What Should the U.S. Do About Rising Student Loan Debt?

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Introduction

Student loan debt in the United States has grown enormously in recent years and is now one of the largest forms of consumer borrowing in the country. Though the benefits of a college education outweigh the costs in most cases, many graduates are concerned about entering a weak job market and worry that lingering debt could hinder their financial futures. 

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Most economists see student loan programs as a sound investment in U.S. workers and essential for maintaining the country’s competitive edge, but questions remain about the appropriate level of federal involvement. A debate has also emerged over whether the government should forgive student loan debt and, if so, how much it should forgive. President Joe Biden’s administration faces increased pressure to cancel student debt amid the COVID-19 pandemic and resulting economic disruption.

How much student debt is there?

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Student debt has more than doubled over the last two decades. At the end of 2020, about forty-three million U.S. borrowers owed nearly $1.6 trillion altogether in federal student loans. Additional private loans bring the total to about $1.7 trillion, surpassing auto loans and credit card debt; only home mortgage debt, at about $10 trillion, is larger. 

Student debt has grown because more and more students are attending college. In the late 1980s and early 1990s, most high schoolers did not enroll at colleges or universities; of those that did, less than half borrowed money to do so. In recent years, about two-thirds of high schoolers have enrolled, and most of them have taken out student loans. 

The average student is also taking on more debt: the balance per borrower rose by 26 percent from 2009 to 2020, according to U.S. News and World Report. Students are generally borrowing more because college tuition has grown many times faster than income. The cost of college—and resulting debt—is higher in the United States than in almost all other wealthy countries, where higher education is often free or heavily subsidized. Meanwhile, U.S. states have pulled back funding for public universities and colleges in the wake of the Great Recession. 

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Who owes it?

About half of the outstanding student debt is owed by borrowers who attended two- or four-year colleges or universities; the rest is from graduate school borrowers, according to the Brookings Institution. While the majority of college students graduate with less than $20,000 in debt, a small portion of borrowers hold an outsize share of student debt. According to Brookings, one-third of the outstanding debt is held by the 6 percent of borrowers who owe more than $100,000. However, borrowers with smaller amounts of debt often have a more difficult time repaying their loans, as higher debt from graduate or professional degrees can pay off with much higher incomes. Students who do not complete their degrees often struggle the most; their default rate is three times higher than those who graduate.

Additionally, the type of institution makes a difference in how much debt is owed. Private school graduates, especially those who attended for-profit schools, generally have larger debts than those who attended public schools.

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There is also a racial disparity in student borrowing that many experts say is problematic and the result of decades of systemic discrimination. Black college students generally take on more debt than white students, and they are more likely to struggle with loan repayment after graduating, in part because they typically have lower levels of family wealth. Black, Latinx, and American Indian students are all more likely to default on their loans than white students.

Why do students take on debt?

Most U.S. students have an incentive to borrow because higher education is typically required for the highest-paying jobs. A worker with a bachelor’s degree earns more than 1.5 times the amount a person with a high school diploma does, while those with doctorates or professional degrees earn more than double, according to the U.S. Bureau of Labor Statistics. 

However, analysts caution that the return on investment in terms of future income can vary widely, depending on factors including a student’s major and the institution. Some recent research found that although a college education still provides a boost in earnings, the increase in wealth a degree provides has declined significantly over the past fifty years, due to the rising cost of college and the increase in other forms of consumer debt. 

Why does the government lend to students?

The U.S. government invests in higher education for its people—through need-based tuition grants, student loan programs, veterans’ benefits, and research grants—because an educated and highly skilled workforce promotes national prosperity. Highly educated workers provide greater tax revenues, are generally more productive and civically engaged, and are less reliant on social programs. Moreover, postsecondary education is seen by most experts as fundamental to a dynamic, innovative economy. Major U.S. research universities, such as Stanford, Harvard, and Duke, often anchor regional innovation clusters.

What is the history of U.S. student lending programs?

The federal government began taking a large role in funding higher education after World War II. The Servicemen’s Readjustment Act of 1944, commonly known as the GI Bill, provided tuition assistance and many other benefits, including low-interest home loans, to nearly eight million returning veterans. The program continues to pay tuition for hundreds of thousands of servicemembers and veterans each year. 

However, federal student lending did not begin until the Cold War. In response to the Soviet Union’s launch of Sputnik in 1957, Congress passed the National Defense Education Act, sweeping legislation that created federally funded student loan programs and supported national security–related fields, including science, math, and foreign languages. In 1965, the Lyndon B. Johnson administration expanded federal involvement at all levels of education with the Higher Education Act (HEA), which laid the foundation for the current system of federal student lending. Since then, Congress has passed laws that expand loan eligibility and allow parents to borrow on behalf of their children. 

The federal government also provides need-based aid in the form of Pell grants, which were established in 1972 and students do not have to repay. But funding levels for the program have not kept pace with the rising cost of college, resulting in more students turning to loans. 

The U.S. government used to guarantee or subsidize private loans through the Federal Family Education Loan (FFEL) program, but critics, including President Barack Obama, argued that this was a handout to commercial lenders, and the program was ended in 2010. All federal student loans have since been issued directly by the Department of Education. 

In response to the COVID-19 pandemic, the Donald J. Trump administration took an extraordinary step in providing tens of millions of student borrowers with temporary relief from making payments on their loans. In one of his first acts in office, President Biden extended the payment moratorium for federal student loan borrowers until October 2021. He also expanded it to include private loans made under the discontinued FFEL program that are in default, closing a loophole that affected more than one million borrowers.

What is the current debate?

In a 2020 poll, less than half of millennials surveyed said taking out student loans was worth the cost, compared to two-thirds of baby boomers.

Many experts and policymakers argue that surging student debt is harming younger generations of students by preventing them from reaching their financial goals while exacerbating racial inequality. While older generations were generally able to pay their way through school, or find jobs that enabled them to pay off their debts, that no longer holds true for recent cohorts, they argue. The combination of soaring tuition costs and the recessions caused by the 2008 financial crisis and the COVID-19 pandemic have particularly affected the millennial and subsequent generations. In a 2020 poll, less than half of millennials surveyed said taking out student loans was worth the cost, compared to two-thirds of baby boomers.

Significant student loan debt can also make it more difficult to borrow for other major purchases, such as houses and cars, and accruing interest can prevent borrowers from ever paying off their debt. In focus groups conducted by the Pew Charitable Trusts, many borrowers said they deferred their student loan payments during periods of financial hardship, either without realizing that interest would continue to build up or because they felt they had no other option. Student loans are more difficult to discharge in bankruptcy than other forms of consumer debt, such as from credit cards, because borrowers are required to prove “undue hardship” from their loans in court.

However, other observers disagree about the extent of the challenge. The Urban Institute’s Sandy Baum says that labeling the current borrowing and debt levels a “crisis” is misleading, because most individual borrowers are able to pay back their loans. According to Pew, about 20 percent of federal direct and FFEL loans are in default. 

Some education finance experts say the increase in federal student lending is making college less affordable for many by allowing institutions to artificially inflate tuition. William J. Bennett, the secretary of education under President George H.W. Bush, argued in 1987 that federal aid was shielding colleges from market pressures, allowing them to charge ever increasing prices. The so-called Bennett hypothesis continues to be debated by education experts. A 2014 study found that federal aid led to tuition increases only at private, for-profit schools, though other research has established a link between aid and rising tuition at public schools as well. 

What are some proposals for reform?

Most experts and policymakers agree that both the rising cost of college and the existing volume of loans need to be addressed, though they differ in their proposals for how to do this. The most recent debate has centered on the issue of loan cancellation: some have called for universal loan cancellation in varying amounts, while others say only targeted relief is warranted. 

President Biden has said he supports forgiving at least $10,000 for all borrowers, and more for low-income students who attended public schools or historically Black colleges or universities. But some Democratic lawmakers and progressive advocacy groups have called on him to go further by canceling either all or up to $50,000 of borrowers’ student loan debt, depending on certain factors. Though Biden has said he would prefer debt cancellation to be handled by Congress, his administration is weighing his legal authority to cancel debt via executive action, as some Democrats have urged. 

Proponents argue that large-scale debt cancellation would help advance racial and socioeconomic equality and provide critical financial assistance amid the COVID-19 pandemic. Without the burden of student loans, they say, more people will be able to buy homes, take entrepreneurial risks, or save for retirement. 

Opponents counter that broad cancellation would be unfair to those who successfully paid off their student loans or who avoided debt altogether. They also say it would disproportionately benefit high-earning Americans, such as doctors and lawyers, who may have large debts but would likely not struggle with their payments. They also contend that the cost of sweeping student loan cancellation would be untenable. Calculating the exact expense of debt forgiveness is tricky, but estimates range in the hundreds of billions of dollars. 

Instead, some experts advocate targeted debt relief, aimed at low-income borrowers, as well as reforms to the system, including expanding access to so-called income-driven repayment plans, which Biden has also proposed. These plans cap payments at a percentage of a borrower’s usable income and are eligible for forgiveness after twenty or twenty-five years. However, in the Pew focus groups, many borrowers said they found it difficult both to enroll and to remain in such plans, since they require an annual certification, and that the plans did not take into account expenses such as mortgage and car payments. Moreover, few students have had their debts forgiven. The Public Service Loan Forgiveness program has been plagued with problems, though Biden has pledged to reform it.

To contain the spiraling cost of higher education for students, some experts and lawmakers say public funding should be increased to, for example, make public colleges and universities tuition-free. Biden has pledged to make community colleges tuition-free for a student’s first two years and proposed doubling the size of Pell grants for low-income students. 

Others say the perception that college is the only path to a well-paying job drives up demand and harms students who could be better served by other forms of education. In recent years, politicians from both major parties, including President Donald Trump, have advocated increasing access to career and technical education (also known as vocational education) as an alternative to college, with the aim of giving students marketable skills without the expense of a four-year degree. Germany’s apprenticeship program is often held up as a model of such an approach. However, some for-profit career training schools have been accused of defrauding their students, leading to calls for greater oversight of the sector.

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