during a national emergency.

But the forgiveness plan faced lawsuits. Six Republican-led states and two individual student loan borrowers took the case to the Supreme Court, saying the plan broke feder

al law. The justices agreed. They said the HEROES Act allows only small changes during emergencies — not full debt cancellation. In their view, canceling that much debt was outside the intended scope of the law, and something only Congress would be able to authorize.

The Biden administration then made other changes to forgive or modify federal student loans. It expanded income-driven repayment plans, made it easier to qualify for the Public Service Loan Forgiveness (PSLF) program, which cancels student debt for people who work full time for the government or a nonprofit and who have already made ten years of payments.

One of the administration’s biggest changes was creating the SAVE Plan, an income-driven repayment plan that lowered payments for many borrowers without capitalizing unpaid interest, as long as people kept to their new payment amount.

What the Trump administration is doing

The Trump administration is changing course, aiming its sights on collecting from delinquent borrowers instead of advancing debt forgiveness plans.

“American taxpayers will no longer be forced to serve as collateral for irresponsible student loan policies,” Secretary of Education Linda McMahon said in April. “The Biden Administration misled borrowers: the executive branch does not have the constitutional authority to wipe debt away, nor do the loan balances simply disappear. Hundreds of billions have already been transferred to taxpayers. Going forward, the Department of Education, in conjunction with the Department of Treasury, will shepherd the student loan program responsibly and according to the law, which means helping borrowers return to repayment — both for the sake of their own financial health and our nation’s economic outlook.”

A couple of weeks later, borrowers started getting those warning notices in the mail.

The future of student debt

For millions of borrowers like Lisa Jones, the struggle with student loan debt is a burden that lasts long after they graduate. While some see it as a ticket to a better future, the road to paying off that debt can feel never-ending, especially when the system seems designed to make it harder, not easier. And for those facing collection tactics that seem punitive or who have been misled by student loan servicers, the weight of student loans can seem crushing.

The US Department of Education, by law, can seize up to 15% of your after-tax income, and as new collection efforts begin and borrowers feel the pinch, calls to ban MOHELA from servicing student loans are likely to increase. And meanwhile, the cost of college continues to climb.