Here’s How New Wealth and Federal Programs Are Cutting Student Debt

If you’re young and have taken on student debt there’s good news on the financial front. Many are now significantly wealthier than just a few years ago and your school debt is probably smaller than before.

This may seem difficult to believe, in part because economic information is sometimes inaccurate. Recently, for example, a barber asked how I was doing in the recession. The recession? There is no recession.

“The United States economy,” said Axios in January, “grew faster than any other large advanced economy last year — by a wide margin — and is on track to do so again in 2024.”

It added that “America’s outperformance is rooted in its distinctive structural strengths, policy choices, and some luck. It reflects a fundamental resilience in the world’s largest economy that is easy to overlook amid the nation’s problems.”

And now we’re seeing that some of this “outperformance” is showing up with student debt. How? There’s less of it.

Student Loans

The news is all over the place when it comes to student debt. The Federal Reserve is an ongoing source of student debt numbers and it simply has two views of what’s going on.

According to the Federal Reserve Bank of New York, student debt in the fourth quarter of 2023 amounted to $1.601 trillion, the highest level on record.

That doesn’t sound very good, but dig a little deeper and two other numbers also show up.

First, the New York Fed also says that student debt grew just $2 billion in the quarter. In the context of $1.6 trillion that’s a rounding error and – importantly – not a significant increase.

In contrast, during the same period auto debt expanded by $12 billion, mortgage debt was up $112 billion, and credit card balances increased by $50 billion.

Second, the Federal Reserve in DC also produces something called the G.19 report. This document reports on student debt and here the results are even better, a plain reduction.

It reports that student debt in December totaled $1.727 trillion. That’s a huge number, but far less than the $1.774 trillion seen in the first quarter.

What do these numbers really mean? We’re beginning to see evidence that the vast ocean of student debt is settling, if not receding. It’s a small start, but it is a start, one that likely means more dollars in your pocket.

In effect, different parts of the Fed are reporting that student debt has reached new highs and also that student debt is declining. Despite such conflicts, it does seem that the student debt picture is improving. Here’s why.

New Wealth for Younger Americans

One way to reduce debt is to simply make monthly payments in full and on time. Such payments push down loan balances, but to pay such bills borrowers need ongoing incom

There is now evidence that young people – those most likely to have student debt – are getting such cash and are wealthier as a result.

“Millennials have broken through decades of stagnation with historically rapid wealth growth, and this is because of the historic economic recovery after the COVID-19 pandemic recession,” said Brendan Duke, senior director of economic policy at the Center for American Progress.

“This rapid and broad-based wealth growth across various assets — whether that’s owning a house, liquid assets, owning a business, or decline in debts — is helping grow financial security and upward economic mobility for younger Americans.”

“Young Americans,” explains the Center, “have seen the fastest wealth growth of any group since the onset of the pandemic: Among Americans under the age of 40, average inflation-adjusted household wealth grew 49 percent since the onset of the pandemic, whereas wealth fell 7 percent for households from 40 to 54 years old and rose only 4 percent for households 55 to 69 years old.”

The Center estimates that with younger households since 2019, “Nonhousing debt, such as credit card debt and student loans debt, fell $5,000. During this time, young households could more easily pay their expenses with higher incomes from more jobs and higher wages, reducing the need to go into debt.”

Why Student Debt Will Fall Even Further

There is good reason to believe that student debt and monthly costs will fall even further. This is happening because new government programs and policies are reducing student loan balances for millions of borrowers.

The government has been able to reduce student debt balances by an estimated $153 billion as of April. The cuts – which have benefited 4.3 million borrowers – are likely to grow in the next few months.

This is because starting this summer, a one-time adjustment to the William D. Ford Federal Direct Loan Program will likely help some 3.6 million borrowers.

In addition, for-profit private schools must now meet new performance standards or lose their access to federal loans under the new “gainful-employment” rule. The rule requires for-profit schools to show that students will earn more than high-school graduates – in other words, the training must be geared toward creating a positive financial outcome.

One result of the new rules is that for-profit school tuition levels were lower in 2021-2022 than in 2010-2011, despite inflation.