Americans Owe $2 Trillion in Student Loans, We Just Don’t Know it Yet

Every time a news site or the TV talks about student loans, they mention the $1.3 trillion burden hanging over the heads of mostly Millennial generation Americans. Occasionally the figure they use is $1.4 trillion or $1.5 trillion. It really depends on how recent the source they're referencing is. These stats are just plain misleading though. I suggest that Americans have way more student debt than is currently thought. My belief is that we already have $2 trillion in student loans.

Official Student Debt for Sure is at $1.5 Trillion

Take a look at an unofficial calculator that projects student loans based on issuance patterns, and we're already above $1.5 trillion according to their figures.

Another reference point is this student debt clock, which shows student debt at $1.46 trillion. However, it makes note that the federal agencies do not include accrued interest in their totals. If you put that into the total, you're above $1.5 trillion.

I think private refinancing is being under-counted too. The most recent private debt statistics I could find did not seem to include the issuance I know is happening with all the fintech startups out there that want to cut your student loan interest rate.

So we've established that “official student debt” is at least $1.5 trillion right now. How am I coming up with the other $500 billion? Great question.

A Big Chunk of Housing Debt is Actually Student Debt in Disguise

I've consulted on student debt for well over 300 people. One pattern I've seen is that parents are constantly taking out home equity loans and mortgages to help cover their kids' educational costs. It happens way more than you think.

What's a typical example? A second generation Asian American college grad wants to go to dental school. Their parents know they can get a tax-deductible 4% home equity loan because the real estate market in California has soared. So the parents take out $200,000, give it to their kid for dental school, and the freshly minted dentist has a six figure debt load they'll pay back to mom and dad.

Here's another one that involves the primary borrower and no parents. A 35 year old physician has 40% equity in her home and she also has student debt. She realizes that she can convert non-deductible debt (student loans) to tax-deductible debt (housing debt). So she takes out a six figure chunk of home equity to pay down her student loans faster in a more tax efficient manner.

Does any of this debt show up in the student loan statistics? No.

I've seen mortgage and home equity loans up to $300,000 or more for a single child's graduate school education.

There's currently about $10 trillion of mortgage debt for family homes in the US. I think it would be fair to estimate that 1% to 5% of that total is actually “student debt in disguise.” That brings in an additional $100-$500 billion on top of the $1.5 trillion we know Americans owe thanks to college.

Credit Card Debt as Part of the Student Loan Pie

If you were like me in college, you got bombarded with credit card offers. The reason? Credit card companies know that a bunch of young 20 somethings will sign up and spend money they don't have.

There's currently about $890 billion in credit card debt in the US. As the burden of unpaid medical bills has declined with the ACA, I'd expect a significant percent of that credit card debt is from 20 and 30 somethings who made uninformed financial decisions while in college.

What's the percentage? My guess is something between 5% to 10%. How many times have you heard that someone made it through college on credit cards? In undergrad, you're limited on the student debt you can take out. Students probably use plastic to fill the void. So add on about $50-$100 billion on the student debt scale.

Family Loans Are Student Loans by Another Name

Maybe you've tapped the Bank of Mom, Dad, Grandma, or Grandpa? That was probably for a small amount like paying your car insurance.

Surprisingly, a lot more people than you think made low or no interest loans to family members to cover the cost of school.

These are informal and formal agreements. I've seen all kinds of interesting lending going on between families to cover the cost of grad school from doing student loan consults for people.

The most common example? Grandma has more money than she knows what to do with and she would've put it in the bank for a 1.5% CD anyway. So her grandkid wants to go to law school, he borrows the full cost from her with $0 origination fees and a 3% interest rate. Grandma makes more money than if she had lent to the bank, and the grandkid gets a lower interest cost.

Perhaps $50 billion exists in family loans for school. Some of that will no doubt be converted into gifts at some point in the future.

Other Kinds of Debt that could be partially Student Loan Related

I've heard some wild stories about how people come up with the funds for their education. Some clients have dual citizenship and get access to super low cost loans from abroad that don't show up on any credit reports.

Others have used their business equity to take out loans and pay them off. Even though that's not a legal thing to do, I know that some folks still do it.

Some banks like First Republic structure student loans as personal loans. That wouldn't show up in official student loan statistics either.

Say there's another $50 billion out there that finances educational costs but doesn't fit neatly into a category.

Add it All Together, and We Could Easily be at $2 Trillion in Student Loans

At a recent congressional hearing, a Congresswoman said there was $1.3 trillion in student loans (she quoted from old statistics). That misses the magnitude of the problem.

We've seen official student debt go from about $300 billion to $1.5 trillion in roughly 12 years. If we add on the loan burden that's directly coming from the cost of college, I think we're already at $2 trillion in student loans.

Putting together housing debt, credit card debt, family loans, and other sources of borrowing, you could easily come up with $500 billion or more that's college related.

Does that matter? After all we have $10 trillion in mortgage debt and we're doing just fine. However, at least housing is backed by a physical asset that you could get out of if you had to. Most Americans with mortgages could walk away from their house with less than a 10% loss. Many would be able to walk away with a positive gain.

Mortgage debt doesn't trap people like student loans do. When you have a mortgage on your brain, you can't go sell your gray matter off. Good luck starting a business when you've got to come up with $500 a month for student loan payment.

There are zero good studies on the amount of phantom student debt in the economy. We should get a good handle on the true burden facing American families that comes from the absurdly high cost of college.

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