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Exploring the student debt crisis in America; the causes of, and proposed solutions for the problem

Authors: Dhruv Jayaraman & Varun Chandran

Editor: Harsh Didwania


Abstract


Student debt in America has been snowballing for decades, with average student debt increasing every year. The Covid crisis has made this worse as they struggle to pay back the debt they owe. The problem arises from a knot of poor governance: from predatory for-profit institutions, to higher-than-average interest rates, to over subsidising degrees. However, Biden campaigned on the issue and both Elizabeth Warren and Bernie Sanders have advanced proposals to tackle it. Some of Biden’s plans have been folded into the American Families Plan, which is awaiting congressional approval, but it may not be enough and may even be detrimental. Hence, the future of American tertiary education still hangs in the balance.


Why did the problem arise


Student debt represents an accurate cornerstone of every politician’s agenda, given that it plagues almost 44 million Americans. The total debt accrued nears about 1.5 trillion US dollars, significantly higher than both credit card and auto loan debt (Kurt, 2021). The disruptive and debilitating nature of this problem arises from predatory debt collection, astoundingly high interest rates, and insufficient economic benefit to pay off these loans with equivalent jobs.


Elizabeth Warren, in her speech for the Consumer Financial Protection Bureau in 2013 stated that average interest compounded on a bank loan is about 0.75%. Conversely, student loan servicers charge 6-8% on student loans, compounding debt and misery (CFPB,2021). As a result of this intensive interest rate tagged on, borrowers are forced to continually save less and less, dedicating more of their finances to regular monthly payments of their student loans – and that isn’t even the worst part. Student debt is outsourced by the Department of Education to loan financiers like Navient – who handle roughly 300bn in loan debt (Friedman, 2021). Stories of inefficiency, lack of empathy, poor advice and counterintuitive decisions plague these loan servicers- and the system makes it near impossible for student loans to be paid back.


Furthermore, the expected pay scale granted from jobs is nowhere near sufficient to compensate for enormous student loans that cripple independent families financially for years and years. The average student loan takes roughly 21.1 years to pay off (Hansen, 2021), and with mean starting salaries hanging out at about 40,000 USD (Editorial, 2021), there is little scope to reconfigure or pay off loans earlier. Therefore, the borrowers are left at an impasse – risking financial flexibility for years owing to enormous interest accrued on loans that continue to rise in value, or halting their monthly payments to then pay an even more substantiated volume in the future.


Along with this there is rife race and gender-based inequity in the education system. Black Americans are far more likely to study in for-profit colleges (Chenier et. al. , 2020) which would lead them to be in greater debt as their degrees both cost more and are worth less in the job market. Also,fewer women attend colleges compared to men. Given this information, can we still generate a policy that manages to come to everyone’s aid and rebalance the growing inequality and deficit in America’s political system and bank account?


A look at existing proposals


We will briefly discuss the plans floating around the political circles currently.

Sen. Bernie Sanders wants to cancel all student debt for families making under $125,000 a year, and make all forms of community colleges and apprenticeships free. Additionally, he wants the loan interest rate to be capped at 1.88% p.a. (Sanders,n.d.). Note, community colleges primarily offer 2 year programmes which result in diplomas, certificates and a limited number of degrees.


Sens. Warren and Schumer want to cancel up to $50,000 in debt and limit the loan repayment period to 20 years, after which it will be wiped (Nova, 2021). Also there is to be more protection for students from fraudulent colleges which charge exorbitant fees, and make it easier for current students who are paying off loans from such colleges to get loan forgiveness (Friedman 2021).


Biden’s plans are a little less clear. He has thus far cancelled 3.8 Billion in loans for disabled students and has streamlined the application process for students to seek relief from fraudulent colleges. However, he has said that he only has the ability to cancel up to $10,000 in debts. He also expressed support for making community colleges free and subsidising university tuition for families earning under $125,000 a year, by including them in his American Families First proposal to the senate. (Conde,2021).


The possible impact of these proposals


The first issue is with how much relief to grant and to whom? There is some data to show that if $10,000 of relief was given, the top 40% of income earners would get half of it, whilst the bottom 60% would receive the other half (Lee,2021). Whilst there is some inequity here, it is important to note that this top 40% would include primarily middle-class families as high income families are unlikely to need loans in the first place. Furthermore a relief benefit of $10,000 would increase the net worth of households by $7000 and that the relief would disproportionately aid Black families (who are significantly more likely to be poorer) over White families, with Black families having significantly higher relative increases in wealth (Chenier et. al. , 2020) .


The loan forgiveness would also help reduce generation disparity that younger Americans face and reduce delinquency which reduces credit scores and hence access to capital (Hess, 2021).


Potential Problems


As alluded to above, there are disparities in the demographics of who goes to college and what sort of college they go to. Thus, debt relief could widen already existing social impediments(Lee,2021), and could potentially do more harm than good, and hand an advantage to someone who already has one.


Further, reducing the price of degrees too much may result in larger deadweight loss as too many people may want to get one. This also ties in with addressing the root causes of the problem, which is that too many people want to go to college. Simply making college free will only add a strain to the American economy as not everyone needs to go to college, and neither should everyone. There are disciplines where schemes like apprenticeship and community college will suffice. Making all forms of education free will only encourage students to pursue opportunities which will not be beneficial to them in the long run as there will not be a job market (or an oversaturated market) for them.


Additionally, there has to be some discussion about how to prevent this problem from happening again in the future. Whilst this write-off of debt may occur now, this cannot be something that the government must do again in the future. Hence it will be important to curb the soaring demand for degrees as well. We must also recognise that some degrees are not as worth to society and thus should be subsidised less. This will help bring the inflation rate of the cost of the degree down, as the demand falls, and discourage for-profit colleges. However, this raises an additional Gordian knot. How do we drive fewer students towards degrees, whilst ensuring that no one is priced out of a degree?


Possible solutions


In tackling the immediate crisis, there is a general consensus that relief should be targeted and differentiated based on income. This will somewhat allay the concerns about a blanket relief which could benefit the middle class more (Chittenden, 2021). Another solution is to relieve a percentage of the remaining loan amount, which again could vary based on income(Roll et. al., 2021). However, there is a concern that this could discriminate against those who have sacrificed in order to pay back as much as they can. Hence targeting a portion of the whole initial loan amount (with a rebate to those who have already paid) may be possible as well.


Moving forward, how loans are granted and repaid should be adjusted as well. Interest rates and repayment schedules could vary with the average market value of the degree, with students who have more valuable degrees having to pay lower interest rates. This will help drive students towards more profitable industries, thus reducing the chances that students graduate with a degree that is worthless. However, there needs to be a robust system in place to reduce interest rates for low income students as well, as no one should be denied an opportunity to study due to the cost.


Concluding Thoughts


It must be noted that there are still multiple, opposing, claims about how much any amount of loan forgiveness would benefit the economy. However, it has also been suggested that there would be other unmeasurable effects, such as an improved ability to save, increased home ownership and increased credit scores (Chenier et. al. , 2020 and Roll et. al., 2021).


Furthermore, beyond just debt relief, there needs to be systemic changes in the American education system, mainly to curb soaring demand for degrees, increasing degree costs and fraudulent institutions. Proposed plans do help alleviate the immediate problem, but heavily subsidised degrees may be the wrong approach in the long run.


Finally, on the note of politics, a divided congress makes it unlikely for any significant changes to be made to the system. Although Biden’s American Families Plan is a step in the right direction, it remains to be seen if it will emerge from the Senate unscathed.



References


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2. Chenier, R. C., Seamster, L., Sharpiro, T., & Sullivan, L. (2020, August 14). Student debt forgiveness options: Implications for policy and racial equity. Student Debt Forgiveness Options: Implications for Policy and Racial Equity. https://rooseveltinstitute.org/publications/student-debt-forgiveness-options-implications-for-policy-and-racial-equity/


3. Chittenden, W. (2021, July 22) Cancelling Student Debt Will Barely Boost the Economy but a targeted approach could help certain groups. The Conversation. https://theconversation.com/canceling-student-loan-debt-will-barely-boost-the-economy-but-a-targeted-approach-could-help-certain-groups-162076


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