The Biden Administration recently announced that it would be forgiving up to $20,000 in student loan debt for eligible borrowers. The plan also extends federal student loan forbearance through the end of December 2022 and includes provisions that would make it easier for struggling borrowers to enroll in income-driven repayment plans, with borrowers’ unpaid monthly interest to be covered to prevent their debt from compounding, even when no monthly payments are made.
Biden’s plan will also forgive any remaining debt after 10 years of payments, versus 20 years, for loans originally worth $12,000 or less.
The Student Loan Forgiveness Plan is being promoted as a way to provide relief to tens of millions of borrowers and has become a key part of the Biden Administration’s attempts to address economic inequality. Student loan debt has been a problem for over a decade and is proving to be more of an issue as the cost of tuition has continued to rise faster than inflation and wages. Burdened by mounting student loan debt, many Americans have been left unable to purchase homes, start businesses, and save for retirement.
While the Biden administration has touted that The Student Loan Forgiveness Plan will help jumpstart the economy, many critics have doubts as they are concerned about the potential long-term implications that the policy will have on the economy.
The spiraling student loan crisis
Today’s $1.7 trillion student loan crisis has roots in the late 1990s and early 2000s when college tuition began surging while incomes remained relatively stagnant. For over 30 years, between 1991 and 2021, average tuition prices more than doubled while the median household income increased by less than 25% during the same time, after accounting for inflation.
Why? Many economists agree that the federal student loan program that was intended to make college more affordable had the opposite effect. The availability of federal student loans allowed colleges and universities to raise their tuition prices without fear that students would be unable to afford them.
Research published by the New York Fed in 2017 found that for every additional dollar of federal student aid, colleges and universities raised their tuition prices by 65 cents. Further research published by the National Bureau of Economic Research (NEBR) found that the increase in the availability of federal student aid accounted for almost all of the tuition increases over the past three decades.
So, if you want to look at the student loan crisis, the loan’s structure is the potential root cause of the crisis. The student loan crisis was exacerbated during the Great Recession when many Americans lost their jobs and were unable to keep up with their student loan payments. Student loan delinquencies and defaults soared by over 18% during this time, with levels remaining elevated even as the economy recovered.
With a heavy focus placed on higher education during the Obama administration, student loan debt continued to grow as Americans increasingly turned to borrowing to finance higher education and keep alive their dreams of economic advancement.
In response to the growing cost of tuition, the federal government began offering more loans and increasing the maximum amount that could be borrowed. So, they took the potential root cause and put it on steroids. At the same time, with all this money available to the taking, for-profit colleges began proliferating, often targeting low-income and minority students with promises of high-paying jobs upon graduation.
In many cases, these colleges failed to deliver on their promises, leaving students saddled with debt and few job prospects, while in closed rooms the colleges may have been saying: “We got paid. The student got the education, but sadly, he ended up not finding a high-paying job to pay for the debt. Well, 2 out of 3 isn’t bad.”
The potential impact of the loan forgiveness plan
Critics of the plan, like The Committee for a Responsible Federal Budget, have raised concerns that the policy will eliminate all the purported disinflationary benefits brought on by the recently passed Inflation Reduction Act. After all, the aggregate cost of loan forgiveness and forbearance is estimated to exceed $600 billion by 2031, which vastly exceeds the $275 billion reduction in budget deficits expected from the Inflation Reduction Act.
To pay for the growing deficit, the critics argue that the plan will require either large tax increases or spending cuts in other areas of the budget. Where we are going to get this money is not yet clear.
The bottom line
While proponents of The Student Loan Forgiveness Plan argue that it will provide much-needed relief to millions of struggling Americans, critics are concerned about the potential costs to taxpayers and the economy. Many others that chose to forego college altogether to avoid taking out student loans have voiced their frustration with the plan, arguing that it unfairly rewards those who took on debt to attend expensive schools.
All streams lead to the same fountain, and it seems the student debt crisis is stemming from an ill-conceived government student financial aid program that caused runaway inflation in tuition.
Do we really believe that addressing the pain of high personal student debt without addressing the cause of the aid programs themselves and lowering the colleges’ incentives to keep raising tuition will help the American economy in any measure or metric?