Forgive and Forget? The Student Loan Debt Controversy

 Student loan debt affects roughly 44.7 million Americans at an average of about $37,584 per borrower.[1] That’s nearly $1.7 trillion owed collectively. Shockingly, this amount has grown more than six times faster than the US economy.

The current student lending system is a field of land mines. Lenders often encourage students to take on loans that are extremely disproportionate to what is affordable. Furthermore, they market loans as ‘financial aid’ or ‘assistance,’ or even as ‘grants and scholarships,’ purposely obfuscating students’ obligations to the debt they incur.

Congress is now talking about student loan forgiveness and it’s a hotly debated issue. As in my previous writings on controversial topics, I’ll mix a bit of history and context, spicing it up with a splash of counterpoints where I can. 

How did we did get here?

Student loans are a relatively recent issue for the American people. In the 19th century, higher education was mostly free or expensive and was widely considered to be a public service to state residents. Keep in mind, however, that these were not universities as we think of them today, nor were they widely attended. In 1870, 9400 graduates received BA degrees nationwide. Schools’ goals were different as well, aiming at educating future ministers in religious studies.

Initially, local wealthy families supported local schools, especially of their religious denomination, often by donating land.  By 1830, protestant denominations set up funds that subsidized about a fourth of the prospective ministers then in college. At the beginning of the 20th century, fewer than 1,000 colleges, totaling 160,000 students, existed in the United States.[2]

As time passed, public support (mostly provided by states) for free or inexpensive tuition waned. This was due in part to a change in educational focus from public good to individual opportunity. The public questioned why they should support a program that had become mostly a subsidized luxury for the wealthy. Tuition increased, but so did demand, which drove up budgets for staff and student services.

Before the 1970s, students could still largely rely on federally funded loans to pay for school, but the demand soon drastically outweighed the available supply. One reason was a pivotal court decision, Griggs v. Duke Power Company. The Supreme Court decided in 1971 that requiring job applicants to take IQ tests (or any test that can't be shown to measure skill related to the job) violated Title VII of the 1964 Civil Rights Act. To counter this ruling, companies began to view college achievement as a stand-in for IQ tests, giving schools great leverage to tout the value of their product and raise prices accordingly. What was once affordable to most students with modest jobs who self-funded their education, became challenging at best, impossible at worst.

In her recent book, The Sum of Us: How Racism Costs Everyone and How We Can Prosper Together, Heather McGhee argues that rising tuition is linked, “squarely to the withering government commitment to public funding. The federal government for its part slowly shifted its financial aid from grants that didn’t have to be repaid to federal loans.” 

In 1973, as a direct result, The Student Loan Marketing Association (SLM), now known as Sallie Mae, sprang into existence under the Nixon administration. SLM was created as a government-sponsored enterprise (GSE) and began privatizing its operations in 1997, a process it completed at the end of 2004 when congress terminated its federal charter, ending its ties to the government. SLM’s initial purpose was to buy out loans from lending institutions, allowing those institutions to lend more flexibly. This enabled far more people to attend universities. It also encouraged loans with a higher probability of default—there are consequences for “lending more flexibly.” 

Of course, the price of higher ed soared. Why wouldn’t it? If you produce a product that drives up demand among customers whose money is backed by the US government, your rate increases will only be tempered by your competition. However, if your competitors assess the market similarly, then rates will continue to snowball.

Here are some interesting stats of current debt compiled by Educational Attainment:

42% of associate’s degree recipients owe an average of $21,890 each in federal loans.

63% of bachelor’s degree holders owe an average of $31,790 in federal loans.

54% of master’s degree holders owe an average of $70,070 in federal loans.

45% of doctoral degree recipients owe an average of $118,360.

71% of professional degree holders owe an average of $199,540.

The question now under debate: Is it reasonable to issue one-time forgiveness? I’m focusing on the long-term fix here, not the momentary relief package prompted by COVID-19.  

President Biden has proposed a one-time stimulus of $10K per borrower and proposed that all federally funded schools provide free tuition for families with less than $125,000 annual income collectively. This doesn’t address who covers the ongoing and perpetually increasing costs.

Does it make sense to increase the moral hazard we’ve created by forgiving debt? Won’t that encourage even more debt? Reviewing the above stats, wouldn’t we be rewarding future high earners at a far greater proportion than average earners? What about everyone else who responsibly paid their debt? Or the parents who saved money for their kids’ education? Or people who chose paths other than higher ed? Why shouldn’t they too receive the equivalent of debt forgiveness, for let’s say, starting a business?

TV host and writer Mike Rowe recently voiced his concern over the narrowness of the proposal, reminding his readers that many loans—not just student loans—are used to secure an individual’s future career. An entrepreneur who buys a work truck to start her construction business is no different, fundamentally, than a student investing in her future. But what’s worse, we’re asking the enterprising individual who didn’t borrow for a spendy education to fund student debt forgiveness. Cancelation doesn’t mean debts disappear; it means that debts are paid by taxpayers instead of the student.

Last year the New York Times reported that student debt cancellation would disproportionately benefit the wealthy, including an analysis from the progressive think tank, the Brookings Institute. Yet, reforming the student loan system is imperative for long-term success in the 21st-century economy. Many of us, like Adam Looney at the Brookings Institute, are outraged over the student debt crisis. Two years ago, Looney stated:

“Moreover, these failures are entirely the result of federal government policies. The federal government gutted accountability rules; treated online programs as if they were the same as traditional brick-and-mortar schools; extended credit to students and parents well in excess of financial need or ability to pay; and raised and then eliminated limits on loans to parents and graduate students, allowing many to accumulate eye-popping, unpayable amounts. The government allowed—and often encouraged—people to make bad choices.”

He went on to propose several solutions including consolidating repayment options into one, universal option under the federal government; restoring loan caps for graduate students and parents; and allowing private loans to be discharged in bankruptcy.  

As a community and as a nation, we shouldn’t lose sight of the big picture. Policies generated in the heat of the moment have unforeseen consequences. We also shouldn’t make decisions based on emotional appeal, as righteous as they may appear. Let’s agree on the importance of education. We’re also probably in agreement that skyrocketing costs need to be contained. I hope our legislators will make decisions based on long-term societal interests, not short-term goals – or worse, special interests. Let’s advocate not for policies that seem satisfying, but instead for truly effective policies.

I’m eager to hear what you think. This being a forum of professionals, your thoughts are of great interest to me. Further, we learn not from opinions reflecting our own, but opinions from alternative perspectives, formed by different life experiences. I welcome yours. 

[1] https://www.investopedia.com/student-loan-debt-2019-statistics-and-outlook-4772007

[2] https://en.wikipedia.org/wiki/History_of_higher_education_in_the_United_States