The current iteration of student loan forgiveness is a disaster
Thoughtful and fair solutions would be fair preferable … here’s hoping
"Getting people to get used to actually paying their loans again is a real problem."- Stacy Cowley, New York Times Finance Reporter on the April 18th “The Daily” podcast, on the subject of student debt.
Across the country, high school seniors are finding out if they were accepted to the college of their choice. It is a humbling moment, regardless of the outcome. For some, they will be attending their dream college, a school for which they have had flags and posters and cheered for since they were 10. For others, they will watch their “dreams crushed” and have to attend "the dreaded back up choice." It is a world filled with hope and dreams and aspirations and freedom. In many ways that letter sets the path for the remainder of your life. And for many, that path leads to perma-debt.
In the United States, there are 45 million federal borrowers who owe $1.6 trillion in student loans. Colleges like Harvard cost $75,000 per year to attend. A full 40% of borrowers never graduate and so hold the debt without any of the earning benefits of a college degree. Even still, the average median starting salary for a college grad of $55,260. Once you pay taxes, living expenses, eat anything but ramen, and drive a car.... well, that $300,000 of student debt is a bad loan, a horrible decision and one that will crush a person financially for their adult lives.
Perhaps this is why, for the 7th time in the 25th month of the "pandemic", the US Government extended the moratorium on paying student loans until August 31, 2022. It is a horrible decision, full of inequity, moral hazard and reeking of political grandstanding, and one that is making inflation and labor shortage worse.
Each month, the federal government is subsidizing borrowers at the 30 year interest rate of 5% to the tune of $6.7 billion a month in forgiven interest. On top of that, borrowers aren't paying any principal on the $1.6 trillion they already owe. At best… well, I can’t think of anything good to say. At worst, it means that people are buying furniture and goods and dinners and cars and pumping their excess liquidity into the market instead of saving and paying their debt. And when you have less obligations, you have no need to work.
But what about the other 100 mm or so American adults? To those that paid off their own loans, I can't even imagine how they feel as they watch their college roommate roll in with a new BMW while they lived in a 1 bedroom apartment for 5 years, despite making $120,000 a year so that they could get out from the under of the burden of loans. What about those that looked at the financial proposition of college when they were 18 and decided to become .... something else ... and now watch as people don't face the consequences of their actions? Good lord.
84% of the debt is held by 18-45 year olds. Relatedly and in particular to this issue, overwhelmingly, college educated and urban dwellers vote Democrat (for all ages with college degrees, the ratio is 53% to 40% who identify as Democrat vs. Republican. The younger they are, generally the more Democrat.) That single issues makes this an enormous issue for the Democratic Party going into the midterms but it’s an issue that Republicans have to pay attention to. If we want to start getting the country back on track, we need to collectively make some hard, bi-partisan decisions that are real solutions.
In 2010, President Obama signed the Health Care and Education Reconciliation, increasing access to student loans and making the Federal government responsible. It capped loan payments at 10% of their income per year and if they kept up with their payments, they would have the loan balance forgiven after 20 years (in public service such as nurses, teachers and military, it was forgiven after 10). At least those were the headlines.
In practice, 2010 was the year that student debt exceeded either auto debt or credit card debt, and coupled with tuition inflation of 8%, college debt quietly became a huge burden to the American economy.
The Federal Government should own some responsibility for making money available to students who shouldn’t have got loans in the first place. Universities should own blame for adding “Masters in Basket weaving” degrees because students had access to cheap debt and it enabled them to adjust tuition upwards at a pace 6% faster than core inflation. But so too should students take responsibility for their choices that weren’t an ROI underpinned equation.
So perhaps a real solution instead of permanent loan moratoriums and debt forgiveness would be to refi all existing student debt to 0% retroactively for a 10 year term, backed by the government, instead of punishing borrowers with a 6.8% interest rates today. To support that if you work as a teacher, nurse, social worker etc. it would extend the 0% interest rate to 20 years. And with those changes, the federal government would end it’s role in financing tuition at private and state schools and instead support community colleges and trade schools as the viable alternative.
The catch to the 0% interest rate? You must finish your degree and be employed and part of the workforce or the interest rate goes up to the 30 year mortgage rate. After all, we have been told for 2 years that every citizen has “an obligation to society” so it seems reasonable for taxpayers to get a return on their investment.
It’s time that politicians stop with talking points and grand standing and instead bring solutions forward that are fair and equitable that do, in fact, address opportunity and equity without undermining equality and hard work.
DRW, very thought provoking post. A few thoughts if I may.
1. I hope we can agree government is not the answer to the student debt problem. They helped to create the problem in the first place. Government should get out of the student loan business.
2. Business is the answer. Business, not government, is in the best position to make a change for the better. Business has benefited from being part of the American experiment so helping to fix this problem is not too much to ask.
3. For those already graduated, businesses could identify people who have the skills needed by the business and offer to assist with repayment of the loans in return for a commitment to work for the company for "X" years. Much like the military pays for college in exchange for service. Of course, some graduates, despite having a sheepskin, don't have the skills needed by business. If the prospective employee is willing to put in additional work to make them employable, the business should make that happen. We need contributing members of society at the end of the day.
4. On the front end, businesses should approach colleges and outline the types of people they need. i.e. mechanical engineers, materials scientists, business analysts etc. This should be extended to trade schools and community colleges to fill the roles that don't require a four year degree. Business should identify the numbers they will commit to hire over a given time period and agree to pay the cost of their education in exchange for the student working as an intern while going to school. Yes, it might be hard to work and go to school but many people have done it in the past. If students want it badly enough, they will put in the work.
5. University's should be producing students that are needed in the workforce. Churning out students with degrees not needed in the workplace is a travesty. However, the liberal arts do have value in producing more well rounded citizens. So if business needs computer programmers but some of them also want to obtain a minor in something like art history or ancient Greek philosophy that should be encouraged.
David, I have worked in many places around the world over my career. During that time I have been privileged to be a part of and to build and grow some successful organizations, populated with people from many different backgrounds. What they all had in common was a belief in dignity, strength of character and human spirit. Massive student debt crushes those traits. As business leaders we should be setting the next generation up for success by not allowing this student loan crisis to continue.
What a joke! Teaching financial responsibilities is part of growing up. This will undoubtedly lead to more people racking up debt they will never pay, file bankruptcy protection, get a credit line reinstated and continue to make more bad decisions. All this stinks! There is a skunk in the White House.