A Grand Bargain on Student Debt
There's a way to solve the student debt crisis permanently and save taxpayer money, while giving both parties something they want
With rumors swirling that the Biden Administration is eying partial or complete student debt forgiveness, this policy issue is (for the next few minutes at least) once again front-and-center in the ADHD-riddled public square. 44 million borrowers stand to gain from forgiveness. It bears disclosing that I am one of those borrowers. To the best of my understanding, however, I do not believe this fact motivates my policy proposal. Be that as it may, I have laid bare my bias for the reader to decide.
There can be no doubt that the current student debt landscape is in crisis. The average student debt held by borrowers has reached $37,113.1 Tuition has increased at twice the rate of inflation for decades now,2 with absolutely no commensurate increase in quality of education. Yet faculty pay is stagnant. Instead, most of this increased revenue has been shoveled into an ever-more-bloated administrative apparatus taking over universities. In the 2018-2019 academic year, actual instruction accounted for just 27% of public university expenses, down from 41% in the 1980s.3 Administrative expenses, on the other hand, have increased tenfold.4
Remarkably, runaway costs have not stifled university enrollment. This is because Pell grants and government-backed loans eliminate price sensitivity for prospective students, who will always get enough “financial aid” (including loans) to cover every penny of cost of attendance and living. This removes the biggest potential check against undue price hikes by universities. There’s no incentive to run a tight ship. Future graduates (and the economy at large) pay the price.
Loan forgiveness without fundamental reforms will do nothing—we will be back in the exact same crisis in a decade or two. Thus, any proposal for forgiveness must include reforms that ensure we address the underlying problem. Ideally, a proposal would include concessions to both Democrats and Republicans—a requirement for effective legislation in a diverse democracy we seem to have all but forgotten in modern times.
So how do we get there?
The Price Tag on Loan Forgiveness is Much Lower Than Advertised
The oft-cited figure for total forgiveness is $1.7 trillion. Critics of forgiveness frame this as a gargantuan sum we cannot and should not shell out to “bail out” young people who got in over their heads. Proponents often point to the fact that the 2016 tax cut was estimated to cost $1.5 trillion over 10 years. In their accounting, we always have money for certain people (and companies) but not those who need it most.
In fact, the actual “cost of forgiveness” is much lower. Student loans are funded by taxpayers at the time they are taken out and that money goes to schools immediately. The universities have already been paid, and the taxpayers have already ponied up. The government, in turn, is left with a promissory note—a legal document that says the student promises to pay back the amount plus interest. On the balance sheet, this is an asset that brings in a trickle of income each year. In 2019, the last year the government collected student loan payments before our current ever-lengthening freeze, the government collected $70 billion, just 2% of federal revenue that year.5 That’s also just 2.6% of total student debt. And since aggregate debt is growing much, much faster than it’s being paid down, the disparity will only increase with time.
In reality, much of that $1.7 trillion will never be paid back, regardless of whether we implement widespread forgiveness. The more tuition and loan balances detach from the reality of ability to repay, the more students will be perpetually saddled with income-based repayment plans until they are either able to take advantage of 10-year or 25-year loan forgiveness programs or they die. In either event, the remaining loan balance is never collected (student loan debt is discharged at death). That piece of paper the government has becomes worthless.
Thus, the real cost of student loan forgiveness is whatever amount borrowers will actually pay back in their lifetimes. And that amount is much less than the $1.7 trillion face value of the government’s promissory notes. In fact, at any given time almost half of all student loan borrowers aren’t even paying on their loans.6 This is due to a combination of forbearance, deferment, grace periods, default, and borrowers still in school or back in school again. Even when you exclude those borrowers still in school, more than a third of borrowers aren’t paying down their loans at all. Millions are in default. Millions more are behind on payments. In fact, before the student loan repayment freeze imposed during the pandemic, only 18 million borrowers holding $685.5 billion of the total $1.7 trillion student debt were in active repayment at all.7
For the 52% of borrowers (18.5 million people) who are paying something each month toward their student loans, 8.5 million are enrolled in payment plans that cap monthly payments based on income.8 Unless their financial situations radically change, virtually none of these borrowers will ever repay the balance of their loans.
The System That Got Us Here is Utterly Broken
This underscores the fundamental problem—borrowers were sold a bill of goods, and they are now holding a tremendous amount of bad debt. To continue to insist the government is sitting on $1.7 trillion in promissory note value is to engage in a kind of fantasy thinking.
It is clear, therefore, that the system that brought us to this point is fundamentally broken and must be bulldozed and rebuilt from the ground up. Saddling millions of newly educated (prospective) middle-class Americans with lifelong debt as a standard rite of passage is an undue permanent shackle on the economy, not to mention millions of people’s lives.
Still, many Americans work fervently to repay their student loans. Many more never take out a single dollar in federal student loans. Opponents of student loan forgiveness point to the unfairness for these groups.
Below is my proposed blueprint forward. This blueprint has components that appeal to the political left as well as the right. It addresses the unfairness to those who paid off their loans or never took out any in the first place. It proposes a new system that makes education more accessible while ensuring we don’t have another student debt crisis a decade or two down the line. Best of all, it should save taxpayer money rather than further increase government spending.
A Blueprint Forward
(1) Forgive All Student Debt
The first step is simple, albeit controversial. Forgive all student debt.
Why not impose a forgiveness cap per borrower?
In reality, such a cap has no relation to any of the goals of our reform. If somebody is buried in debt, partial forgiveness might be effectively the same as no forgiveness at all. If you are a social worker or public defender making $45,000 a year with $120,000 in student debt, for example, reducing your loan balance from $120,000 to $70,000 does not change the fact that it is impossible for you to ever repay your loan balance. Almost 3 million borrowers have more than $100,000 in student debt. This is less than 10% of borrowers, but for each of those borrowers, their crushing debt is fundamentally life-altering. If the goal of forgiveness is to help graduates out of impossible situations resulting from a broken system, partial forgiveness leaves too many borrowers in need behind, and for too little benefit.
Why not means-test loan forgiveness?
Limiting forgiveness to borrowers below a certain threshold at least makes more sense than placing caps on the amount of forgiveness. Afterall, does a borrower making $150,000 a year need a bail out? Probably not, but as I will discuss further below, my proposed new system will ensure that going forward no American is required to take on student loans to earn a degree. Total forgiveness is the closest we can come to putting current and past graduates on the same footing as future students.
Finally, the administrative burden associated with means-testing government programs often costs more than it actually saves. There is no reason to needlessly take on these costs to find a few needles in a haystack comprised of 44 million pieces of straw.
(2) Give Non-Debt Holders a Commensurate Tax Credit
The average holder of public student loan debt owes $37,000. Giving a tax credit in that amount to all taxpaying adults who did not benefit from loan forgiveness should address concerns of unfairness.
This credit can be paid out over a ten-year period so that each year non-debt holding taxpayers receive a $3,700 tax credit. (Note: in a sense, student debt holders experience forgiveness over time as well, since most would not have paid off their entire loan balance in one lump sum but rather over several decades, if ever).
(3) Make All Public Colleges Tuition-Free
Public universities should be a free option for students looking for higher education without taking on student debt. As discussed further below, existing federal funding from the failed legacy system of student aid can be reallocated to the states and apportioned at the state level. This funding can be made contingent on those states’ public schools agreeing not to charge students tuition for attendance.
To bring down the currently sky-high costs associated with post-secondary education, it will be necessary to cap the ratio of administrative staff to enrolled students. And since this blueprint will bar schools from continuing their current trend of aggressively increasing tuition each year (with no tuition to increase), they will have to run a tighter ship, ensuring costs don’t balloon again down the road.
Students choosing to work part-time will find that covering their cost of living is much more manageable than tackling today’s astronomical tuition costs. Additionally, the federal work-study program could be left intact because this program actually costs the federal government very little in the aggregate and provides effective, targeted aid for less advantaged students. Finally, individual states and universities have existing programs to help provide students with scholarships and financial aid. The funding from such programs can be repurposed to help address students’ cost-of-living.
(4) Abolish Pell Grants, Student Debt Tax Credits, and Other Federal Aid Programs
Aside from work-study, this blueprint proposes we abolish all federal aid programs. With free public college, we don’t need them anymore.
How much money will this save? It turns out, more than universal tuition-free college will cost.
How is that possible?
In the past decade, the annual total Pell grant disbursement has ranged from $26 billion and $42 billion.9 This is a need-based grant paid out to public and private universities for each student whose family earns less than $50,000. For students who attend private schools, this is a direct government subsidy to that private school. The federal government additionally forgoes tens of billions of dollars each year in higher education-related tax credits, including student loan interest deductions, the American Opportunity Tax Credit, and 529 plans.10 The actual figures fluctuate year-to-year, but the total cost of federal aid (excluding loans) ranges from about $60 to $90 billion annual.
And the annual cost of all tuition paid for public schools? Even at the current highly inflated tuition rates necessary to upkeep massive administrative bloat (which this blueprint would slash by capping administrative staff), public schools took in between $60.27 billion and $82.78 billion in tuition annually between the 2010/2011 academic year and the 2018/2019 academic year.11
Most of the tax breaks above are rendered superfluous by a system without federal student loans. The remaining program, 529 plans, disproportionately benefits the wealthy,12 and would be less necessary in any event in a world with universal tuition-free college. Pell grants represent massive subsidies to private colleges, including predatory for-profit colleges. If the government gets out of the business of propping up private schools and providing college-related tax breaks to the upper class, it can rejuvenate public schools with a universal tuition-free model while saving taxpayer money.
(5) Allow Private Colleges to Compete Without Government Subsidies
Prospective students are still free to seek student loans in the private market, of course, but those loans will no longer be guaranteed by the government. And private colleges are free to keep their current levels of administrative bloat and commensurately astronomical tuition rates. Doing so, however, when prospective students have a completely free alternative in a public option, would be economically ruinous for those universities, whose admissions numbers would plummet.
Therefore, private colleges will naturally be incentivized to cut costs and offer more sane tuition rates. Massive endowments and existing scholarship and grant programs can help ensure greater access to students that don’t come from advantaged backgrounds. And with tighter competition from public schools enticing more students away from private schools, those private schools will have more incentive than ever to welcome students from less advantaged backgrounds.
The current system is completely broken. The government is sitting on $1.7 trillion in bad debts, a fraction of which it can actually hope to recover. We got here because of a system with students lacking price sensitivity (because the government ensures no matter how expensive school is, you can borrow enough to pay for it) and universities shamelessly increasing costs year after year to rake in more government dollars.
The government can’t (and shouldn’t) force private institutions to fix their broken business model, but it can right its own ship and stop throwing money at mismanaged private schools. The money it saves by doing this is more than enough to create a completely tuition-free model for future students. That model will compel private institutions to shape up in order to compete.
Taxpayers win. Graduates win. Students win.
Who loses? (a) Private schools, who have until now turned the federal government into a veritable piñata of virtually no-strings-attached bags of cash; and (b) university administrators, who have rapidly soaked up an increasingly larger share of university budgets for decades without any indication they’re actually improving the quality of education anywhere.
Considering what we stand to gain, I think we can live with that.