Everybody agrees student loan debt is a large problem, having serious adverse effects on family formation, purchasing of houses, and many other aspects of American life. So, what should we do?
Everybody agrees student loan debt is a large problem. In the United States approximately $1.5 trillion is currently owed by around 45 million people at an average of over $32,000 per borrower. While relatively few borrowers owe more than $75,000, that relatively few includes over 4 million people. Another 24 million borrowers owe more than $10,000. According to LendingTree’s Value Penguin website, from which I’ve taken these statistics, the student loan balance has increased by around $80 billion every year since 2004.[1] This debt has serious adverse effects on family formation, purchasing of houses, and many other aspects of American life.
What should we do? President Biden just announced a federal loan forgiveness plan of $10,000 for individuals making $125,000 or less in annual income ($20,000 for households making $250,000 or less annually, and $20,000 for Pell Grant recipients who qualify under these income requirements). During the presidential election cycle of 2019-2020, Elizabeth Warren proposed forgiving up to $50,000 for debtors, while Bernie Sanders proposed forgiving all of it.[2] Both also called for free college and trade school. President Trump proposed something both more and less drastic than their plans: making one standard payment program that caps payments at 12.5% of discretionary income (currently most payment plans hit around 10%) but then forgiving the remaining debts after fifteen years for undergraduates and thirty years for graduate students. This loan forgiveness would be open to everybody and not just those in certain careers, as is currently the case under the Public Service Loan Forgiveness Program.[3]
Why not go all the way? After all, the discharge of debts, the forgiveness advocates argue, will allow a great many people to start businesses or have the children they say they want. The Sanders campaign cited a 2018 study by Bard College’s Levy Economics Institute that concludes a debt cancellation would result “in an increase in real GDP, a decrease in the average unemployment rate, and little to no inflationary pressure over the 10-year horizon of our simulations, while interest rates increase only modestly.”[4]
Some might argue that the discharge of this debt is a lot of money. This is true, but granting the above estimates, the stimulus value might be worth it. Even assuming the Levy Institute is wrong, however, it’s not clear that Americans are currently that concerned about the mounting debt the U. S. government has been accruing. For better or worse, many people see the waste in government and would rather see their children or even themselves (and the amount of debt held by those over sixty has greatly increased over the last decade) have their debt discharged.
Another objection by skeptics of large-scale student loan forgiveness is that such programs would ultimately benefit those who are already in a higher class and thus not actually reduce real inequality. A Brookings Institute Study of Senator Warren’s plan found that the bottom 60% of American households would only see 34% of the benefit.[5] The Sanders campaign claimed that under its plan, “seventy-three percent of the benefits of cancelling all student debt will go to the bottom 80 percent of Americans, who are making less than $127,000 a year.” It’s hard to see how that could be true, however, especially since Sen. Warren’s plan has caps and Sen. Sanders’ doesn’t. If inequality were really the problem, radical debt forgiveness is not likely a solution. But it’s not clear that inequality per se is the problem.
A third objection is that debt forgiveness might make colleges even more expensive. After all, the increase in student debt loan comes from the extraordinary rise in college tuition, a rise that happened at the same time as large amounts of federally guaranteed loan money became available and that has been more than double that of the Consumer Price Index over the last four decades.[6] In other words, such forgiveness programs will simply create moral hazard by encouraging American colleges and universities to keep doing more of the same. Senators Sanders and Warren seem to think that making a system of free higher education would solve the problem. But if parents and students are given reason to believe that debts will be forgiven at the fancier private schools, why not do that?
The question about debt is tied, however, to the question of what we want in education. In “A Grand Bargain On Student Debt: Loan Forgiveness for Ending Federal Student Lending,” Matthew Peterson argues that the problem is deeper than a large and somewhat comfortable “peasant class” chained to debt for decades on end.[7] Too many students come out of American higher education without having been given marketable skills, liberal education, or any formation as American citizens.
Dr. Peterson notes that William F. Buckley’s book-length lament God and Man at Yale was published almost seventy years ago now, yet there has been no real improvement in American higher education other than in certain technical research areas. Instead, there is a widespread sense among both conservatives and old-fashioned liberals that even what is good in the American university is being crowded out by unhealthy understandings of “diversity,” “social justice,” and other ideological agendas. Even apart from the content of higher education, the nature of the institution is one in which professors are not hired nearly as often as administrators. In a blistering 2015 opinion piece for the New York Times, University of Colorado Law Professor Paul Campos cited Department of Education data showing a 60% increase in administrative positions at American colleges between 1993 and 2009, an increase that was ten times the rate of tenured faculty positions.[8]
Higher education in our current state is not serving America or Americans well. Thus Dr. Peterson’s proposal, starting with some modest ones. The first order of business would be to make it possible for students to discharge their loans through bankruptcy, something available only for a very small number of loans of very specific types. The second order would be to make sure that colleges and universities have “skin in the game.” In our current system, loans are made to students who then pay their bills to the university but are on the hook for what they’ve taken out. Making universities take some share of responsibility for the loans would itself be something that changed higher education drastically. But Dr. Peterson is out for bigger game:
Trump should therefore propose a grand bargain: a one-time student loan forgiveness program in exchange for shutting down the federal educational loan program. Close down the spigot of free and unaccountable money to the colleges and universities, which inflates prices and allows our educated class to incubate the ideas that are destroying America, in exchange for some kind of forgiveness program.
True, such a bargain would be costly to Americans. But it wouldn’t be the same sort of moral hazard as forgiveness and leaving the system in place. Closing down the spigot would mean colleges and universities with enormous endowments might have to spend some of them. The ones on the bubble would have to rethink higher education and figure out what exactly they are providing and what people will actually pay for. Is it education? Research for corporations and the government? Job training? Woke indoctrination? Expensive credentialing? Jobs for administrators?
Too many of my colleagues say that higher education is too “market driven.” I disagree. I wish it were much more market driven in a way that it is not now. There is largesse and greed and waste, to be sure, but this is what happens in distorted markets. American medicine is like higher education: opaque prices, third-parties involved in payment, administrative bloat, and gigantic rises in costs. But let’s take one problem at a time. If Matthew Peterson’s Not-So-Modest proposal—or even his modest ones—were to be enacted, I think much of American higher education would have to become much more like other markets—sensible prices and products without decades-long payment plans.
A slightly different version of this essay was published here in October 2019.
The Imaginative Conservative applies the principle of appreciation to the discussion of culture and politics—we approach dialogue with magnanimity rather than with mere civility. Will you help us remain a refreshing oasis in the increasingly contentious arena of modern discourse? Please consider donating now.
Notes:
[1] “Average Student Loan Debt in America: 2019 Facts & Figures,” Value Penguin, Lending Tree.
[2] For Warren’s plan see “I’m calling for something truly transformational: Universal free public college and cancellation of student loan debt,” Medium, Team Warren, April 22, 2019. For Sanders’s plan, see “College for All and Cancel All Student Debt,” BernieSanders.com, Bernie Sanders Campaign.
[3] For Trump’s positions and plans, see: Sarah Kessler, “Trump on Student Loan Forgiveness,” Student Debt Relief.
[4] Scott Fulwiler et al, “The Macroeconomic Effects of Student Debt Cancellation,” February 2018, p. 6.
[5] Adam Looney, “How Progressive is Senator Elizabeth Warren’s loan forgiveness proposal?” Brookings April 24, 2019.
[6] Abby Jackson, “This chart shows how quickly college tuition has skyrocketed since 1980,” Business Insider, July 20, 2015.
[7] Matthew Peterson, “A Grand Bargain On Student Debt: Loan Forgiveness For Ending Federal Student Lending,” Daily Caller, September 20, 2019.
[8] Paul F. Campos, “The Real Reason College Tuition Costs So Much,” New York Times, April 4, 2015.
The featured image is courtesy of Pixabay.
This is by far the most reasonable and competent solution to student debt I’ve heard do far.
Great idea but why the negotiation. Simply end the program. If you want an education pay for it. If you cant get it…well the world needs ditch-diggers too.
This might work, if we held true to the cancellation of the government-backed student loan program. The danger is that once the debt is cancelled, it cannot be undone; whereas the government loan program could just be restarted at a later date.
Not everybody agrees this is a major problem.
One crucial issue that is not often discussed when talking about student debt and student debt forgiveness/cancellation is, who owns student debt? Not who “owes” student loans but, who (or what entity or entities) “are owed” student debt balances? In other words, who exactly are the creditors?
This is no small matter, since it determines how student debt can be “cancelled” in practice, i.e. who must be compensated (by the government of the United States), how the compensation will take place, how much it will cost the Treasury to compensate the creditors, etc. As it happens, most student debt today is held by the U.S. Department of Education itself. A relatively small amount (if 140 billion dollars can be called a small amount of money) is held by private entities.
Biden’s Executive Order does not cover privately owned but there’s still a problem: a lot of student debt (privately and federally owned) is securitized. They are called SLABS, “student loan asset backed securities”. Figuring out which student loan securities are affected by the cancellation and what are the government’s guarantee obligations to the holders of these securities is another problem. I don’t think the US government will itself default on its student loan asset backed securities, even if more student debt is cancelled, but it will cost the Treasury a lot of money. In the mean time, this student loan payment market that has been created as a matter of policy by the United States federal government and in which state governments with their own student loan programs also participate is understandably in turmoil.