By Reaghan Waites, Civitas Intern
Long seen as America’s launching pad for success, high school students clamor at the doorstep of collegiate institutions hoping for a piece of the pie. But what waits beyond those doors carries a much more ominous tune than the excitement of obtaining a degree: mounds and mounds of student debt.
At a time when college graduates have traditionally anticipated buying a home, relocating for a job, or starting a family, today’s college graduates are drowning in an ocean of student debt and the stress that comes with it. Nearly 70-percent of students in America resort to federal loans to navigate the financial hurdle of tuition.
I am one of the 70-percent.
While student debt forgiveness sounds nice, my initial reaction is to laugh every time another politician promises to forgive student loans. These proposals come with a slew of problems despite the meticulous effort lawmakers make to tiptoe around reality.
Student debt is on the rise in North Carolina, with the average debt per borrower increasing from $17,693 in 2007 to $26,362 for the class of 2017. When states are ranked according to 10-year increase to the average debt per borrower, North Carolina is the 19thworst in the nation.
On the national level, student borrowers have collectively racked up $1.5 trillion in debt. No Fortune 500 company reaches even half of this amount in annual revenue. Student debt is the second-highest category of consumer debt, second only to mortgage debt. Nationally, 11-percent of students default on their loan repayment.
To help address this issue, several Democrats in Congress have proposed loan forgiveness measures. Sen. Elizabeth Warren’s (D-MA) plan targets low earning individuals (though it would still forgive more than 95-percent of borrowers) while Sen. Bernie Sanders’ (D-VT) plan does not. His plan, the “The College for All Act” will release 45 million Americans from student debt obligations and is a big step towards making college free.
As much as I wish a clear-cut solution existed for the soaring number of students drowning in debt, I know complete loan forgiveness as championed by Sen. Warren and Sen. Sanders is not the answer. These proposals sound good at first, but they introduce a whole new set of problems. Let’s discuss 4 reasons why loan forgiveness is not the solution for resolving student debt:
1. Loan forgiveness fosters the mentality that everything in life is free, thus devaluing education.
Complete loan forgiveness takes for granted the fact that some things worth having come with a price tag; higher education is one of those things. Once higher education becomes free, it will inevitably start to lose its attraction and become lackluster. This is because availability has an adverse effect on prestige.
From a practical standpoint, cheapening higher education will flood the market with college graduates and cause job demand to exceed job availability. Since the financial burden has been eliminated, students will likely be in school longer because college will become the new high school. The cheapening of education may mean more desirable jobs will now require a graduate degree, causing us to wonder, 10 years from now, will the government pay for masters’ degrees’ as well? Loan forgiveness programs begin a vicious cycle aggravated by government involvement.
2. Loan forgiveness is not a financially realistic solution.
Complete loan forgiveness is a solution that robs Peter to pay Paul. Yes, it will cancel the $1.5 trillion accumulated by 45 million student borrowers. But given the $12.4 trillion dollar baseline deficit projected over the next decade and $22.4 trillion in current national debt, loan forgiveness does not seem like a smart or viable financial decision for the country.
Proponents of loan forgiveness say the plan would be financed by taxing financial transactions.
So think about this: loan forgiveness prioritizes the forgiveness of debt for people that consented to financial obligation over American investors whose money stimulates the economy. Under loan forgiveness programs, the financial transactions will be taxed (0.5-percent fee on all stock trades, 0.1-percent fee on all bond trades and 0.005-percent fee on all derivatives trades) to help pay the cost. Even though such transactions have nothing to do with student debt, these transactions will bear the burden of cost– and, so will our economy.
While it would be wonderful to have my student loans wiped away, doing so in this manner would raise the nation’s deficit and require additional taxes on business transactions that help keep our economy growing. When coupled with the additional downsides of loan forgiveness, the costs to implement such a program are simply too great to justify.
3. Some loan forgiveness proposals will benefit all borrowers — regardless of income.
Take Sen. Sanders’ policy for example. Undeniably, many college students — including myself – would benefit from the proposal. But not without a caveat: just under half of student debt is held by households whose earnings are in the top quarter of the nation’s income. So loan forgiveness would provide a disproportionate advantage to the financially successful. Another consideration is the amount of debt held by graduates with advanced degrees, many of whom will probably make a comfortable living. A substantial 39-percent of student loan money is used by students in graduate school. Neither Sen. Warren’s nor Sen. Sanders’ plan accounts for this. It is estimated that even Sen. Warren’s more moderate plan would channel two-thirds of allotted funds to the top 40-percent of households by income. This is not the way to help struggling borrowers.
The inevitable outcome of debt forgiveness is actually just a government handout to the upper-middle class. Remember: one of the driving motivators behind earning a college degree is to make a better living. While college tuition is an unfortunate reality, in most cases, it typically comes with the opportunity for better employment prospects. For those in extreme situations, such as borrowers who do not finish school or whose degrees are defrauded, there are several options for repayment. Loan deferment, forbearance, or “income-based repayment” plans are available. There is also Public Service Loan Forgiveness, or PSLF, which forgives the debt if the borrower works in the nonprofit or government sector for ten years. All of these options provide aid without disproportionately advantaging borrowers who don’t need help.
4. Debt forgiveness programs do nothing to address the heart of the problem; why is college so expensive?
The prevalence of federal financial aid has severed colleges from the realities of supply and demand. As a result, colleges and universities have driven up tuition in response to the increased availability of federal loans. In reality, relying on federal funds to solve issues is a vicious cycle that exacerbates the problem.
I genuinely hope lawmakers can reach a solution to this issue, both for me and my peers borrowing money for school. But when you look closely at loan forgiveness proposals, they are a temporary solution to a permanent problem.
One potential solution that might work to help colleges control costs would be to give higher education institutions skin-in-the-game by incentivizing them to provide quality education while reducing costs. President Donald Trump included a skin-in-the-game provision in his budget proposal. Skin-in-the-game proposals place some of the responsibility on the college instead of a defaulted payment falling on the taxpayers’ dime. Specifically, students that take out federal loans will be guaranteed that if they default, the college will cover the missed payment. Such provisions incentivize institutions to ensure students are progressing and are graduating. If colleges bear some of the risk if a student is not successful, institutions will be more inclined to improve the quality of education while controlling costs—win-win!
Another way to set students up for success is to concentrate on creating a culture focused on improving job prospects. Government regulations such as occupational licensing create an unnecessary burden for those seeking employment. Much of the problem associated with student debt could be addressed by breaking down the barriers that stand between graduates and job prospects. Less regulation means more jobs, and more jobs mean less student debt.
Student debt is a significant and growing problem. Politicians are fooling themselves and students alike when they rely on loan forgiveness as the solution. As a student myself, I hope a solution to the debt crisis is reached just as much as the next person. But a “solution” that cheapens education, is financially unrealistic, and fails to address the heart of the problem is no solution at all. If helping students really is a priority—as so many politicians claim—then they should spend less time trolling for votes and more time on finding practical solutions to the problems we face.