President Biden announced back in August that his administration would unilaterally be “canceling” up to $10,000 in student loan debt ($20,000 for former Pell grant recipients) for borrowers making under $125,000 a year. The President also extended the “emergency” Covid-19 pause—a pause that has already cost taxpayers $100 billion—on student loan repayment until at least August 2023, as well as other changes, like reducing payments for those in income-based repayment programs.
But earlier this month, a skeptical Supreme Court heard oral argument in a case likely to strike down key aspects of the Biden plan as beyond the authority of the Executive Branch. Justice Thomas, for example, said, “in effect this is a grant of $400 billion, and it runs headlong into” the Constitutional powers of Congress appropriate money.
While loan forgiveness is popular with many in the credentialed class, who hold thousands of dollars of debt themselves, it transfers the burden to taxpayers, including those that saved to pay back any debt they incurred, those who chose not to attend a four-year institution to avoid taking on the debt, and those who made various sacrifices to deal with the Hobson’s choice presented by the high cost of a college degree. The real issue underlying student debt is one few want to talk about: the problem of college cost. Can you guess which of these three statements about loan forgiveness is a lie?
A. Student loan debt is becoming a large crisis for millions of younger Americans.
B. The taxpayer is already on the hook for unpaid student loans.
C. Student loan forgiveness is a way to help out working-class Americans.
Let’s take these statements one at a time.
A. TRUTH! The student debt crisis is enormous. One in six Americans (one in three under 30) has student loans, and those loans amount to about $1.8 trillion outstanding, outstripping both car and credit card debt. Just over half of those loans are in any kind of repayment, which includes those taking advantage of federal programs pegging lowered payments to their incomes, meaning that for a lot of people, student loan payments are just not feasible. Even before the pandemic and current economic turmoil, 40% of these loans were expected to be in default just a couple of years from now.
The primary reason for escalating and unpayable student loan debt is simple: college simply costs much more than it used to. Public universities have raised their tuition by about 300 percent over the past three decades (adjusted for inflation) while private universities have an even steeper cost curve upwards. When it often costs upward of six figures to pay for tuition, textbooks, and living expenses, it’s easy to see why student loan debt has become unsustainable for a lot of Americans.
B. TRUTH! Uncle Sam holds the vast majority—upwards of 90%—of student loan debt. Under the Obama administration, the federal government cut out the quasi-private, Fannie and Freddie-style private banks as the middleman, and the Department of Education now originates and holds the overwhelming number of student loans. This means that when students default or cannot pay, we are all picking up the tab.
Unfortunately, the government’s involvement in student loans, initially intended to ensure that the less well-off would have access to college, has created the upward cost spiral that is crushing graduates. For every subsidized student loan dollar a university receives, its price increases by 60 cents. Add that up over the decades, and federal loans have created a situation in which every high school graduate becomes a walking six-figure check to the university sector, encouraging the lowering of academic standards and admission of those the university knows are unlikely to graduate (only 60% of incoming freshmen graduate in six years).
C. LIE! Student debt is a crisis, but it’s primarily a crisis of the middle to upper classes. The top fifth of income earners holds $3 in student debt for every $1 held by the lowest fifth, and about a quarter of debt holders have a medical or legal degree, even though people holding those degrees make up less than 1% of the population. Worse, the subsidization of the pathway to college—through federally-backed student loans—creates a “credentialing treadmill” for jobs that once didn’t require a four-year degree, making things harder on the majority of Americans without one.
Bottom Line:
Student loan debt is holding back a lot of young Americans, but student loan forgiveness does nothing to stop the underlying college cost crisis. In fact, it makes it worse by allowing universities to continue to raise prices year over year and forcing their students to take out ever-larger federal loans, knowing it will all be forgiven by the taxpayer on the back end. Instead, we should look for creative ways to bring down college costs, incentivize alternative routes to professional and personal success, and lower the debt burden on students without unfairly transferring that burden to the taxpayer, including working and middle-class Americans, many of whom have been locked out of college track by high prices to begin with.
Finally, universities must play a role in solving this crisis. They have benefitted enormously from our broken system, as evidenced by an explosion in administrative hiring and luxury campus construction. Any solution that doesn’t make universities responsible for the mismatch between what they’re charging and the value of what they offer will not solve the underlying crisis.
Loan forgiveness will make this cost spiral worse by allowing universities to continue to charge unsustainably high prices, relying on post hoc bailouts from taxpayers to cover the gap between the real value of a degree and tuition costs. In fact, it is estimated that if the Biden plan is executed (at the expense of anywhere from $500 billion to $1 trillion to taxpayers), in four years we will be right where we are now, with the same levels of unsustainable student loan debt.
Loan forgiveness is unfair, regressive, and worst of all, won’t solve the underlying crisis of college cost.