From hopeful beginnings to a broken system, student loans reveal how policy choices turned higher learning into a lifelong financial trap.
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With the student debt crisis spiraling out of control, some media outlets have called it a “national emergency.” Outpacing most other borrowings by consumers, Americans who owed federal student loans more than doubled between 2000 and 2020, “from 21 million to 45 million, and the total amount they owed more than quadrupled from $387 billion to $1.8 trillion,” according to a 2024 article in Brookings.
A notable demographic shift has also emerged, with older borrowers now outnumbering younger ones, holding more debt despite having taken out smaller loans many years earlier. According to my analysis of the 2024 second quarter figures from the Department of Education, there are now 2.1 million more people over the age of 35 (23.7 million) with student loans than under the age of 35 (21.6 million), and they owe 160 percent more on average ($43,680 versus $27,250).
Approximately 5.3 million borrowers who had taken federal student loans are “in default,” states an April 2025 PBS article.
Improving access to education is integral to ensuring the economic success of any nation, leading to substantial returns in terms of salaries and gross domestic product. “When more individuals hold high-value credentials, workforce participation increases, financial security becomes attainable for more families, and economic growth accelerates. But these benefits won’t materialize without action. Federal and state governments must prioritize education funding, align learning with workforce needs, and reaffirm education as a public good,” according to an opinion piece in the nonprofit news publication, The 74.
Unlike the U.S., many other countries are prioritizing investing in education to support economic growth. If America doesn’t rectify its policies, which have led to “declining confidence in the value of a degree,” the situation could become irreparable in the future.
Student loans were introduced to make education more accessible for students from low-income backgrounds, which would eventually lead to better job opportunities. Far from achieving this goal, the flawed loan system has been monetized by politicians and companies over the years, keeping students in an endless cycle of debt.
“A generation ago, Congress privatized a student loan program intended to give more Americans access to higher education. In its place, lawmakers created another profit center for Wall Street and a system of college finance that has fed the nation’s cycle of inequality. Step by step, Congress has enacted one law after another to make student debt the worst kind of debt for Americans—and the best kind for banks and debt collectors,” states ABC15 Arizona.
The consequences of this financial burden are severe and worsening, leading to tragedy in some instances, like in the case of the Nelson family from Broken Arrow, Oklahoma. They filed for bankruptcy in 2020 as their debt grew, “most of which was unpaid student loans,” according to the New York Post. The family, including six children, was found dead in 2022 in what was termed a “murder-suicide,” owing mainly to their financial circumstances.
The student debt exceeds the state budget in most states (particularly Southern states), based on the first quarter 2025 data I analyzed. The increasing debt has resulted from a significant increase in borrowing and the cost of education over the years. The lending system, by all rational metrics, is a catastrophic failure.
Unfortunately, the political dynamics that have taken hold of both Congress and the White House over the past couple of decades—from both parties—have only solidified against student loan borrowers, perpetuating this broken and dangerous loan program. It is crucial that the public understand the history of how we arrived at this point, the current political and other dynamics at play, and, most importantly, how we can move away from the ledge we, as a nation, now find ourselves on.
The debtor’s revolt in Western Massachusetts, which took place in the 1780s and came to be called “Shays’ Rebellion,” was believed to have compelled the drafting and ratification of the U.S. Constitution, which laid out uniform bankruptcy laws.
When President Lyndon Johnson came to power, he signed the Higher Education Act (HEA) into law in 1965. The HEA “created… guaranteed loan programs establishing that loans borrowed by students from private loan companies were now guaranteed by the federal government if students defaulted,” according to the Boston University website. During the signing ceremony, Johnson declared that the loans would be “free of interest,” pointing out that the act would ensure that “the path of knowledge is open to all… [who] have the determination to walk it.”
In 1972, a hybrid, public-private company, Student Loan Marketing Association, which was later called Sallie Mae, was established to serve as a repurchaser and guarantor for federal student loans made by private banks. The company had all the profit-making incentives of a private company, but also had the full backing of the U.S. Treasury, whose money it used for its operations. This created a monopoly over the nascent student loan industry, and the company became the de facto expert and driving force, along with Congress, on legislative matters.
“In the mid-1990s, skyrocketing demand for student loans prompted by escalating college tuitions, expanding eligibility for student loans, and a host of new types of lending combined to make the student loan industry infinitely more complex, larger, and more lucrative. And Sallie Mae emerged as the industry’s biggest player,” stated a 2007 report, “Leading Lady: Sallie Mae and the Origins of Today’s Student Loan Controversy.”
In 1976, bipartisan legislation—pushed by Sallie Mae and other related financial interests in Washington—was enacted by Congress, which made federal student loans non-dischargeable in bankruptcy for five years after the repayment period started, unless borrowers could show “undue hardship.” The reason given for this unprecedented removal of standard bankruptcy rights from student loans was that there was a crisis of graduates flocking to bankruptcy court in droves to expunge their debts.
According to a 2013 policy brief by the nonprofit Reason Foundation, however, “the narrative that students are routinely graduating from college with debt and immediately declaring bankruptcy after graduation was pushed by Sallie Mae and other student lending companies in the hopes that these measures would even further reduce the risk shouldered by lenders when issuing student loans.” The discharge rate of student loans in bankruptcy at that time turned out to be far less than 1 percent—lower than almost all other debts in bankruptcy court.
While a waiting period for bankruptcy discharge surely seemed inconsequential to most in Congress at the time, Sallie Mae was just getting started. In the ensuing years, this unique exception to discharge was extended to include loans made or insured by nonprofit companies. Then, the waiting period was extended to seven years in 1990.
In 1991, Sallie Mae (and the lending industry it essentially controlled) successfully convinced Congress to remove statutes of limitations from federal student loans. And in 1998, Sallie Mae and the student loan industry managed to end any “waiting period” for bankruptcy discharge with the passage of the Higher Education Amendments.
The number of loans made annually between 1990 and 2000 doubled from 4.5 million to 9.4 million, according to the American Council on Education 2001 brief. “This increase in student borrowing was fueled, in large part, by legislative changes enacted early in the decade.”
To keep up with the increasing demand, Sallie Mae went on an acquisitional drive, purchasing two of the largest student loan guarantors, USA Group and Southwest Student Services, in 2022, and “went on to purchase the student loan collection companies, so that by 2006 it dominated all aspects of the student loan industry,” according to a 2010 article by World Socialist Web Site (WSWS). These companies generated most, if not all, of their revenue from collecting on defaulted student loans.
Sallie Mae eventually became a completely private company in 2004. “Sallie Mae’s moves to acquire numerous guarantee, origination, and collections companies under a single corporate banner had fundamentally altered the student loan marketplace and made Sallie Mae the undisputed leviathan of the student loan industry,” stated the Reason Foundation brief.
But Sallie Mae and the student loan industry weren’t finished. In 2005, they managed to convince Congress, after spending millions of dollars in lobbying, to end bankruptcy rights from all student loans—including those made by private lenders—as a part of the landmark bankruptcy bill, the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005. At the time, they argued that this would allow the industry to lend to more needy students. But this never happened. Instead, they began demanding cosigners (typically parents or grandparents) for nearly all of their private loans.
These were truly the “happy times” for the student loan industry. Sallie Mae’s stock price shot up. “In 2005, Sallie Mae was named by Fortune as the second most profitable company in the U.S. (Microsoft was 18th that year),” according to WSWS. The company’s CEO at the time, Albert Lord, was the “highest-paid CEO in Washington, D.C., that year.” He built his own private luxury 18-hole golf course.
By 2004, Lord was even bragging to shareholders that the company was actually “writing checks” to the Treasury at the end of every year—a reference to the fact that the government was making a profit on defaulted student loans through Sallie Mae’s collection activities.
No lender makes a profit on defaulted student loans in any other lending industry. The fact that the federal government profits from defaulted loans is a defining hallmark of a predatory lending system, resulting from the removal of bankruptcy rights and statutes of limitations. It is even more true today for the Department of Education, as it now owns the loans outright, rather than the old-style lending model where it only guaranteed the loans.
The nongovernmental student loan industry generates more revenue from defaulted loans than from those that remain in good standing. There is a government program called “student loan rehabilitation” where a defaulted borrower is coerced into making nine payments for 10 months and ultimately signs for a new, much larger loan. The private companies that facilitate these loan rehabilitations receive 16 percent of the value of the new loans, for instance, on a $50,000 defaulted loan that is rehabilitated into a new $100,000 loan, a $16,000 payment is made by the taxpayer to these companies. This, of course, gives the industry a perverted incentive to want loans to default.
Wall Street and Washington had found a way to make profits on a lending instrument: Remove all standard consumer protections, hyperinflate loan balances—including and especially through defaulting loans—and use collection powers that would “make a mobster envious,” as stated by Senator Elizabeth Warren, to extract the money from the borrowers and their families.
This is precisely the sort of lending tyranny that the founding fathers wanted to avoid when they called for uniform bankruptcy rights and equal protection under the law.
Under President Barack Obama, the lending program was nationalized, resulting in the Department of Education making and owning all new loans from July 2010 onward. While private companies like Sallie Mae did not like this change, they remained in the mix by both servicing healthy loans and collecting on defaulted student loans.
Disturbingly, because lending companies could now only make revenue through these two means—where rehabilitating defaults would be far more profitable for them than servicing loans—this only strengthened the perverted incentives these companies already had to frustrate, baffle, and bamboozle borrowers into default.
This change was clearly a boon for the Department of Education, which now stood to earn interest on the loans. Some of the profit was even used as an offset to pay for the Affordable Care Act. The federal government loved this new arrangement, as lending skyrocketed, leading to the accrual of interest.
It also became apparent that the Department of Education had no intention of fairly administering the lending program under Obama’s presidency. The various income-driven repayment (IDR) plans that were in place were run in ways that would lead to the disqualification of the overwhelming majority of borrowers. Between 2013 and 2014, the department found that an astonishing 57 percent of borrowers had “fallen out” of these programs for failing to verify their incomes—just one of many hurdles borrowers must overcome to receive the promised loan cancellation after 20–25 years of making payments.
The Department of Education also fought tooth and nail behind the scenes to keep bankruptcy rights away from student loans on Obama’s watch. They regularly submitted testimony to judges in bankruptcy cases and even micromanaged such cases directly or through contracted attorneys.
Despite the long-standing promise by Democrats to return bankruptcy rights to federal student loans (which they failed to do in 2008), the best we saw from President Obama was an order to “study” the feasibility of returning bankruptcy rights to the loans. There was no meaningful action on this front. During Obama’s two terms in office, nearly $1 trillion was added to the nation’s student debt tab, according to my analysis.
President Donald Trump’s first term in office was—with a couple of notable exceptions—a nightmare. He hired Betsy DeVos—who held stock in student loan collection companies—to be his secretary of education. DeVos ran the department in even worse faith than seen during Obama’s term. She was even threatened with possible prison time by a federal judge for violating “a court order to stop collecting loans from former students of a now-bankrupt for-profit college,” according to the online news publication Government Executive.
There were, however, a couple of surprising bright spots from Trump’s first term. First, he became the first president to cancel student loans broadly, and by executive order. He first did this in August 2019 when he canceled student loans for 25,000 disabled veterans. He did it for a second time for everyone when he first enacted the repayment pause at the onset of the COVID-19 pandemic. This proved that the president can, indeed, cancel federal student loans by executive order. There were no lawsuits or controversies surrounding either of these actions.
Interestingly, it was these actions that compelled my group to start the petition in March 2020 to return bankruptcy rights to all student loans, igniting public conversation about canceling student loans by executive order. The petition quickly grew to hundreds of thousands of signatures and went viral in the mainstream media. Within six months, leading senators, including Elizabeth Warren and Chuck Schumer, began making a similar call.
Joe Biden, who won the election in 2020, meanwhile, promised to both “eliminate” the student debt of people who went to public colleges and Historically Black Colleges and Universities (HBCU), and also committed to restoring standard bankruptcy rights to student loans.
The feeble attempt that Biden made in 2023, however, toward fulfilling these promises was struck down by the Supreme Court. While most point to the obvious reasons—Republican attorneys general and their lawsuits—the key reason was opposition to it from leading Democrats.
Shortly after the 2020 election, Steven and Mary Swig, a billionaire San Francisco “power couple,” circulated a memo within Democratic circles declaring that the president could not cancel student loans by executive order.
Soon after, Democratic leaders like Nancy Pelosi and Susan Rice were parroting this memo, declaring that the president could not cancel the loans administratively. When the Supreme Court handed down its verdict, Chief Justice John Roberts actually quoted Pelosi in the majority opinion.
It seems like Biden himself wasn’t entirely behind this plan. He rejected a “$50,000 student loan forgiveness plan” shortly after the elections, according to ABC News, and the law that he attempted to use to justify the cancellation was “ill-fitting.”
The loans that were canceled during Biden’s term weren’t because of anything that Biden did or didn’t do. Instead, these were loans that were, by and large, supposed to have been canceled through existing rule or law, years or even decades ago. While Democrats often cited them as evidence of their concern for student loan borrowers, the fact remains that these cancellations were relatively small compared to the loan portfolio’s growth over four years.
On returning bankruptcy rights to student loans, the Biden administration did stop “opposing” student loan borrowers in bankruptcy court, but the “new bankruptcy process” they put in its place effectively transferred the power to determine the case from the judges to the departments of Education and Justice. The process has proven to be an expensive joke on the borrowers, with only a few borrowers getting discharges. In fact, out of 450,000 student loan borrowers who have filed bankruptcy since the new process was implemented, only around 2,500 people (0.6 percent) have received partial relief.
Meanwhile, Dick Durbin, former chairman of the Senate Judiciary Committee, had a good bipartisan bill called the FRESH START Through Bankruptcy Act of 2021, which he introduced along with Republican Senator John Cornyn. It proposed making “federal student loans eligible for discharge in a bankruptcy proceeding ten years after the first loan payment comes due.” Leading Democrats, like Elizabeth Warren, however, refused to endorse the bill.
In 2025, Trump returned to the presidency, and the Republicans gained control of the White House, the House, and the Senate. He has promised to “eliminate” the Department of Education, and “return student loans to the states” (which is incredibly ambiguous). Trump has already gotten the go-ahead from the Supreme Court to dismantle the department.
In fact, the passage of the One Big, Beautiful Bill in July 2025 makes the situation worse for student borrowers. It reduces “the number of repayment plan options down to two from seven… [also] capping the amount individuals can borrow for higher education,” states CBS News.
Both parties in Washington have joined hands in keeping this failed loan scam going. At this point, this is not just unwise, but also immoral. We are truly in uncharted territory here. Going forward, we can easily expect half of all student loan borrowers to wind up in default in the next few years. This is precisely what the founding fathers wanted to avoid when they called for uniform bankruptcy rights. The worsening of this situation is going to take a tremendous toll on millions of people.
We can take action to prevent this by compelling Congress and the president to restore the standard, constitutional bankruptcy rights that were removed in the first place. This will end the widespread abuse that we’ve seen, prevent the far greater financial and social harms that the lending industry is poised to inflict on the country (particularly in light of the passage of the “One, Big, Beautiful Bill” law in 2025, and, over time, should lead to more rational pricing and more sensible lending.
As the U.S. lags in understanding the value of investing in public education, other nations have recognized the importance of an educated workforce to ensure a thriving economy.
In Norway and Sweden, higher education is “tuition-free,” which guarantees equitable access to learning. To prepare students to meet industry demands, Germany offers a dual apprenticeship system, which “integrates classroom learning with paid, on-the-job training, producing well-prepared graduates for industry demands,” according to The 74 opinion piece by Courtney Brown, vice president of impact and planning at Lumina Foundation. Denmark provides students with grants to support them financially.
“Switzerland has a vocational education system that allows students to split their time between school and work in fields like health care, information technology, and advanced manufacturing. Singapore’s SkillsFuture program gives adults financial credits they can use to pursue short courses and certificates at any stage of their careers. In Finland, adults can attend publicly funded retraining programs to gain new skills when industries shift or disappear,” adds the May 2025 opinion piece.
The U.S. student loan crisis is not simply the result of rising tuition costs, but of decades of deliberate policy choices that transformed higher education from a public good into a profit engine for lenders, politicians, and corporations. The stripping of bankruptcy protections, the monopolization of the lending system by Sallie Mae, and the bipartisan complicity of Congress have entrenched borrowers in a cycle of debt with no escape, leaving millions in financial ruin and undermining confidence in the very value of a degree. Meanwhile, other nations are investing in free or low-cost education, apprenticeships, and lifelong learning as a foundation for economic growth and social equity. Unless the United States confronts this broken system head-on—by restoring basic consumer protections, reducing costs, and reaffirming education as a public good—the crisis will continue to deepen, threatening not only individual livelihoods but the country’s long-term economic stability.
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