Student loan debt is having major effects on the economy. Liam Glen writes on the importance of addressing the debt crisis.
Billionaire Robert F. Smith received rightful praise when he pledged to pay off the student debt of Morehouse College’s graduating Class of 2019. As he said in his address, “I’m giving you access to your lives.”
But the move also brings up an obvious issue. There are still millions of indebted college graduates in the United States who are unlikely to get assistance from a billionaire.
In the competitive modern job market, most well-paying positions require a four-year degree. Meanwhile, the cost of university in the US has been growing at a rate eight times that of wages. For many students, the only recourse is to take out loans to cover the cost.
According to 2017 statistics, total student debt in the US has reached $1.4 trillion. Those who took out loans owed an average of $37,172.
A problem clearly exists, but it is easy to find excuses not to address it. Columnist Philip Klein, for instance, argues that student debt forgiveness would be unfair to those “responsible” enough to pay off their debt.
Even those who acknowledge the problem, such as Senator and presidential candidate Amy Klobuchar, demure from more radical solutions like tuition-free college as it would be too expensive.
Much of the discourse frames student debt as a sectional issue that only affects those directly indebted. In truth, however, it is a major economic problem. And it is much cheaper to deal with it now than to do nothing and wait for the consequences.
A Societal Problem
College education is the key to a skilled workforce. However, the prospect of thousands of dollars in debt is not encouraging for prospective students.
Even those who do complete their degree by taking out loans cannot be expected to be top contributors to the economy. Unsurprisingly, thousands of dollars in debt discourage consumption and investment.
A paper by the Federal Reserve attributes both low homeownership rates and rural brain drain to student loan debt. Economists also believe that it is has made the younger generation less likely to start small businesses.
Blaming students’ own inability to pay off their debt does not make it go away. And it does not stop the inevitable slowdown of economic growth.
The risk could be even greater given the controversial idea of student loan debt as a bubble that will pop as default rates grow.
A Lunch That Pays for Itself
The immensity of the problem has left no shortage of solutions, especially as the competition for the 2020 Democratic nomination moves the Overton window to the left.
Bernie Sanders’s College for All Act would pay all tuition for working and middle-class students. The Debt-Free College Act would cover other expenses to ensure student loans are unnecessary. Elizabeth Warren plans to forgive all existing student loan debt.
“There is no such thing as a free lunch” is the typical retort to such proposals. All of these programs will have to be paid by taxes. This is true, but that is not necessarily a bad thing. Taxation exists to invest societal wealth in things that benefit the country and reap future returns, like education.
K-12 public education is already free in the US. Several countries, including Germany and Norway, have tuition-free universities.
However, there is no denying that such a major departure from the current system would be expensive. Sanders himself estimates that College for All would cost $47 billion per year. Warren places her own plan at $640 billion, paid through her controversial wealth tax proposal.
Major proposals such as free college have their strengths and weaknesses. They would also be extraordinarily difficult to enact into law. While they should not be discounted, they are also not necessarily the only solutions.
Other plans to make higher education affordable can come from a federal, state, or even institutional level. Mitch Daniels, former Republican Governor of Indiana and current President of Purdue University, favors income-share agreements. Under this system, students repay investors as a proportion of their income over a set period of time after they graduate. Unlike normal loans, no one’s debt exceeds their ability to pay.
Programs like this can alleviate the problem. And some change in students’ behavior will be necessary – a lot of debt comes from students who attend for-profit private colleges, for instance. But, given the scope of the issue, systematic, national change is the only way that it will be solved.