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
Almost 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 Consumer Financial Protection Bureau study, black students carry more debt on average than white students and are more likely to have difficulty repaying their loans. Overall, black, Latina, and Native American students are all more likely to fail on their loans than white students, damaging their credit scores, making them ineligible for additional federal student aid, and possibly leading to wage garnishment, tax refund withholdings, 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. These same loans have made it much more difficult to buy a home, according to CNBCand student borrowers are also less likely to qualify for car loans.
Seeing others struggle with student debt also fuels growing distrust of higher education in general: less than one in three adults Saying a degree is worth the cost. Today, there are four million fewer students To college ten years ago, and the National Center for Education Statistics reports that the percentage of high school graduates enrolling in college nationwide after high school has increased 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 crisis of college devaluation: market disruption, diminishing return on investment, and an alternative future of learning , we need to expand access, leverage our industry and corporate partnerships to create scholarships and sources of funding, and pursue entrepreneurial investments that seek to incubate alternative businesses. 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 curator American Institute of Enterprise. “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.” Many 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 previous studies, concluding that there is still a strong link between education and a nation’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 generated an average of about $113,000 in economic impact in 2021, according to the National Association of Calculated Realtors—impact that is not realized when otherwise eligible buyers cannot save for a down payment, are denied 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 lesser known benefits of higher education this would decrease as millions of eligible students drop out of college, including an “increased likelihood of civic participation, lower infant mortality rates, better maternal health, and a reduced likelihood of being homeless or experiencing food insecurity”.
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.