Part One in a Two-Part Series
For many Americans, taking on student loan debt is the only way they can afford to go to college. Among the class of 2020, 55% of bachelor's degree recipients took out student loans, graduating with an average of $28,400 in federal and private debt. And with college costs increasing, the amount of student loan debt is not about to decrease any time soon. As perU.S. News data, for the last 20 years, tuition has more than doubled across ranked private and public national universities. That rise in tuition and fees continued for the 2021-2022 academic year, with private and public national universities increasing their rates by about 2% to 3%. In aggregate, student loan debt in the U.S. now totals 1.3 trillion owed by about 43 million borrowers. Unsurprisingly, this has led to an ongoing debate about what to do about it, with some advocating for complete loan forgiveness and others arguing that it isn't a fair solution. Our Money Matters, a free online platform dedicated to helping students get their financial health in order, shares the pros and cons.
The Pros
1. Student loan debt has disproportionately hurt black students. Forgiveness could help rectify racial inequity.
Black college students borrow more than their white counterparts due to generational wealth and family income, among other factors, and owe an average of $25,000 more in student loan debt than white borrowers. And while they graduate college with more student loan debt, they are also often denied the type of salaries that would make it feasible to pay those loans back. In fact, four years after graduation, 48% of black students owe an average of 12.5% more than they borrowed.
2. Student loan debtors do not have the option of declaring bankruptcy.
In every other debt situation, including car loans, credit card charges, business loans, medical bills, etc., Americans can declare bankruptcy if they can no longer afford to repay their creditors. The U.S. Supreme Court said in 1915 that the benefits of bankruptcy allow debtors to “start afresh," essentially enabling adults to release themselves from the yolk of debt to start with a clean slate. And yet, mainly younger people, who take out college loans often before they know the full implications of that debt, are not afforded that same option.
3. Excessive debt has prevented an entire generation from reaching adult milestones.
The choice to receive a higher education should not prevent people from realizing the American dream once they graduate. Unfortunately, that has turned out to be the case for many. According to the Federal Reserve, owning one’s home has turned from a dream into a nightmare, with student loan debt preventing about 400,000 people from buying homes between 2005 and 2014. That accounted for a significant decrease of 25% in homeownership. And those with student loan debt only save half as much for retirement by age 30 as those without obligation. These two things hurt both those struggling with the debt as well as the entire economy.
The Cons
1. Debt forgiveness would disproportionately help prosperous or more financially secure college graduates.
Constantine Yannelis, Ph.D., Professor of Finance at the University of Chicago, states, "Any policy that is a universal loan forgiveness policy or a capped forgiveness policy — say forgiving debt up to $50,000 — is going to give most of the dollars in forgiveness to upper-income individuals.” That is supported by the fact that students from families earning more than $114,000 a year borrow at the same rate as the lowest-income students — and they take out loans nearly twice as large. Adam Looney, Ph.D., Nonresident Senior Fellow at the Brookings Institute, pointed out, “More than 90 percent of children from the highest-income families have attended college by age 22 versus 35 percent from the lowest-income families and workers with bachelor's degrees earn about $500,000 more throughout their careers than those with high school diplomas.” So, essentially the argument is that by agreeing to a universal bailout, the American taxpayers are giving a free ride to many people that could, and should, pay their loans back.
2. Eliminating student loan debt is an abuse of the entire system.
In the same way that people must be held responsible for other personal economic choices, student loan borrowers should be no different. Is it fair to wipe out student loan debt for some while others worked hard to pay off their debt or are currently in the process? American society guarantees free education through high school, but it does not offer that same benefit at the university level. Therefore, those who choose to continue their education and take out a loan should go into it with their eyes open and acknowledging their obligation to pay it back.
3. Debt forgiveness does not address the rising cost of tuition.
Debt forgiveness would not address the fact that tuition is increasing at an astronomical rate. Tuition inflation has risen faster than the cost of medical services, child care, and housing. And prices at American colleges are the highest of any large country in the developed world. According to a Forbes article, there are four possible explanations for the significant cost increases; students overestimate the ROI of a degree; colleges are not transparent about their actual fees; too few institutions operate in each regional market; there are significant barriers to entry for new educational providers. That means that until these issues are addressed, the U.S. will essentially be dealing with this exact situation in the future even if they forgive student loan debt today.
Conclusion
The bottom line: there are no easy answers. And no matter which side of the debate you fall on, there are upsides and downsides associated with every scenario. That said, this is a crisis that’s not going away, and it needs to be addressed. In our next Our Money Matters blog, we will outline some of the possible solutions that are being proposed.
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