As of 2025, America's outstanding student loan debt stands at $1.65 trillion [1]. It has surpassed credit debt to become the largest share of consumer debt after mortgages [2]. One in six adult Americans holds student loan debt with an average balance of $39,000 [3]. The federal student loan program has ballooned far past its modest intention to provide access to higher education and now threatens the financial security of some 43 million borrowers [4]. Student loan reform has become a focus of both major political parties amid near-universal frustration with the program. The current economics of student loans have led to an untenable situation in need of decisive, targeted reform. 

History

The first implementation of student loans in America emerged as a response to the U.S.–Soviet Space Race, when the United States realized that advancing American science was key to achieving dominance over the Soviets. Congress passed the National Defense Education Act in 1958, aiming to fuel scientific innovation by offering the first student loans to scholars in STEM fields [5]. In 1965, as part of his Great Society initiative, Lyndon Johnson passed the Higher Education Act. The legislation further developed the student loan system, establishing the first government-backed private student loans [6]. Johnson’s reforms were in line with his War on Poverty, through which he sought to increase access to higher education to boost social mobility. The next set of reforms came from President Ronald Reagan, who introduced Pell Grants and Parent PLUS loans. These improved educational access for low-income middle-class students [7]. These programs were all initiated with the dual goals of increasing higher education rates and powering education-driven social mobility. The original intent was for students to take out small loans, graduate with a valuable degree, and quickly pay back their loans. These early student loan programs were a resounding success and spurred an explosion in higher education’s growth. Higher education enrollment increased by 280 percent between the beginning of these programs and the end of the 1980s [8]. 

The scope of these earlier programs was large, but still controlled. The scope of the federal student loan program only became expansive after the introduction of the Higher Education Amendments of 1992, which introduced federally guaranteed, unsubsidized loans and increased borrowing limits [9]. In near lockstep with skyrocketing college tuition prices, both loan balances and the number of borrowers increased dramatically [10]. This trend has continued for the past 25 years, leaving Americans with a nightmare. The Congressional Budget Office projects $393 billion in student loan program net losses over the next ten years [11]. Nine to ten percent of borrowers default within three years of beginning repayment [12]. Over the full lifetime of the loan, that number becomes 28 percent [13]. Compounding the issue, as of 2025, 39 percent of all federal student loan borrowers are enrolled in income-driven repayment plans (IDRs) [14]. IDRs are the most common form of debt forgiveness. In these plans, after a fixed number of reduced payments, the loan balance is erased. Importantly though, from a fiscal perspective every IDR plan is a net negative for the taxpayer. Less than half of all borrowers, including unpaid IDR enrollees and borrowers who default, will ever pay back the full sum of their loan. However, Washington is finally realizing the magnitude of this fiscal disaster. From Biden’s loan forgiveness plan to Trump’s Big Beautiful Bill, both major political parties have implemented and proposed various student loan reforms. All sides of the political spectrum agree that reform is needed, making the sole question how to reform the student loan system.

Reform

At its core, reform must be forward-facing. Although retroactive reforms like debt forgiveness are popular, any retroactive reform is fundamentally flawed for a couple of reasons. The first is that it is simply an arbitrary handout. Those lucky enough to have outstanding debts benefit while everyone else is left out in the cold. The underlying foundations of a diseased system are left untouched, and as a result the problem will only propagate in the future. More problematic, however, is the message debt forgiveness sends to borrowers. After COVID, the Biden administration made a number of tumultuous changes to the program and attempted broad loan forgiveness [15]. These changes were litigated aggressively in court and caused massive confusion among borrowers, leading many to simply pause payments until a secure outcome was guaranteed. 

This is the intrinsic problem with retroactive reform. A student loan is a contract with the government. Everyone agrees to the same terms because the loan is supposed to be fixed. Yet, the government intervenes and sporadically adjusts some borrowers’ terms favorably at one moment, and the next year for others. This cycle does not allow borrowers to effectively plan long-term for their debts. Recent Ipsos polling estimates that up to 48 percent of borrowers anticipate loan forgiveness in the future [16]. A rational borrower who believes that they will receive loan forgiveness will look at their debt balance and run the cost-benefit analysis on whether it is worth it to continue paying down their loans. Many will enter unnecessary IDR plans or simply cease payment in the hopes that a forgiveness-inclined presidential administration will come along and erase their debt. These efforts only add financial stress to the already-strained student loan system, resulting in even greater political pressure for reform and giving more borrowers a reason to pause payments. Admittedly, this is a situation with no easy way out. However, continued calls for retroactive reform will only encourage borrowers to make irresponsible loan decisions, causing taxpayers to incur hundreds of billions of dollars more in losses. Instead, the focus needs to be on forward-looking changes to prevent situations like this from recurring.

To reform student loans within voters’ interests, we must first examine where the majority of defaults come from. Borrowers who attend for-profit institutions are by far the worst off. With default rates nearing 52 percent, this cohort is clearly struggling [17]. Loans to fund attendance at for-profit colleges need to be eliminated immediately. The value of these degrees is next-to-nothing, and tuition costs are outrageously high. These shortcomings are evident in the fact that for-profit college students make up only ten percent of all student loan borrowers but account for half of all student loan defaults [18]. Eliminating this borrowing option is the simplest reform that would substantially improve the economic mess facing the federal student loan program. 

The second worst-off group is borrowers who do not complete their degree. Being saddled with tens of thousands of dollars in debt and having no additional earning potential is an economic quagmire that pushes 59 percent of this group of borrowers into defaulting [19]. One possible method of assistance is requiring higher GPA minimums to take out student loans. Students who do not meet these minimums should be able to access credit to attend two-year community college transfer programs instead. This plan would allow all students the opportunity to graduate with a four-year bachelor’s degree and provide better preparation for students who are not quite ready for a four-year college. It would also reduce debt for students who drop out of college with no degree. Alternatives to a GPA minimum include reforms like the Student Protection and Success Act, which is backed by the bipartisan pair of Senators Jeanne Shaheen (D-NH) and Todd Young (R-IN). Under this plan, colleges would be held accountable if a significant percentage of their student borrowers fail to graduate [20]. If cohort default rates were to rise, the institution would lose its eligibility for future federal student aid [21]. This potential consequence would transfer some student loan accountability back to universities, creating dual incentives to reduce tuition—and, thus, the burden placed on student borrowers—and to improve academic support systems.

Not all degrees are created equal. In a traditional loan, a lender will examine the borrower’s credit history to determine the likelihood of repayment. Because 18-year-olds do not have sufficient credit history for a loan of this scale, student loans should at least account for a borrower’s intended career path to match their expected earnings. In many fields, the starting salary for careers which require a STEM degree are over 50 percent higher than salaries in humanities fields [22]. This disparity is reflected in default rates, with arts and humanities degrees having significantly higher default rates than STEM and vocational degrees [23]. Evidently, loans for humanities students are riskier, and loan terms should reflect that added risk. Available credit should be lower for humanities degrees. Likewise, GPA minimums need to be higher for students pursuing these programs. Arts and humanities majors play a pivotal role in society, but it is undeniable that their career earnings are lower [24]. If, on average, these students will struggle more than their peers to pay back their loans after graduating, interest rates and borrowing caps ought to be adjusted accordingly to reflect this increased risk. 

The most essential part of student loan reform is shifting the general perception of college. The college landscape today is almost unrecognizable when compared to the 1980s. A four-year college degree can no longer be viewed as a baseline expectation. Instead, it is a luxury. With overall costs reaching into the tens or even hundreds of thousands of dollars, college needs to be viewed as a purely economic decision. Ultimately, college is a place to prepare for a lucrative and successful career. Certain colleges prepare students for the job market better than others, but tens of thousands of dollars of debt is an anchor that can stall even the most successful of young careers. Furthermore, there is increasing evidence that college choice is not particularly impactful on career earnings. A 2011 National Bureau of Economic Research study found that, after controlling for students’ GPA and SAT scores, the earnings premium for attending selective, expensive institutions is almost zero [25]. Even in studies where some school-based effect is present, the effect is modest and significantly less impactful than the tens of thousands of dollars in extra tuition that costly institutions with competitive admissions charge [26]. Teachers, parents, counselors, and the broader educational ecosystem need to adapt to this economic reality and encourage students to attend institutions they can both afford and thrive at. 

There is an inherent Catch-22 present in any loan-providing system. Their existence is meant to uplift those in lower socioeconomic classes by providing the credit and opportunity needed to obtain higher education. Nevertheless, impoverished recipients who need the loans the most are at greater risk of being unable to graduate or obtain a high-paying enough job to offset their debt [27]. The more effective the program is at providing opportunity, the more individuals will fall into potentially crippling debt. When these defaults inevitably occur, there is no recourse. In mortgage or auto loan defaults, the individual forfeits their car or house, and nothing else. With a student loan, there is no such option. The degree cannot be returned, and the debt cannot be discharged. Regardless of what happens, either the taxpayer or the borrower loses out. A better alternative would be an expanded grant program that uses direct monetary transfers to allow students to enroll at the institution of their choice. According to the CBO, the established Pell Grant program will cost some $355 billion between 2024 and 2034, still less than the projected losses from the student loan program as a whole over the same period [28]. The current student loan programs masquerade affordability at no taxpayer expense, then present hundreds of billions of dollars in unexpected costs down the line. In a grant system, costs are all upfront. The taxpayer knows exactly how much will be spent, and students can focus on their education and career.

Student loans have undeniably opened up doors to higher education for millions of Americans, yet have also caused harm. Student loan reform is needed immediately, before more borrowers fall into insurmountable debt. Borrowing for proprietary institutions needs to be halted, and unsubsidized borrowing caps must be decreased. Loans need to be evaluated like loans instead of grants, with interest rates and credit limits tied to major and career path. Broadly, the perception of college needs to change, and alternatives such as community college transfer programs need to be heavily promoted in high schools. It was never possible for student loan programs to fulfill all of the objectives they promised. An expanded grant program would alleviate some of the burden of providing social mobility, allowing student loan programs to fill incremental gaps in tuition rather than the full cost of degrees. Though well-intentioned, a well-meaning student loan program simply cannot keep pace with the overwhelming changes to higher education. This unresponsiveness has led to the mess we have today. Still, the fundamental motives of student loans are pure. As long as education remains the driver of social mobility, the American public will support it in some form. A reformed student loan program can and will continue to allow all to strive for the American Dream.