Student Loan Debt & the Economy: Impact Explained

• Personal bankruptcies are rising.

• Consumer stress is growing with rising prices, tariffs and slowing job growth.

• Medical expenses, job losses and divorce are among the top problems that lead to a bankruptcy.

Personal bankruptcy filings are up as much as 15% in 2025. It’s likely they’ll rise even more in 2026.

Some of it is the economy, which may look great overall on paper. (Nvidia (NVDA) hit a new 52-week high on Thursday.) But many consumers are stressed from slowing job growth, tariffs, and business uncertainty.

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Plus, there’s the continuing hangover from the Covid-19 pandemic, the  disaster that keeps on giving.

That said, there is one specific reason why many Americans will ask bankruptcy courts to help. They’re drowning in student loans.

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This should not be a surprise. Student loan outstanding in the United States has grown fantastically in recent years, from $511 billion in 2006 to $1.81 trillion as of June, according to data from the Federal Reserve.

Yes, that’s “trillion” with a T, and that total is up 255% in the last 20 years.

Of that total, according to the Federal Reserve Bank of New York, about 10% of student debt — perhaps about $184 billon — is late by 90 days or more. It doesn’t get classified as in default until no payments have been made for 270 days or more.

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Student debt is the largest category of delinquent loans — nearly 30%, according to American Bankruptcy Institute data. That’s ahead of:

• Credit card debt 26.9%

• Mortgage debt, 19.5%

• Auto loans, 14.8%

And President Trump’s 332-page Big Beautiful Bill contains multiple references to the goal of cracking down on non-payers of student loans starting in 2026.

So, the bankruptcy bar is expecting more people with student loans filing for bankruptcy in the next year or so. Bankruptcy lawyer Ed Boltz of Durham, N.C., says he’s already getting calls for help.

In raw numbers, bankruptcy in the United States is a consumer problem and weighted toward the lower end of the income spectrum.

Consumers file under Chapter 7 or 13. The overwhelming number are Chapter 7 filings, which means you liquidate much of your debt and get a fresh start. Chapter 13 is expected to produce a payment plan designed to pay off debt in a number of years. Maybe a third actually succeed.

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Business bankruptcies are filed under Chapter 11, and their number is relatively small but rising, including JoAnn Fabrics, the arts and crafts retailer, which ultimately shut down this year.

Chapter 11 is often used as a strategy for companies to shed businesses or operations they don’t want or maybe break union contracts.

One reason Chapter 11 filings are growing (modestly) may seem flukey. But, when a corporation files for Chapter 11, all of its subsidiaries must also file. So, a restaurant chain with, say, 25 operating units, will make 26 separate filings: One for the parent and one for each operating restaurant.

Chapter 11 filings can be used to delay judgments. Alex Jones, the conservative radio host, has used bankruptcy for years to try to protect his assets after a $1.4 billion judgment from families of Sandy Hook gunshot victims. Jones had charged the 2012 deaths were faked.

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Bankruptcy is not something you take lightly. It takes years of good financial behavior for it to be deleted from your credit history.

And filing for bankruptcy usually comes slowly, says Robert Lawless, a law professor at the University of Illinois. But, finally, people decide they have no choice. They need to start over. So they file.

Lawless is a top researcher with the Consumer Bankruptcy Project, which has been researching the subject for more than 40 years. (A founder is Elizabeth Warren, now a senator from Massachusetts.)

The CPB has built a huge database by asking bankruptcy filers to answer survey questions about their decisions. The research  suggests personal bankruptcy filings starts with:

Credit cards get involved because people don’t know how to use them or, actually more likely, use them to keep current on other bills.

Student loans comes to bear because of two problems:

Getting a degree is no guarantee you’ll get a job that pays enough that you can support the debt payments.

It’s so difficult to get loans discharged because most student debt is made by the Education Department and typically can’t be discharged (forgiven) in a bankruptcy.

This thought may produce harumphs — or worse phrasing — along with icy comments like, “Well, they shouldn’t have taken out the student loans.”

It’s not that simple, of course. Medical students routinely graduate with $200,000 or more in student loans that take years to pay off, according to the Education Data Initiative, a small group that researches education costs.

Given the income prospects of doctors, that’s doable, though it may take 20 years. (There is an incentive. If you make payments for 25 years, the Education Department may forgive the balance of the loan is left.)

But fine arts grads, barbers, hair dressers, public defenders or college professors, whose incomes don’t approach those of doctors and high-priced lawyers, have a more challenging problem: How to match the costs of getting their degrees with the subsequent income to support the loan payments.

So, bankruptcy starts to enter the equation. It becomes a serious inquiry for single mothers, especially African-American mothers, according to Consumer Bankruptcy Project research

Colonial America used English law. So, going broke meant everything you owned went to the creditor and probably earned you a jail term. The Constitution that was ratified in 1789 gave Congress the authority to enact “uniform laws on the subject of Bankruptcies.”

Bankruptcies are severely limited at first, and the bankruptcy code we know now began to emerge in the 1930s. Not until 1984, were the bankruptcy courts made independent branches of the U.S. court system. And the system of chapters was built.

Since 2000, personal bankruptcy filings had two huge spikes, in 2005 when less favorable rules for debtors were enacted, and in 2010, in the aftermath of the Great Recession.

Personal bankruptcy filings, made in the U.S. bankruptcy court, fell dramatically during the Covid-19 pandemic. One reason was student loan debt payments were suspended. They’ve been rising since early 2023 in part because the Trump Administration has made a push to get people to pay.

Nowadays, a bankruptcy filing, with the nearest U.S. bankruptcy court, requires paying a $245 filing fee, a $75 administrative fee and a $15 trustee surcharge.

And that’s before a lawyer’s fee, which might come to $2,000, paid upfront. (Some lawyers suggest stop paying on unsecured debt like credit cards and use that to pay your lawyer.)

A legal obligation for the debtor is to organize and file schedules with data that includes:

• Monthly income.

• All monthly expenses, including required payments.

• Property owned. Savings and retirement accounts.

• Support payments owed.

• Expenses to support, say, parents.

Usually, the primary motivation of filers is to protect homes, cars or, even, tools used in the workplace.

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This story was originally reported by TheStreet on Oct 5, 2025, where it first appeared in the Economy News and Analysis section. Add TheStreet as a Preferred Source by clicking here.