On July 14, 2023, the Biden Administration announced that it would forgive roughly $39 billion in student loans for over 800,000 borrowers. This comes just a few weeks after the Supreme Court rejected a broader forgiveness effort by President Joe Biden (Dept. of Education v. Brown, Biden v. Nebraska). While there still might be some ways to go before this becomes a reality (if it ever does), many Americans with outstanding loans are excited to hear the news. But, what if I said student loan forgiveness doesn’t solve the problem by itself?
Currently, there are a number of factors contributing to the student loan crisis, and loan forgiveness only addresses part of it. In this article, I will dive into how severe this crisis is, explore the flaws in solely student loan forgiveness, and propose more effective solutions to address the problem.
How Bad Is The Issue?
Student loan debt is an unprecedented burden on many citizens in the country. There are an estimated 38 million Americans with outstanding debt for an undergraduate degree in the US. This has resulted in the cumulative student loan debt in the country ballooning to the highest it’s ever been ($1.6 trillion), marking it as the second largest form of debt behind home mortgages.
The reason why more and more aspiring college students look to take out student loans is due to rising tuition costs. According to the College Board, since 1990, the cost of a private four-year college education in the United States has more than doubled, going from $18,560 to $37,650. In that same time frame, the tuition for public four-year colleges tripled, increasing from $3,800 to $10,560.
At first glance, one may argue that this increase reflects changes in the cost of living, but this is incorrect. Over the last 20 years, the rate at which college tuition has increased has doubled the rate of inflation. Since 2010, university tuition inflation was 4.63%, which is roughly double the average rate of inflation of 2% over that time. Not only has tuition outpaced inflation, but it also far outpaced increases in household income. US News reports that, from 1990 to 2020, the average household income only increased by 56% and 21% for the highest quartile and the lowest quartile, respectively.
| % Increase | |
| Public School Tuition | 177.89% |
| Private School Tuition | 102.86% |
| Avg. Household Income (Upper Quartile) | 56% |
| Avg. Household Income (Lower Quartile) | 21% |
With all this in mind, it becomes clear why so many are looking to debt to attend these schools. The price tags associated with college are now at unprecedented levels with no signs of slowing down. Deciding on a college is now a life-altering financial decision, as there is an unprecedented financial obligation attached to it. Today, choosing the wrong college can have tremendous consequences that can last a lifetime. And, it has become apparent that many people are currently facing those life-long consequences.
Student Loan Debt Bubble?
As more graduates are unable to pay their outstanding student loans, this debt bubble is starting to tread dangerous territory. An estimated 40% of individuals who entered college in 2004 will be unable to make payments by 2023. Banks have been rather lenient in student loan applications, practically granting one to anyone. This is irresponsible behavior and mirrors much of the activity that resulted in the Financial Crisis of 2008. Wall Street is even profiting from speculating on student loans, very similar to how they profited from mortgage-backed securities prior to 2008.
Once too many graduates cannot pay their obligations, the market can experience another financial crisis like in 2008. Patrick Healey, the founder and president of Caliber Financial Partners, believes as much: “Experts believe that student loan defaults have the potential to adversely impact the U.S. economy, which could trigger another recession”. Something needs to be done to prevent this from occurring and to alleviate the financial pressure faced by these graduates.
Why Can’t People Pay Back Their Loans?
Student loans aren’t intrinsically bad. In fact, I’d argue that they can be very beneficial to one’s career. If someone is unable to afford tuition at a university, student loans would provide them with the opportunity to attend the institution and tremendously increase their earnings potential for their career.
Unfortunately, many students do not see college for what it truly is: an investment. Many do not consider the return on investment when it comes to their education. As a result, students may completely disregard the earnings potential of their chosen career path when taking out student loans.
The Role of Your Major
If a student’s major results in a job with a high salary post-graduation, then college is worth it. They would be able to make all the necessary payments towards their debt. In this case, the debt was worth it. It allowed the individual to further their education and acquire a high-paying job.
However, this is not always the case, which is why student loan debt in the country is so high. If a student were to take out significant debt to major in a field with low-paying job positions, they will be unable to make their payments. For example, if someone were to take a $60,000 loan to attend school and land a job only paying $15 per hour, then their student loan debt would far outweigh their yearly income. This wage would roughly result in a yearly income of $30,000, which is half of the outstanding value of the loan. This does not include any interest payments on top of the principle.
Going to college is definitely worth it if it results in an individual attaining a job with a high enough salary to make interest payments on any student loans. Otherwise, going to college is not worth the large price tag. If the post-graduation position does not pay enough, then one’s student loan debt could cripple their entire financial future. This could be resolved if basic financial education were taught to individuals at a young age. During the college selection process, these soon-to-be high school graduates should understand the magnitude of this choice.
Scholarships & Financial Aid Are Also Very Important
In addition to not taking a return on investment into consideration, many prospective college students may also disregard the benefits of scholarships and financial aid. These two factors can save you tens, if not hundreds, of thousands of dollars in tuition costs.
Some make the assumption that paying full tuition is worth it if the school is prestigious; they may opt to pay a premium solely for a school’s name and reputation. Thus, a student may look at the national ranking of a college and make a decision ultimately based on that.
While getting accepted to a highly-ranked school is definitely an accomplishment, many overvalue school rankings. For example, the drop-off between the #6 and #12 universities in the US is very minimal. However, one may turn down a scholarship at that #12 school to attend the #6 school at full tuition. Why? These coveted rankings.
In his book Outliers, Malcolm Gladwell states that “the idea that schools can be ranked, like runners in a race, makes no sense.” He’s got a point. When schools are on the same level as one another, there is not a significant difference between them. So, it may not make the most financial sense to make such a sacrifice.
Honestly, all that matters is your job after graduation. You could go to Harvard and end up having a job with someone from a small, local college. Many assume the name of a school can take them places, but that is not always the case. The hard work you put in (plus some networking and luck) can go a long way. Yes, a prestigious school would provide you with more tools to network and grow your career, but you have to draw a line as to how much that should cost you.
Debt Forgiveness Alone Won’t Solve the Problem
If you’ve read this far into the article (fingers crossed that you did), it should be clear that student loan debt is definitely a crisis in America. It’s hard to deny it. However, the approach of student loan forgiveness does not really address the root of the problem. I’d describe it as placing a bandage over a bullet wound.
What’s my issue with the policy exactly? Well, debt relief doesn’t actually address why so many students are unable to pay their student loans.
Yes, forgiving debt would reduce some of the burdens faced by many Americans, but it doesn’t stop future college students from taking out exorbitant loans for school. The patterns of behavior that led to the current situation would not be addressed. With that said, it wouldn’t be hard to envision the situation returning to its current state or worse in several years after this relief.
In that case, should student loan forgiveness have to be a regular occurrence? Regular student debt forgiveness also would not solve the problem. In fact, it would only worsen the situation. In a sense, it would promote irresponsibility, as individuals would rely on debt with the thought that it will be canceled in the future.
Marc Goldwein, a senior policy director at the Committee for a Responsible Federal Budget, believes that: “People are going to assume there’s a likelihood that debt is canceled again and again… and if you assume there’s a likelihood it’s canceled, you’re going to be more likely to take out more debt upfront. That’s going to give colleges more pricing power to raise tuition without pressure and to offer more low-value degrees.”
Goldwein also makes the interesting point that recurring relief would incentivize universities to take measures that are unfavorable for their students. Those measures would potentially include raising tuition rates, which would effectively negate any form of student loan forgiveness. Evidently, universities have had no issue raising tuition costs to ridiculous levels in the past. I don’t see this changing with this new policy, which would only increase the amount of outstanding debt in the country.
The Solution
To clarify, I’m not opposed to the idea of student loan forgiveness (even as someone who benefited from a scholarship to attend college). The use of forgiveness would be very beneficial to many drowning in debt. However, as mentioned before, forgiveness alone is not sufficient. There needs to be a drastic change in order for this issue to be resolved.
Government Intervention
The first change that needs to be made is addressing the pricing of college tuition. College tuition has far outpaced the rates of inflation and household income growth over the last several decades. Why? One possible explanation is a reduction in state funding for many colleges. This pushes the cost of tuition from state governments to the student, who consequently looks to student loans to be able to afford this new tuition. Another explanation (unfortunately) is that colleges can simply get away with charging whatever they want for tuition. In the US nowadays, a college degree is a must for most careers. This means there is almost an inelastic demand for a college degree. As such, colleges can charge whatever they want for tuition, and students will almost always pay.
In order for this to stop, the government needs to address the issue. For one, the government as a whole needs to emphasize funding education. Subsidizing state universities would make college tuition more affordable, which may result in students not requiring loans. Secondly, the government should look to regulate the cost of tuition.
Previous Government Intervention
There is a precedent of the US government holding colleges accountable for their tuition prices. In 2021, the Federal Trade Commission put 70 for-profit colleges on notice that the agency is cracking down on the schools’ misleading practices. This is in addition to other universities, such as the University of Phoenix and Devry University, that the FTC charged for false advertising. In these cases, the FTC claims the schools misrepresented students’ career and salary prospects and university corporate relationships to attract students. In another instance in 2022, the US government forgave over $70 million in debt for students of Devry University, which allegedly misled students through false advertising.
For these instances, the government took action to hold universities accountable for malicious financial practices. Why not continue this pursuit with not-for-profit institutions as well? While they might not falsely advertise like these for-profit universities, not-for-profit colleges charge students high tuition to pursue a major that the university knows won’t pay well. This is still predatory behavior, as the majority of 18-year-olds taking out this debt don’t understand what they’re getting themselves into.
As such, the government should regulate the tuition charged by these universities. It would promote equality amongst social classes for one. And two, it would lower the need for student loan debt to attend college.
Teach Financial Literacy
Let’s be honest with ourselves: hoping the government actually gets involved is a long shot. So, the second best thing we can do is equip soon-to-be college students with the tools they need to avoid unnecessary debt. This can be done through teaching financial literacy in schools.
Across the board, financial education would greatly benefit society. There are a number of ways that this can be done, including:
- Enacting effective school programs/curriculums
- Making conversations about finances less taboo
- Having financially literate individuals teach others
- Spreading awareness so people can self-educate (through platforms like this!)
A combination of these could definitely improve financial literacy, which is low across the board. Especially in this situation, learning financial literacy can promote healthy habits (i.e., planning for retirement with an IRA or 401K) and eliminate poor decision-making (i.e., overspending). With this understanding, more prospective college students would be able to identify the cost-benefit of the college they’re attending.
Forgive Student Loans
While cracking down on tuition and teaching financial literacy would be viable solutions, it would only impact future generations of college students. As such, it does make sense to have some form of debt forgiveness for existing student loans.
Overall, student loan forgiveness can be a great tool to help many Americans who took out tremendous debts without knowing the consequences. Today, many college grads have no feasible way of paying their debts. I know there are many criticisms of forgiveness. They may include: “People should be paying their own debts,” “I paid my own debt, why shouldn’t they?”, and “Why should I pay more in taxes for others’ bad decisions?”
While I understand these arguments, I disagree with all of them.
Shouldn’t People Pay Their Own Debts?
For one, in most cases, people should be responsible for paying their own debts. However, student loan debt is a unique situation. Largely, individuals got into these situations unknowingly, as they did not receive proper education about financial literacy. Unlike mortgages or auto loans, student loans are often taken out by 18-year-olds. In other words, those taking out these loans are essentially children barely out of high school. Not only are the borrowers young, the amount of debt they take out is very high, straddling them down for life before they even start their careers.
If I Paid My Own Student Loans, Why Shouldn’t Others?
Secondly, paying your own debt has nothing to do with the debt of others. Yes, many people have made sacrifices to attend college. That includes working through college to pay tuition or turning down more prestigious schools for more affordable options. While you deserve kudos for being able to navigate a tricky financial situation, it doesn’t really justify allowing others to suffer in their own financial situations. Again, many people taking out this debt have no concept of finances.
What About My Taxes?
Lastly, I don’t see an increase in taxes being a significant issue. Firstly, the United States enjoys spending tax dollars on less significant issues. Secondly, a reduction in existing student loans could stimulate the US economy. Many borrowers currently have less discretionary income as a result of their loans. If their debts were forgiven in part, they would have more to spend in the economy. This increase in consumer demand could result in an increase in the need for labor, creating more jobs for the economy as well.
The legitimate concern regarding taxes relates to the one receiving the forgiveness. Under IRS Topic No. 431, any debt cancelation is typically a taxable event, where the one receiving the debt relief must recognize the forgiveness as taxable income. However, under certain circumstances, you would be allowed to exclude the income from canceled debt, and one of those circumstances would be under President Joe Biden’s American Rescue Plan. Under this, Americans have received $10,000 in student loan relief, with the guarantee that the cancelation will not be taxable at the federal level.
Bottom Line
Student loan forgiveness is a controversial topic. Regardless of your opinion on the topic, you can’t ignore the fact that a significant number of Americans are straddled in student debt. With so few people learning financial literacy in school, many college students took out tremendous amounts of debt without knowing how and if they’d be able to repay it. As a result, the US faces a student loan crisis, where millions of Americans have student loan debt worth over an accumulated $1 trillion.
Having so much debt can prevent young people from seizing financial opportunities, like planning for retirement and creating an emergency fund. In order to alleviate the situation, action must be taken. However, student loan relief alone is not the solution. It doesn’t address the behaviors that resulted in this issue in the first place. There are larger phenomena at play that require widespread reform rather than a single instance of debt forgiveness.
As such, more needs to happen. And, that should be a combination of government intervention, an emphasis on financial education, and partial student debt forgiveness. As mentioned earlier, this three-pronged approach appropriately addresses the issue of student debt and the factors that play into it.