Americans owe about $1.6 trillion in student loan debt. That’s about twice the current budget for the Defense Department and around 22 times the budget for the Education Department. The prime question is – why is college so expensive? In 1965, the US government passed the Higher Education Act, which was supposed to encourage the students to go to college. The US Government told the universities that they would personally guarantee student loans. When the colleges heard this, they got assured that they would be paid, no matter the cost, thus they raised their prices. After all, the government isn’t a money-making entity and so they are just managing their finances by playing with the citizens’ money. 

Do you know that tuition for public colleges alone more than quadrupled between 1980 and 2015? The cost of college is crazy and we’re constantly blown away by the eye-popping price tag for some college degrees. According to CNBC, college tuition was far more affordable for older generations. Adjusting for inflation, the cost of private schools rose by 129% since the 1980s while the cost of public schools rose by an even more staggering 213%. By contrast, wages across the board have increased by just 67% since the 1970s. To afford college, many students take on debt, resulting in more than 1 million people defaulting on their student loans every year, all of which amounts to $1.5 trillion in collective student loan debt shared amongst 44 million people.  Take the case of India, Indian banks saw a 142% increase in student loan defaults during a period of just over three years. 

Until recently, student debt and growing loan defaults were considered to be an American problem. Over time, the problem spread to India, where the higher education system is broken and degreed but unemployable young people are mass-produced by the hundreds of thousands. Student numbers have increased due to population growth and the common belief that a college degree improves one’s life chances, and the government’s push to improve the gross enrolment ratio (GER). The number of students enrolled at private institutions has gone up, primarily due to the slow growth of public institutions and their physical and academic decay and they are, of course, more expensive to begin with.

The two main drivers of the rising cost of tuition are reduced state funding and the incentive for tuition raised as unrestricted revenue to benefit colleges, meaning colleges can choose to spend tuition money however they wish. States and local communities are spending less per student. Someone has to take on that cost, and unfortunately, it’s been the student. 

Higher education is increasingly considered a necessity, and today’s young people are often encouraged to borrow to cover the costs. Much like the mortgage industry before the housing crisis, lenders are extending credit to students without fully weighing their ability to repay the debt. Institutions are eager to enroll students, but many borrowers, especially those who leave school without a degree, struggle to find well-paying jobs to pay back their loans.

So should the government pay off all student debt? 

The plans to eliminate debt come in tandem with proposals to decrease or eliminate college costs, which prompt questions of their own. But what, exactly, might happen if the government simply wiped out student loans?

The Problem With Broad Student Loan Forgiveness Plans

Unfortunately, those of us who have been around for a while know just how “expensive” free stuff can be. Plans would cost $1.2 trillion over ten years, a tab taxpayers are expected to handle on top of everything else. The original plan is to tax other people for giant entitlement programs and new initiatives, but everything costs more than people think, and those costs trickle down to hit everyone if you give them enough time.

But these are only two problems that will plague student loan forgiveness on such a broad scale. There are many more egregious moral hazards to be aware of — hazards that could lead to a whirlwind of consequences for pretty much everyone involved, and especially taxpayers.

Firstly, blanket loan forgiveness would reward people who overpaid for their degrees. One of the biggest moral hazards will be that it punishes people who put their college degrees to good use — as in, to earn a lot of money. In the US, households with an income under $100,000 would have up to $50,000 in student loan debt forgiven, but forgiveness would be phased out for households who earn between $100,000 and $250,000. Finally, households with incomes higher than $250,000 will have no loans forgiven. Due to the way this plan is set up, a family with two doctors and top-tier earnings would be left to fend for themselves. This is despite the fact they probably spent 8+ years in school so they could learn to save people’s lives. On the flip side, someone who borrowed $150,000 for a bachelor’s degree in general studies and works only part-time would likely see some of their loans forgiven. How fair is that?

Second, we’re asking taxpayers to pay for individual decisions. It really boils down to the fact that we’re asking taxpayers to cover individual decisions regardless of how good or bad they are. The rich have a way of working to minimize tax consequences, and the middle class is often hit the worst. 

Next, student loan debt holders are already privileged. Student loans are held by consumers who hopefully got a college degree out of the deal. This means they have a better shot at finding higher-paying employment than someone with only a high school diploma and are already better off financially. If we’re going to help someone with our tax dollars, shouldn’t it be the people who need it the most? Those who are pursuing higher education, therefore, forgiving student loan debt could be considered already helping a privileged group rather than spending government funding to help those in poverty.

Obviously, pretty a post-forgiveness and free college world could create moral hazards on the part of schools. Knowing that the students they take in have easy access to money that they will likely not have to repay could motivate schools to accept more students, or offer more programs, even in the absence of value. While schools are currently motivated by competitive forces to offer quality programs and admit students who can succeed, this may be somewhat mitigated by broad-stroke debt forgiveness. This is because, like it or not, students are less likely to hold schools accountable to provide a quality education if they don’t have to repay the money.

Finally, let’s not forget that broad student loan forgiveness and “free college” plans do nothing to address the growing problem of rising college costs. By awarding blanket student loan forgiveness, students may have no incentive to head into desired majors or fields of study which would be more in line with the needs of our economy. Plus, without appropriate cost controls in place, many will try to go to college “just because,” even if they’re not a good candidate for college to begin with and it can make college the default choice when it does not necessarily need to be.

If the government decides to make the very natural move of borrowing money from elsewhere to wipe off student loans, it would simply mean an interest burden on the economy with the citizens at the target. The interest charges would be dug out of tax slabs. If the government tries to curb that by printing more currency, a decrease in the value of the currency and an increase in the cost of living will be the consequences.

While we do need bold action to help those who are struggling with student debt, total student loan forgiveness is not the solution and will only create a moral hazard problem for current borrowers and future students.

Alternatives like reforming public service loan forgiveness, borrowing caps on student loans, addressing “return on investment” of educational costs, and helping borrowers who may have been victims of unscrupulous schools are likely better solutions to the situation. To quote, the current system of income-driven repayment: for those enrolled, monthly payments are capped based on income and depending on the plan, remaining loans are forgiven at the end of a 20- or 25-year period. However, canceling all student debt would lift GDP and decrease unemployment, and would increase the wealth gap in the economy.

 

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