It isn't surprising that college debt is a hot-button issue in
the U.S.: Americans collectively hold more than $1.5 trillion in
federal student loans, making it the second-largest category of
consumer debt, behind only mortgage debt.
Among the approximately 43 million student-loan borrowers in the
U.S., almost 60% owe $20,000 or less, while about 25% owe $40,000
or more, according to Education Department data. Borrowers who
graduated with bachelor's degrees in 2018 left school owing an
average of about $29,000, according to the College Board.
So is this a crisis that calls for a cancellation of all federal
student debt, as championed by former Democratic presidential
hopefuls Bernie Sanders and Elizabeth Warren? Or are there
less-drastic ways to help those struggling to pay off their
loans?
Proponents of mass debt cancellation say it is the appropriate
response because failed government policies, not recklessness on
the part of students, led to an explosion in borrowing. Opponents
point to high repayment rates as evidence that the student-loan
program is working, and question the wisdom of forgiving the debt
of wealthier students and those with advanced degrees.
Suzanne Kahn, deputy director of the Great Democracy Initiative
and Education Program at the Roosevelt Institute, makes the case
for debt cancellation. Jason Delisle, a resident fellow at the
American Enterprise Institute, argues against it.
YES: The government made this crisis. The government should
solve it.
By Suzanne Kahn
Today's student-loan crisis is weighing down the entire U.S.
economy.
Americans hold a collective $1.6 trillion in federal and private
student loans, and the effects of that debt on recent college
graduates has been well documented: delayed homebuying, marriage
and wealth formation. But college loans also are eating into the
retirement savings of older Americans, who hold increasing amounts
of such debt, taken on for their own education and that of their
children. Overall, student loans now account for 35% of the most
severely delinquent household debt.
In the face of these stark numbers, it is time to cancel all
federal student loans.
Cancellation is the appropriate response because this is a
crisis of the government's making. In the wake of the 2008
financial crisis, states cut public funding to higher education,
leaving individuals to pick up the slack. Tuition at public
four-year colleges increased 36% between 2008 and 2018. And as many
young people turned to higher education to wait out a weak job
market, increased demand pushed up tuition costs at private
schools, as well.
Readily available federal loans, rather than expanded grants,
helped students meet rising costs. This might have worked out if
the returns on a college education had climbed at a similar rate.
Instead, since the recession ended, wages for college graduates
have stayed flat. One 2018 analysis from Brookings predicts that
nearly 40% of borrowers who entered college in 2004 -- and thus
graduated into a depressed job market during the recession -- may
default on their loans by 2023.
Among those most hurt by rising costs and stagnating wages have
been Black students, who are more likely to have to borrow to go to
college and face a discriminatory job market when they graduate.
Research shows that 12 years after entering college, the average
black borrower still owes more than he or she borrowed.
To address mounting concerns about borrowers' distress, the
federal government created repayment programs that tie monthly
payments to borrowers' incomes. The complexity of these programs
have led many to experience the sudden addition of unpaid interest
to loan balances or be outright denied forgiveness. Nevertheless,
almost 45% of federal loans are now being paid through such
programs. That isn't evidence of success but rather a clear sign
that borrowing hasn't paid off for many. These programs are the
main reason the average monthly student-loan payment has remained
stable relative to income over the years.
Canceling student debt would be an important acknowledgment of
the consequences of a failed policy. Moreover, it would boost the
economy.
Before the current Covid-19 crisis, research from the Levy
Economics Institute found that canceling all student debt could
boost real GDP between $86 billion and $108 billion a year for 10
years and lower the unemployment rate between 0.22 to 0.36
percentage point over the decade.
Some ask why Americans who didn't go to college should help pay
the debts of those who did. As long as student debt is serving as a
drag on our economy, everyone is paying for it, and the country can
no longer afford not to act.
Debt cancellation alone isn't enough to ensure this crisis won't
repeat itself. To bring down student-debt levels permanently, we
need to pair a one-time cancellation with free, public higher
education. (Federal student loans might continue to exist as an
option to protect students who need to borrow for living expenses
or who choose private education from predatory, private lenders).
Done together, free college and student-debt cancellation policies
would signal that the decision to place the onus for financing
higher education on individuals was a mistake.
Canceling student debt will benefit the economy as a whole,
narrow racial inequalities and begin to correct the policy mistakes
that have limited an entire generation's ability to build
wealth.
Ms. Kahn is deputy director of the Great Democracy Initiative
and Education Program at the Roosevelt Institute. She can be
reached at reports@wsj.com.
NO: The student-loan program isn't perfect, but it works
By Jason Delisle
Calls for the federal government to forgive outstanding student
debt are grounded in the belief that most borrowers face long-term
hardship from these debts. But if that truly were the case, one
would expect advocates for mass loan forgiveness to also call for
an end to the student-loan program. Yet most would have the
government make new loans even after the current stock of debt is
forgiven.
This is a major inconsistency in the argument for large-scale
loan forgiveness, and it illustrates why the case for forgiving all
debt is quite weak.
The government's student-loan program isn't perfect but on the
whole it works. It ensures widespread access to higher education at
affordable repayment terms and the vast majority of loans are fully
repaid.
The Consumer Financial Protection Bureau reports that about 80%
of borrowers pay off their student loans within 12 years of
entering repayment. Others take longer, especially when economic
crises like the coronavirus outbreak occur, but flexible repayment
terms help them stay afloat and repay when the economy recovers.
And while it's true that a subset of borrowers -- mainly those who
attend community colleges and for-profit institutions -- have high
default rates, their balances tend to be relatively small (about
$7,000) and are often fully repaid despite the default.
Budget statistics also reflect that overall payments remain
high. Unpaid debts cost taxpayers $4 billion per $100 billion in
loans made annually. That loss pales in comparison to the cost of
forgiving all debt.
Of course, loan payments can still be overly burdensome for some
borrowers. Here again, however, the evidence isn't consistent with
a permanent and widespread affordability crisis.
A recent study by the JP Morgan Chase Foundation of four million
families' financial records finds that the typical monthly
student-loan payment ranges from $144 to $203. Data collected by
the Federal Reserve show a similar figure. And student-loan
payments tend to take up less than 6% of a borrower's earnings, an
amount that has been remarkably stable since the mid-1990s, as
documented in a 2014 Brookings Institution study. As such, it is
hard to imagine that student loans are preventing family formation
or home buying on a large scale.
The idea that loan forgiveness is needed to boost the economy is
similarly questionable. Yes, putting cash in families' pockets
might goose short-term economic growth, but why target student
debt? Many households carry mortgages, auto loans and credit-card
debt.
Student debt might be better suited for mass forgiveness if only
low- and middle-income families held it. But among first-year
undergraduates, students from families earning over $114,000 are
just as likely to borrow as the lowest-income students -- and they
take out loans twice as large. That isn't surprising since
financial-aid policies have spared many low- and middle-income
students from college-tuition price hikes. The result is that
high-income students would be major beneficiaries of loan
forgiveness, as would the countless lawyers, doctors and others
with advanced degrees who account for 42% of all student debt.
None of this is to say that all borrowers can afford to repay
all of the time, especially in times of crisis. But temporary
economic shocks can be addressed with temporary solutions, such as
the recent coronavirus-relief package that waives student-loan
payments and interest for six months.
And for borrowers who need longer-term relief, there are
programs such as Income-Based Repayment, which allows those with
federal loans to pay a small share of their income no matter how
much they owe, and then qualify to have remaining balances forgiven
after 20 years.
This program should be improved to help borrowers who are
struggling the most, rather than forgive everyone's debt regardless
of whether they really need the help.
Mr. Delisle is a resident fellow at the American Enterprise
Institute. He can be reached at reports@wsj.com.
(END) Dow Jones Newswires
May 26, 2020 16:51 ET (20:51 GMT)
Copyright (c) 2020 Dow Jones & Company, Inc.