On Student Debt
As of September, 2017, some 44 million Americans, nearly 14% of the population, cumulatively owe over one trillion dollars in student loan debt. Only mortgage debt is larger among types of consumer debt. Millennials and younger people hold disproportionate levels of debt, with 17 million Americans under the age of 30 holding 375 billion dollars worth of debt as of 2015, the last year for which data is available. Staggering levels of student debt are the product of rising education costs and predatory lending practices, and will lead to a long-term slowing of the economy through lessened purchasing power, postponed homeownership, and America’s potential students either forgoing college or leaving the country for affordable education and staying abroad, thus leaving a less skilled workforce. Any sustained remedy to the student debt crisis will require two elements: relief for current levels of student debt, and stymying the rising education costs and predatory lending that led to the crisis. The first might be done through an expanded GI bill, in which student loan debt can be paid off through a certain number of years’ service in the armed forces, Americorps, or Peace Corps. The second might be done by expansion of community colleges, increased subsidies to states for education, and disincentivizing predatory lending through making debt dischargeable through bankruptcy.
High levels amounts of student debt in America slow the economy by reducing the purchasing power of 44 million Americans, including 17 million people between the ages of 20 and 30. The median monthly student loan payment for those between the ages of 20 and 30 is $203, much of which goes to paying off interest. With delinquency rates exceeding one ninth of all student loans, the indebted are likely to stay that way for some time, paying over $2000 per year- five percent of the median 25–34 year old American’s income before taxes- for the foreseeable future.
The economy will slow because if millions of Americans are for many years spending one out of every fifteen, twenty, or twenty five dollars on student loan payments and interest, they will have less money to spend on other things. The money will flow to the banks and the Federal government, which may in turn spend much or all of them money, but will not have the same economic impact on consumer goods and services that millions of people spending their cash will. If an American 24 year old owes $2000 per year on student loan debt, he is less able to save money for bigger expenses like a house or a car. If he can’t buy a car, one less car will be made. Fewer cars made means less need for car salesmen, manufacturers, and a whole other assortment of things. Demand creates jobs. A well balanced economy has strong demand in many sectors. If money is flowing to pay off loans, creditors will grow rich, but the rest of the economy will suffer from a lack of spending. Someone paying $203 per month in student loans is less likely to go out to eat, creating less demand for wait staff at restaurants and for food products by retailers. Trillions of dollars that could be used stimulating a large, diverse array of industries in the large, diverse American economy are instead funnelled to creditors, who do some reinvestment and consumption of their own, but on nowhere near as large or diverse a scale as millions of consumers would. If the debtors who can no longer afford discretionary spending are disproportionately young, industries that cater to young people and those associated jobs will simply dry up. Less demand begets fewer jobs, which in turn will begets even less spending power and still fewer jobs. The drain on American, especially young American, finances will be felt throughout the economy.
Potentially the most significant consequence of enormous levels of student loan debt is foregone homeownership by young people. Traditionally, homeownership has been the most significant driver of American wealth. Home values tend to appreciate, and as mortgages are paid off, families are left with a property worth more than they originally paid for. A Harvard University study found that when it comes to creating wealth, there is “no substitute for homeownership,” in the words of the New York Times. People can borrow against their house to finance business ventures or other investments. They can take comfort in the knowledge that their homes provide a safety net should they fall on hard times, and oftentimes will retire after selling their homes and finding cheaper places cheaper. Student debt is proving itself deadly for homeownership among the young; in 2007, almost one in three people in their twenties owned a home. The number is barely over one in five today. Less homeownership means less wealth for individual Americans and fewer investments, which will slow the economy and make it more vulnerable to recession. A New York Fed study attributed some 35% of the decline in millennial homeownership to student loan debt. Surveys by Realtor organizations various pollsters have found student debt to be a key reason reported for postponing or forgoing homeownership among those under 35. With recent graduates increasingly struggling to pay off their loans, delinquent payments and higher balances five years after graduation are more and more common. The effect is, among other consumption, less homeownership, and in turn less wealth, less security, less opportunity for investment, and more vulnerability to recession for the country as a whole.
Student debt will also slow the US economy by dissuading American from getting an education or pushing them to go abroad to do so and possibly remain there, resulting in a less skilled workforce at home. Education is an investment: money is spent and wages forgone in the hopes of gaining skills and forging connections,which in turn lead to a “better” job, generally defined as making more money but also perhaps more pleasant and interesting than the student might otherwise be able to obtain. Like any investment, education entails risk in the form of education costs and forgone wages while the student in question is in school rather than the workforce. When education costs rise, the risk inherent in getting an education rises. Humans are naturally risk-averse. If the risks of obtaining an education rise in the form of costs, people will not take the investment if the expected returns are not rising on track with the risk. Today, with the already steep costs of higher education rising even further, requiring Americans to take on more and more debt, increases in returns simply are not on pace with the rising risks. As a result, fewer Americans than ever can be expected to take on the risk of a higher education in the United States, either forgoing it altogether or travelling abroad for it.
This past decade has seen a soaring of the number of Americans pursuing four year degrees abroad, with foreign classes taught in English and foreign tuition and fees sufficiently lower than their American counterparts that the travel costs and cultural barriers are worthwhile. Many of those going abroad will likely stay, as foreign students in the United States often do, resulting in the same brain drain in the United States that afflicts so many developing countries-which, ironically, the US has been a huge beneficiary of up to this point.
When countries subsidize college heavily through tax dollars, they are spreading risk throughout the population so that the risk is relatively low compared to expected returns for students looking to take on an investment in the form of education. The result is a more skilled and innovative workforce, able to specialize in highly specialized, productive fields that yield greater wealth for society as a whole. Education in the United States has become a far more risky investment than it used to be, with students being asked to take on enormous quantities of non-dischargeable debt for returns that have not risen as high or quickly. Fewer students, then, will go to college in the United States, either forgoing higher education altogether or enrolling abroad and possibly not returning.The result will be a less skilled, less specialized, and less productive American workforce, which will in turn lead to a slower, more vulnerable economy.
On a purely psychic level, debt makes people unhappy. Studies have shown that household debt is a major source of stress for most Americans, severely impacting their quality of life. Millions of young people will suffer anxiety and worry for decades because of the loads of debt they’ve taken on. Simply taking out a student loan has been shown to negatively impact the quality of life for aspiring students. Allowing national levels of student debt to continue unabated will lead not only to a weaker economy, but to a less happy, less healthy population. Youth is a time to work hard and dream about the future, not toil under the burden of feeling that future has been sold for debt. For the sake of its people, especially its young, and its future psychic and economic health, America must find a solution to the student debt crisis.
Any solution will necessarily be two pronged: eliminating student debt currently held, and preventing another massive buildup of debt in the future. Student debt currently held could be solved through a sort of expanded GI Bill, in which debts are fully forgiven by the government in exchange for a year or two of national service in the armed forces, Americorps, or Peace Corps, as well as the re-legalization the dischargement of student debt through bankruptcy. Prevention of a future massive buildup of student debt can be accomplished through the reduction of education costs. Means of lowering those costs may include lowering demand for higher education by encouraging high school graduates to go into “middle skill jobs” that don’t require a degree, by following the lead of many states in expanding free community college and subsidies for public universities, and by curbing predatory lending practices.
Over 44 million Americans-more than one in eight Americans-hold a total $1.45 trillion in debt. A problem of this magnitude requires a long term, comprehensive solution. An effective strategy for relieving this debt burden is total debt forgiveness in exchange for national service . A form of this exists already, with the Public Service Loan Forgiveness program and the GI Bill. The PSLF program forgives student loans after ten years of payment and work at a qualifying employer, typically a nonprofit or government organization. The GI bill has also subsidized or paid for education for those in the armed services since 1944, if not by directly paying off loans. The United States government, if it wants to relieve its citizenry of debt they have taken on, would be wise to consider an expansion of the PSLF: total debt forgiveness in exchange for two years’ service in Americorps, with a massively expanded program able to undertake badly needed public projects. Americorps is already included as qualifying employers under the PSLF. Under a wide ranging, two year forgiveness program people would be able to pay off their debt and pursue their dreams more quickly, while still making America healthier in countless ways and gaining valuable new skills and experience.
Such a program would likely be expensive, but could feasibly pay for itself in the long run. Volunteers could be tasked with two years each of repairing America’s badly crumbling infrastructure, which would yield its own economic benefits. Simply putting members to work repairing roads and bridges would be beneficial to the country’s infrastructure and economy and cost effective, given the low stipend given to members. Volunteers seeking debt forgiveness could spend two years staffing free medical clinics or underprivileged schools, helping overwhelmed doctors and teachers while gaining valuable skills along they way. They could be deployed to help with hurricanes in Puerto Rico, Texas, and Florida, the nationwide opioid crisis, or to help finally solve the water crisis in Flint once and for all. Problems that will cost America dearly in the long run could be solved, or at least mitigated, by allowing millions of people struggling with student loans to serve their country.
By no means should this solution be considered a fix-all. There would be costs of training inexperienced people to help opioid addicts or build roads. Not seamless, but not insurmountable either. If debt can be totally forgiven, some people might be incentivized to take advantage of the program, taking out more than they need in loans knowing it will be forgiven with two years of service. For this reason, a cap on the amount that can be forgiven may be prudent, or perhaps only forgiving that debt tied to tuition and on-campus housing. It is unlikely, however, that many people would willingly take on more debt than they had to. As mentioned earlier, people are risk averse, and would likely prefer to keep debt levels down, even if it will be forgiven.
Another question is how this program would help those students with private loans. While the Federal government has within its purvey the right to forgive loans it has made, forcing banks to forgive loans they have made would be inappropriate on the principle of private autonomy, and have future economic ramifications by disincentivizing banks from making loans to future borrowers at all; why make a loan, even to a responsible person, if the government might step in and forcibly forgive it? For this reason, the Federal Government should seek to buy student loan debt from banks. Currently, privately held loans comprise some $100 billion, less than ten percent of all student loan debt. $100 billion is not much money for a country with a GDP of nearly $20 trillion.
The government would further be in a position to negotiate with banks were it to adopt another long-term solution to keep the costs of education down: repeal laws preventing the discharge of student loan debt in bankruptcy. Since 2005, no student loan debt is dischargeable through bankruptcy, the only form of debt for which that is the case. Enabling student borrowers to discharge their debt through bankruptcy would have the triple effect of incentivizing private creditors to sell their debt, incentivizing those same creditors not to lend to those unlikely to pay them beck, and in turn preventing students from taking out excessively high loans, thus reducing the amount of money colleges and universities can charge. The expanded PSLF program would be better able to succeed, lenders and borrowers would be more responsible, and tuition costs would come down. Laws penalizing those going bankrupt would need to be kept in place, however, so as to disincentivize bankruptcy as anything but a last resort. The potential of spending up to a decade with the black mark of bankruptcy on their credit record should sufficiently disincentivize all but those with truly unmanageable debt-and there are many of them-from declaring bankruptcy.
Relieving the current debt crisis will do little good if high education costs create another one. Efforts must be undertaken to reduce the costs of education. In addition to making debt dischargeable through bankruptcy, which disincentivizes outrageous borrowing and thus outrageous fees, education costs could be massively reduced through following simple laws of economics. Prices for a good or service are the result of the levels of demand and supply for that good or service. Currently, demand for college education is very high; 2015 saw a 30% increase in college enrollment from 2000, and enrollment has jumped nearly 50% since 1995. Yet, employers today also bemoan a dearth of workers for “middle skill” jobs- those requiring some training but not a four year degree, such as plumbers, electricians, and welders. Demand for higher education is high relative to how many four year degrees are actually needed in the economy. Why not encourage more high school seniors to pursue careers in those fields rather than go to college? Many of those jobs pay good wagesEncouraging, or at least letting graduating high school seniors know it is ok, to go into skilled trades would reduce demand for colleges, in turn reducing prices and the need to take on an enormous amount of student debt. Prices could be expected to fall. This happened with law schools recently: a weak job market and exorbitant tuition costs led to fewer applicants. As a result, several schools opted to cut tuition. Cheaper schools were rewarded with more applications from those still choosing to go to law school. A reduced demand for law school resulted in a decrease in tuition costs, and thus a decrease in the need to borrow money to finance an education.
In addition to reducing demand for higher education, costs can be brought down by increasing the supply. Some states have already invested in free or subsidized community colleges, bringing down the overall costs of higher education. The Tennessee Promise, implemented recently by the Tennessee State Government, promises free community college tuition to any student obtaining a certain GPA in high school. In Virginia, any community college student who does well is guaranteed admission to any four year school. If students can save money by spending two of their four years in community college, and states and the Federal government more heavily subsidize and expand public universities while passing the bulk of those savings onto students, few would have to take on debt to finance an education. Students will then have the option of a cheaper education, and private school students may even benefit as well, if their colleges and universities are competing with ever-cheaper public schools.
The student debt crisis must be solved. To ignore it is to not only condemn our country to a slower economy and to a large swath of our fellow citizens to a lower quality of life, but to forgo an opportunity to solve a host of other problems. There is no question as to whether this problem can be solved, but rather as to whether there exists the political will. Hopefully there does, or we all will bear the consequences.