Institutional debt is debt owed by students directly to an institution of higher education that arises because of unpaid tuition or other financial obligations. The majority of this debt is incurred when students with federal aid, such as a Pell Grant or federal student loan, have to unexpectedly withdraw before the end of a term and their institution is required to return their aid money. The schools then charge the student for the amount of the returned aid, converting it into debt owed to the school directly. 

Institutional debt disproportionately impacts low-income students, who are more likely to come from racially marginalized communities, and it perpetuates the cycle of inequity in higher education. Current or former students with outstanding institutional debts can face disastrous consequences. Colleges can place holds on a student’s account barring them from re-enrolling in coursework, withholding degrees harming a student’s employment prospects, and even placing students in private collections or subjecting them to offsets of their benefits and tax return.