Note: This article appeared in the June 4 issue of Commonwealth Magazine.
Any day now, President Biden is expected to make an announcement that his administration will be cancelling up to $10,000 in college student loan debt for each borrower.
A lot of people are going to be unhappy about that.
Borrowers with much larger loan balances hoping for greater relief will be deeply disappointed.
Democrats like Massachusetts Senator Elizabeth Warren, seeking to forgive $50,000 in debt, or Vermont Senator Bernie Sanders, who wants to erase all student loan debt, will fall quite short of their goal.
Republicans like Utah Senator Mitt Romney and Missouri Representative Jason Smith, who think any proposal to eliminate student loan debt is reckless fiscal policy and a political stunt designed to earn votes may try to stop the president’s anticipated executive order.
So, just who will be happy?
Most likely, a relatively small portion of Americans with modest student loan debt and average incomes, as well as some borrowers who took out loans and did not complete their degrees.
More importantly, as both Democrats and Republicans seem to agree, waiving any amount of student loan debt today does nothing to alleviate the systematic problems that created the debt crisis we now face in the first place.
How in the world did we get into this mess, and what can we possibly agree on that will get us out of it?
Who Has Student Loan Debt?
There are a lot of misconceptions around student loan debt, which can make it difficult to understand what the best solutions might be.
Here are some straightforward facts, available through the U.S. Department of Education, the Brookings Institution, the National Student Loan Data System, and Educationdata.org that should inform better policy decisions:
- Right now, about 45 million borrowers (around one in every eight Americans) owe a collective $1.7 trillion in student loan debt.
- In 2022, the average student loan debt is $36,510 per borrower.
- About 75% of borrowers used loans to pursue undergraduate degrees at two-year and four-year institutions, and account for about half of all student loan debt.
- About 25% of borrowers used loans to pursue graduate degrees, and account for the other half of student loan debt.
- Despite horror stories about graduates drowning in six-figure loan debts, only about 6% of borrowers owe $100,000 or more, and most of those attended professional schools to study business, law, or medicine.
- Around 30% of undergraduates complete college with no debt, and another 25% graduate with $20,000 or less in debt.
- Nationally, nearly two-thirds of associate degree earners at community colleges have no student loan debt (here at Northern Essex Community College, only 11% of the graduating Class of 2022 have student loans and the average amount borrowed is less than $10,000).
- Student loan debt by race varies widely, with Black and African American college graduates owing an average of $25,000 more than White college graduates.
- Black and African American college graduates also struggle the most to repay their loans, with a default rate five times higher (21%) than their White college graduate counterparts (4%).
The actual amount of debt a borrower owes is not always the most critical factor.
Whether the borrower graduates with a degree, the borrower’s earnings, and the amount of the borrower’s monthly payment more frequently determine whether the debt is a wise investment in a future career or an unmanageable burden leading to years, even decades, of financial stress.
While there is no single formula for determining how much student loan debt is too much, financial advisors offer rules of thumb such as:
The total amount of debt should not exceed the yearly salary that the borrower expects to earn during the first year after college.
And:
The monthly payment should not exceed 10% of the borrower’s gross monthly earnings.
Considering these two options, a software development engineer with a bachelor’s and master’s degree and $65,000 in debt (the median for the field according to EducationData.org), should be able to reasonably manage making $722 monthly payments for ten years with a $147,000 annual, or $12,250 monthly starting salary (typical for the field according to Monster.com).
On the other hand, a social worker with a bachelor’s degree and $35,000 in debt (about $10,000 more than the median for the field) may struggle to make $389 monthly payments for ten years with a $33,000 annual, or $2,750 monthly starting salary (also typical for the field according to Monster.com).
If that same social worker is a first generation, Black college graduate from a low-income family, and attended a for-profit college (where Black and Hispanic students are three times more likely to go than White students), her debt may be twice as high, and it may ruin her financially for the next twenty years or more.
The Pros and Cons of Student Loan Debt Forgiveness
The move that the Biden administration is about to make to forgive some amount of student loan debt is the result of millions of Americans delaying ordinary stages of life, such as getting married, buying homes, and having children, or even delaying retirement because of their student loan obligations.
According to a recent poll by Morning Consult, about two-thirds of Americans believe there should be some kind of student loan debt forgiveness, ranging from just some debt for the lowest income borrowers to all debt for everyone.
Perhaps not surprisingly, this belief breaks down quite differently by age group, with 71% of voters under the age of 34, including 56% of Republicans, favoring some form of debt cancellation, while the older Baby Boomer generation, especially Republicans, disagree.
A chorus of voices on both sides of the debt forgiveness debate has been rallying supporters for years now.
Those pushing to forgive some or even all student loan debt argue that:
- This generation faces significantly higher college costs unlike any previous generation and something has to be done.
- To make matters worse, student loan debt is making an already terrible racial wealth gap even worse. Black and Hispanic college students borrow at higher rates and larger amounts than white borrowers, and carry those debt loads much longer.
- Student loan debt is slowing the national economy. Forgiveness will boost the economy and benefit everyone.
- A college education is mostly a public good, building a skilled workforce, increasing tax revenues that benefit everyone, stabilizing families and decreasing the cost of social services such as public healthcare, welfare, and incarceration; therefore, its cost should also be publicly funded.
While those who do not support debt forgiveness argue that:
- Forgiving student loans is not fair to the people who have already paid their debts.
- Inflation is already soaring and juicing the economy with billions of dollars in additional, suddenly discretionary, income will make it worse.
- Only about a third of Americans have a college degree. Loan forgiveness would amount to the people who did not attend college paying more for the people who did. In particular, loan forgiveness would be a giveaway to well-educated, wealthy professionals—doctors, lawyers, and corporate CEOs—who chose to go to expensive universities and pursue graduate degrees, and who now earn enough to pay their debts.
- A college education is mostly a private good, earning the degree holder about a million dollars more in annual income over a lifetime; therefore, its cost should also be privately funded.
What Policy Changes Would Really Make a Difference?
Just because a majority of American voters, especially younger ones, favor some form of debt forgiveness, and a Democratically controlled White House is ready to make it happen, is it the best choice to make to solve the problem we are facing?
Probably not.
The gesture will indeed provide relief to about a third of federal loan borrowers, those who owe less than $10,000, and it will lower the balances on millions of other borrowers, making it somewhat easier to pay down their loans over time.
However, without addressing the myriad problems with the existing federal student loan system, as well as the overall cost of college attendance and resources available to pay for it, we will find ourselves right back in the same place again almost immediately.
And of course, the Biden administration has no authority at all over the approximately $133 billion in privatestudent loan debt carried by millions of Americans.
So, while $10,000 in debt forgiveness may well be a one-trick pony that will leave a lot of people wanting more (or less), there are some more moderate, practical solutions that could help reduce overall student loan debtwhile increasing college attendance and completion, particularly for low-income, first-generation, students of color.
For example, a group of the most knowledgeable experts on the front lines of this dilemma, the National Association of Student Financial Aid Administrators, just released a report, Protecting Borrowers & Advancing Equity: Systemic Solutions to Improve Federal Student Loan Servicing & Repayment, with nearly fifty very specific recommendations.
A few with the greatest potential for positive impact (and maybe even bipartisan support) include:
- Consolidate the seven different student loan plans and sixteen repayment options for federal loans into three easy-to-understand and administer plans.
- Eliminate origination fees and lower student loan interest rates.
- Get rid of “negative amortization,” which happens when borrowers make the minimum required monthly payment, and it is not enough to cover the interest charged, so they end up with higher loan balances even years after beginning repayment.
- After taking the steps above, allow all borrowers who are currently in default on their loans a one-time opportunity to “reset” with these new safety nets in place.
- In the future, automatically enroll borrowers who are delinquent on their loans into income-driven repayment (which already exists but is underutilized) before they enter into default.
These may all seem like down-in-the-weeds, technocratic solutions, certainly not as eye-catching or headline-grabbing as “Student Loan Debt Forgiven,” but when it comes to the art of the possible in Washington right now, they may be more achievable, and will do a lot of good for a lot more people.
Another idea to consider, which may not have the same broad appeal:
- Place more limits on student loan borrowing (including private loans). There are already annual limits on federal student loans at the undergraduate level, as well as aggregate limits: Dependent students cannot borrow more than $31,000 and independent students cannot borrow more than $57,500.
However, there are no limits on federal loans for graduate studies or on private loans at any level. Tighter restrictions on borrowing, while not popular with everyone, would force some choices among borrowers and at colleges and universities, which may have to put tighter controls on their costs.
While much less likely to gain bipartisan support, the one step that would be most likely to reduce the cost of college to students, and therefore their student loan debt:
- Increase the amount of Pell Grant funding available, and expand the number of students eligible to receive it. When Pell Grants were created by Congress in 1973, they covered approximately 80% of the cost of attending a four-year public college. Today, they cover less than 30%. Because of the way federal financial aid is calculated, increasing the amount of Pell Grants (which some have suggested doubling from $6,900 to $13,800 annually) would simultaneously make more students eligible for the aid. It would also return the Pell Grant to its original purpose: Helping to pay for the real costs of attending college.
Lastly, there is a role for states to play here as well. In Massachusetts, the Department of Higher Education has successfully advocated for funding from the state legislature that has expanded the MassGrant Plusprogram to help community college students pay the full cost of their tuition and fees, and is about to expand the program further to include students at state universities and the University of Massachusetts campuses.
Additional funding for students’ living expenses beyond tuition and fees—food, housing, transportation, and more—would further reduce the need for student loans while improving student retention and graduation, and adding to the state’s skilled workforce.
The debate over student loans and how most Americans pay for a college education should no longer be about whether we do something, but rather about what we are going to do.
And if we are going to make real, lasting progress anytime soon, our attention needs to be forward-focused on solutions that address the actual causes of the problems we face, so that a generation from now, our children’s children aren’t facing them, too.
