The American Student Loan Crisis: A Ticking Financial Time Bomb

During the Great Depression of the 1930s, British Economist John Maynard Keynes published his theory on government intervention in the economy – an argument that would transform approaches to fiscal policy internationally. Keynes argued that fiscal spending, or government spending, both stabilizes the economy and increases aggregate demand, which he considered the greatest driving force behind healthy economies (Jahan, 2014). In the past, the United States has effectively implemented Keynes’ teachings, from the New Deal to the American Recovery and Reinvestment Act during the 2008 recession and even recent COVID-19 stimulus spending. However, recently, the federal government has largely overlooked this approach in addressing the economic time bomb that is the increasingly unsustainable student loan crisis.

Across the United States, student loan borrowers owe a combined $1.8 trillion. This year alone, economists expect 9 million borrowers to default on their payments (Taylor). The ramifications of student loan debt threaten to trigger a cascade of disasters across the national economy. This burden is especially apparent in home ownership and small business entrepreneurship, two essential drivers of the U.S. economy. In fact, over the past decade, studies have found that student loan debt accounted for a 20% decline in homeownership and a 14.4% decrease in the start of small businesses (How does student debt affect the economy?). 

Economists and politicians should take a page out of Keynes’ book and actively pursue widespread loan forgiveness to stimulate demand and spending, thereby spurring economic growth. Current loan forgiveness plans, such as the U.S. Department of Education’s Income-Based Repayment plan, are placing a Band-Aid on a bullet hole and not inducing the sweeping change necessary to remedy this issue (Sheffey, 2025). The clock is ticking and the debt is growing. In its current state, student loan debt is heavily weighing on debt holders, taxpayers and public repayment programs. If left unresolved, many signals point toward an imminent recession. 

Alternatively, the federal government could boost the economy by sponsoring a far-reaching loan forgiveness program. The economy would see a dramatic rise in investment, consumer spending, and ultimately demand as a result, but this comes at a cost. For example, economists estimated former U.S. President Joe Biden’s prospective student loan cancellation plan in 2022 cost anywhere from $400 billion to $600 billion. However, the looming concern of Biden’s program was its potential impact on inflation, with most researchers estimatingthat inflation would increase by 1 to 1.7%. While an initial inflation shock would drastically affect interest rates, raise prices and decrease real wage values, the potential for a spike in entrepreneurship and spending would largely offset these short-term risks (George). 

That said, the success of a loan forgiveness program depends on its fiscal sustainability. A dramatic spike in government spending could drive interest rates higher, creating new financial pressures. Additionally, financing such a program has its tradeoffs. Raising taxes would reduce disposable income for individual taxpayers and businesses. In addition, any expectation that the potential benefits of cancelling student loan debt reduce citizens’ reliance on social welfare programs, justifying diverting federal funding from them, ignores the gap in the economy that would likely take years to bridge for formerly indebted Americans to be completely on their own two feet and interacting in the economy independently of government support (USAFacts).

Keynes argued that debt, in all of its forms, undermines financial stability for a society when individual debts aggregate. However, Keynes clearly distinguished between forgiving debt for reckless spending and debt relief for national necessities. According to Keynes, debt relief improves economic stability (Keynes, 1919).  Education is one of the U.S. government’s most vested interests. In the United States, education has historically acted as a clear growth stimulus for the economy, as most states exhibit a direct relationship between educational attainment and economic growth. Nationally, every 1% increase in the amount of bachelor’s degrees received is tied to an additional $130.5 billion in the economy. This economic growth then fuels business and public spending which supports the entire labor force (Holtz-Eakin, 2019). Therefore, every American has a stake in student loan forgiveness. A survey found that 85% of Americans who never enrolled in college or dropped out did so due to the high cost (Carrasco, 2024).  Therefore, debt relief for student loans is an investment in national productivity of the government, rather than an indiscriminate transfer of wealth to the public (Carter, 2022). 

Federally subsidized student loan forgiveness encourages future educational attainment, which is critical to national economic growth and entrepreneurship. While critics of student loan forgiveness make compelling arguments regarding the risks of high government spending, the greatest danger during economic stagnation is government inaction. The clock is ticking as more Americans continue to fall into debt and default on their loans — to avoid a future financial catastrophe, the U.S. government must step in immediately. Bold, targeted fiscal intervention is not merely compassionate policy; it is sound economics.

Edited by Michelle Fang

References

Carrasco, M. (2024). Report: The biggest barriers to higher ed enrollment are cost and lack of financial aid. NASFAA. https://www.nasfaa.org/news-item/34147/Report_The_Biggest_Barriers_to_Higher-Ed_Enrollment_Are_Cost_and_Lack_of_Financial_Aid

Carter, Z. D. (2022). Actually, Loan Forgiveness is a long-standing principle of functioning societies!. Slate Magazine. https://slate.com/business/2022/08/student-loan-forgiveness-long-history-debt.html 

George, A., & Lubik, T. A. (n.d.). Student debt cancellation raises the price level and inflation. Federal Reserve Bank of Richmond. https://www.richmondfed.org/research/national_economy/macro_minute/2022/mm_10_11_22 

Holtz-Eakin, D., & Lee, T. (2019). The economic benefits of educational attainment. AAF. https://www.americanactionforum.org/project/economic-benefits-educational-attainment/?utm

How does student debt affect the economy?. Peterson Foundation. (2025). https://www.pgpf.org/article/how-does-student-debt-affect-the-economy/ 

Jahan, S., Mahmud, A. S., & Papageorgiou, C. (2014). What Is Keynesian Economics?. What is keynesian economics? https://www.imf.org/external/pubs/ft/fandd/2014/09/basics.htm 

Keynes, J. M. (1919). The Economic Consequences of the Peace. Project Gutenberg. https://www.gutenberg.org/ebooks/15776

Sheffey, A. (2025). Student-loan forgiveness is back on for 2 million borrowers. Business Insider. https://www.businessinsider.com/student-loan-forgiveness-back-on-ibr-borrowers-debt-relief-processing-2025-10

Taylor, L. (n.d.). The student debt tsunami our economy is not prepared for. World Economic Forum. https://www.weforum.org/stories/2025/08/student-debt-tsunami-global-economy/ 

USAFacts. (2024b). How much money does the government collect per person? https://usafacts.org/articles/how-much-money-does-the-government-collect-per-person/

Countess, J. (2023). Student loan borrowers gather outside the Supreme Court building in February 2023. The court's ruling on President Biden's debt relief plan is expected in June or July. [Photograph]. People's Rally. https://www.southcarolinapublicradio.org/2023-05-31/is-the-debt-deal-changing-student-loan-repayment-heres-what-you-need-to-know