The Student Loan Debacle

Sep 24th, 2022 | By | Category: Featured Issues, Politics & Current Events

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The amount of student debt held in America, the New York Times reports, is roughly equal to the size of the economy of Brazil or Australia.  More than 45 million people collectively owe $1.6 trillion.  That figure has skyrocketed over the last half-century as the cost of higher education has equally skyrocketed. [Student debt has nearly doubled since 2011 to $1.6 trillion, though the number of borrowers has increased by only 18%.] “The growth in cost has substantially been more that the increase in most other household expenses.”  The remarkable rise in college education costs has not been matched by increased scholarship support, national government support or state government support to colleges and universities.  In fact, due to the COVID pandemic, state support for higher education has actually declined by 10%.  Thus, students and their parents take out various loans, some guaranteed by the federal government; some not.  It is a significant financial crisis—for the national government, which holds the student debt, and for the students and their families, who owe the debt.

For all these reasons, President Biden in late August announced a plan, via executive order, to wipe out significant amounts of student debt for millions of people.  The federal government will remove up to $10,000 from the balances of individuals earning less than $125,000 a year (as 95% of Americans do), and $20,000 for those who received Pell grants, which are mostly awarded to university students from poor families.  Assuming the inevitable legal challenges fail, Biden’s plan will impact Americans, and the American economy in various ways.  Is this a wise plan?  Will it permanently solve the student debt problem?  Does the plan actually avoid dealing with the fundamental cause of so much student debt?

  • First of all, The Economist cites Marc Goldwein of the Committee for a Responsible Federal Budget (CRFB), a think-tank, who reckons that Biden’s “pen stroke will cost between $400bn and $600bn. Having just dubbed its recently enacted climate-change and tax plan the Inflation Reduction Act—because it would reduce net federal expenditures by $300bn over the next decade—the White House might as well call this effort the Inflation Acceleration Action. Whereas most pandemic-relief programs lapsed months ago, everyone holding student loans, rich or poor, has not had to make payments since March 2020. That has cost the federal government an estimated $60b na year, making it twice as expensive as the mortgage-interest deduction afforded to homeowners (which now costs $30bn annually).  The analogy to the mortgage-interest deduction is apt in another way. It is hardly progressive. Owners of houses have higher incomes and wealth. Those with college and graduate degrees may start their working careers in greater debt, but command significantly higher wages later in life. According to the Bureau of Labor Statistics, the wage premium for a worker with some college education relative to one with just a high-school diploma is 11%; for a completed bachelor’s degree it is 65%; for a professional degree it is 138%.When researchers at the Penn Wharton Budget Model, an academic costing outfit, evaluated the impact of a blanket forgiveness of $10,000 (even with a qualifying income cap of $125,000), they found that 69% of benefits accrued to those in the top 60% of the income distribution. The extra boost to Pell-grant recipients, which was a surprise, will make the move a bit less regressive. But the final verdict is unlikely to be a coup for the proletariat.  The deeper difficulty, however, is that partial debt cancellation is an expensive kludge atop a broken financing scheme that will not be repaired. Many European welfare states generously fund higher education for all. But in America, pairing universal financing with little cost discipline has created a moral hazard for colleges to increase prices. Despite the largesse displayed, the CRFB estimates that aggregate debt loads will return to their present levels in five years. ‘The problem is that the laws that have allowed this crisis to occur—this disaster to unfold—are still on the books,” says Adam Looney, a senior tax-policy adviser in Barack Obama’s administration and a professor at the University of Utah. “Every year, American students borrow $100bn in additional student loans. And they have the same terrible outcomes as borrowers who took out a loan ten years ago.’”

The Administration estimates that about 27 million will be eligible for up to $20,000 in forgiveness, and some 20 million will see their balances erased.  As the Wall Street Journal editorially observes:  Biden “is also extending loan forbearance for another four months, even as unemployment among college grads is at a near record low 2%.  Congress’s Cares Act deferred payments and waived interest through September 2020, but Donald Trump and Joe Biden have extended the pause for what will now be three years.  [The four-month freeze on payments will cost $20 billion on top of the roughly $115 billion it already has cost.]  The Administration is claiming, again, that this will be the last extension and is needed to help borrowers prepare to resume payments.”  In addition, Biden is cutting undergrad payments to a mere 5% of discretionary income.  The government will also cover unpaid monthly interest for borrowers so their balances won’t grow even if they aren’t paying a penny.


  • Second, David Leonhardt relates that the emphasis of Biden’s plan partly reflects academic research that has found that the people who struggle the most to repay their loans don’t fit a common perception. They are less likely to be baristas with six figures in debt and a graduate degree than blue-collar workers who have a smaller amount of unpaid loans but never graduated college. That worker, Biden said yesterday, has the “worst of both worlds — debt and no degree.”  A study by Judith Scott-Clayton of Columbia University found that the loan-default rate for borrowers without any degree was 40 percent. For those with a bachelor’s degree, it was less than 8 percent.  The details of Biden’s plan mean that it targets the people most likely to default, rather than the caricature of them. “$10k will forgive ALL the debt of many millions of borrowers,” Susan Dynarski, a Harvard University economist — and herself a first-generation college graduate — tweeted yesterday. As an example, she cited “those who went to community college for a semester or two.”
  • Third, there is a moral and ethical dimension to this executive order.  “Those who pay for this write-off are the tens of millions of Americans who didn’t go to college, or repaid their debt, or skimped and saved to pay for college to avoid a debt trap.  This is a college graduate bailout paid for by plumbers and FedEx drivers.”  Like other Great Society programs, federal student loans and grants were initially aimed at helping low-income Americans.  “They have since become another all-you-can-eat entitlement.  Its costs grow on autopilot as lawmakers boost subsidies in the name of making higher education more affordable, but in reality doing the opposite.  Undergraduates were allowed to borrow a total of $7,500 in 1973.  But Congress over the years has lifted the lifetime loan limit, which is now $31,000 for students who are dependents and $57,000 for others.  Congress in 1980 established low-interest Plus loans for parents, which were expanded to graduate students in 2006.  These have dollar cap.  Colleges have responded all too rationally by raising prices and using the free-flowing spigot to increase professors’ salaries, [and] hire more administrators . . .  Since 1980 the average annual cost to attend four-year public and nonprofit colleges has increased by nine-fold to $22,690 and $51,690 respectively . . . The average debt for a master’s degree recipient is $71,287; for a doctoral grad its $159,625 . . . Colleges therefore have no financial incentive to ensure that their programs impart skills demanded by employers or provide a decent living.”

What should Biden have done?  At the least, Biden should have launched a plan to hold colleges accountable.  The Wall Street Journal editorially advocates that “The best way to reduce costs is to change the financial incentives for colleges.  Former Education Secretary Bill Bennett once suggested that schools be required to take an equity stake of 10% to 20% in student loans.  Missouri Sen. Josh Hawley introduced legislation in 2019 that would require colleges to pay half of the loans for borrowers who default.”  It also seems wise for the government to abolish graduate-school government loans.  “Private lenders say the feds have squeezed them from the market.  There’s no reason for Uncle Sam to subsidize advanced degrees; private markets can price the credit risk . . . Public and nonprofit colleges are like any other business, except they can profit form taxpayer subsidies without accountability.  Biden’s loan write-offs show this system has failed to reduce student costs while enriching academic elite and soaking taxpayers.  It’s time for reforms that hold them accountable.”

See Ella Koeze and Karl Russell in the New York Times (28 August 2022); David Leonhardt, New York Times “This Morning” (25 August 2022); Tom Clark in The Atlantic (24 August 2022); The Economist (25 August 2022); and Wall Street Journal editorials (25 And 26 August 2022).

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