President Biden’s student loan forgiveness program, which would erase up to $20,000 in debt for millions of Americans, has been both hailed as much-needed relief and derided as unfair.
The argument against it presents the issue of college debt as a matter of personal choice: students chose to go to college, fully understanding the cost and freely taking out loans to pay for it. Their debt is their publish. Following this line of thinking, the program simply provides a handout to undeserving borrowers.
Is the pushback simply a case of political divisiveness (marking any Biden decision as flawed)? Is it centered on perceived inequity (why give debt relief to some when most have to face the financial consequences of their decisions alone)? Or, does the resistance represent a lack of understanding of how individual debt and consumption affect the overall economy?
In the latter case, it is critical that the Biden administration and legislatures make clear the wide-ranging repercussions of student debt on society as a whole. There is a strong case for debt relief or elimination, not just to help individual borrowers, but to create immediate and long-term positive consequences for our country and our economy.
Student debt today
Nearly 43 million Americans have federal student loan debt (federal debt accounts for 92.7% of all student loan debt). The overall outstanding balance is $1.617 billion, with an average of $37,787 per borrower. Adding private loan debt brings the average to over $40,000.
These figures are a relatively recent phenomenon. According to the credit reporting company Experian, this average balance has increased by almost 92% since 2009. Much of this increase is due to rising tuition fees, which have greatly exceeded income and more than doubled between 1974 and 2012.
Another factor affecting debt balances is interest capitalization, which is adding interest accrued while a student is attending school or when circumstances prevent payments from being made on the loan principal. Applied almost exclusively to student loans, it can inflate loans to levels that make them nearly impossible to repay.
Here’s a simple example: If you borrow $40,000, at an interest rate of 5%, with a repayment term of 10 years, your payments can be deferred for the four years you’re in college. But, meanwhile, the loan earns $8,000 in interest. When it’s time to start repaying that loan, you owe $48,000 and additional interest is calculated on that new amount.
Racial disparities are also concerning. According to a study by the Consumer Financial Protection Bureau, black students on average carry more debt than white students and are more likely to have difficulty repaying their loans. Overall, black, Latinx, and Native American students are all more likely to default on their loans than white students, which hurts their credit scores, makes them ineligible for additional federal student aid, and can result in a wage garnishment, tax deductions and lawsuits. .
Debt Drives Decisions
A study by the University Professional and Continuing Education Association found that financial concerns were the most common reason for leaving college before earning a degree. However, those who leave still have to repay their loans, and these loans can cause financial hardship for decades. A 2019 TIAA-MIT AgeLab study found that 84% of Americans cannot save enough for retirement because of their student loans. Those same loans have made it much harder to buy a home, according to CNBC, and student borrowers are also less likely to qualify for car loans.
Watching others struggle with student debt is also fueling growing distrust of higher education as a whole: fewer than one in three adults say a degree is worth it. There are four million fewer students in college today than a decade ago, and the National Center for Education Statistics reports that the percentage of high school graduates enrolling in college in the whole country after high school went from 70% in 2016 to 63%. in 2020 (the most recent year for which figures are available).
why is it important
Critics of the Biden administration’s plan to erase some student debt argue that the fate of student borrowers is up to them, and that the current decline in college attendance and the inability of millions of Americans buying a home or funding their retirement have no effect on the rest of us. Simply put, they are wrong.
First, let’s recognize that the potent combination of distrust and exorbitant costs has placed institutions such as the one I lead in a position of change or death. To regain trust and ensure that the degrees we confer have meaningful value and relevance, we must evolve. As I detail in my book The College Devaluation Crisis: Market Disruption, Diminishing ROI, and an Alternative Future of Learning, we need to expand access, leverage our industry and corporate partnerships to create scholarships and funding sources, and pursuing entrepreneurial investments that seek to incubate alternative projects. These efforts are non-negotiable.
Our commitment to the relevance and value of colleges and universities is vital because, even as professional, technical and on-the-job training increases, “higher education continues to be an important driver of upward mobility”, according to a report by the conservative American Institute of Business. “More than half of low-income students who enrolled in public and nonprofit universities moved into one of the top two income quintiles by the time they reached their early 30s.” Numerous studies support this finding, concluding that a post-secondary education is one of the strongest drivers of economic and social mobility, a fact that we, as a society, cannot ignore.
But the value of a college degree is not limited to the gains for individuals and their immediate families. Recent work by economists Erik Hanushek and Ludger Woessmann confirms decades of earlier studies, concluding that there is still a strong link between education and a country’s overall economic growth. “Over the period 1960-2000, three-quarters of the variation in GDP per capita growth between countries can be explained by international measures of math and science skills. The relationship between aggregate cognitive skills, called a nation’s knowledge capital, and long-term growth rate is extraordinarily strong,” they write.
And what about the effect on society of the tens of millions of people who are unable to buy a home or save adequately for retirement? Each home purchase averaged about $113,000 in economic impact in 2021, according to calculations by the National Association of Realtors — impact that isn’t realized when otherwise eligible buyers can’t save for a down payment, see themselves refuse a mortgage, or both . Likewise, with consumer spending being the main driver of economic growth, a large number of retirees whose lack of savings forces them to drastically reduce their consumption has a negative effect on economic growth.
Costs to society as a whole; go one step further, says Professor Tolani Britton, who studies higher education economics at the University of California, Berkeley. She cites some of the lesser-known benefits of higher education that would diminish as millions of eligible students drop out of college, including an “increased likelihood of civic participation, lower infant mortality rates, better health motherhood and a reduced likelihood of being homeless or food insecure.
In short, America needs college graduates who can graduate with less and more manageable debt. We need them to be able to earn a living that allows them to thrive, not just for their own good, but for society as a whole. Biden’s plan is a step in the right direction.