In the last two decades, a combination of factors have pushed the student debt crisis to a critical point of unsustainability. Therefore, canceling student debt, while not perfect, is necessary to provide immediate relief to millions of Americans and buy policy makers time to enact legislation to truly solve the crisis.
During my senior year of high school, my inbox was perpetually clogged with notifications of scholarships and financial aid opportunities. Every hour, I would feel my phone buzzing with new messages, pulling me from my schoolwork. I was often annoyed at the constant barrage of emails, but then I would always remind myself that every dollar counts. And, when considering the amount of student debt in the United States, this phrase could not be more true. According to the most recent estimates from the Federal Reserve, U.S. student debt totals $1.75 trillion, which is higher than both medical and auto debt.
To address this crisis, on August 24, President Joe Biden announced his plan to provide student loan relief by canceling debt for millions of Americans. Biden’s plan sent shockwaves around the country – some lauded it as a gift to the middle-class, while others criticized it for its recklessness. Given the widespread debate over debt cancellation and Biden’s proposal, a closer look into the student debt crisis is warranted.
Student debt in the U.S. was not always an emergency. Only within the past two decades has the cost of higher education exponentially grown. According to the Bipartisan Policy Center, between 2007 and 2020, student debt increased by 144% from $642 billion to $1.56 trillion. So, what is driving this massive growth?
A combination of factors have led to this point, the first being a lack of state funding towards public universities. Within the last decade, the responsibility for public university funding has shifted away from the states and towards students. According to the State Higher Education Executive Officers Association (SHEEO), the average student contribution towards public four-year university revenues was 53.2%. While critics argue that state funding towards public institutions has increased in the past decade, per-student funding has decreased, leading to higher tuition costs for all.
Additionally, the 4.5% growth in university funding during the 2021 fiscal year was driven by federal stimulus money and is unlikely to continue in the long-run. According to SHEEO, if between 2020 and 2021 full-time student enrollment had not declined and federal stimulus money had not been provided (in effect, if there was no pandemic or recession), total university funding would have decreased by 1%, suggesting that long-term growth is unlikely to occur. Thus, the lack of state funding in public universities has led to students bearing the brunt of the financial burden.
The rise in student debt is also attributed to the high demand for elite university education. According to the National Student Clearinghouse, during the pandemic, universities with less than 50% acceptance rates experienced growth in their class sizes, with public universities experiencing a 4.5% increase and private universities experiencing a 12% increase. These metrics indicate that the demand for elite universities is so high that even a recession can not diminish it. As a result, institutions have little incentive to lower their tuition, causing more students to take out loans.
The surge in popularity of for-profit universities has led to a dramatic increase in student debt. Unlike non-profit colleges which are required to invest their profits into the institution, for-profit colleges are under no such obligations. Consequently, these universities, such as DeVry University and the University of Phoenix, prioritize financial gain, often at the expense of their students. As a result, students who attend these institutions are more likely to have student debt and be ill-equipped to pay it off, causing total student debt in the U.S. to increase.
For example, a study published in the Journal of Financial Economics found that between 2000 and 2010 (during which for-profit enrollment was at an all-time high) student debt rose by 66%. According to the same report, in 2012, 39% of all federal student loan defaults were among those who graduated from for-profit universities. Moreover, according to the Student Borrower Protection Center, for-profit institutions disproportionately target communities of color, exacerbating racial inequity. Thus, as more students get scammed into attending for-profit universities, student debt will increase.
Finally, the sheer number of people attending undergraduate and graduate schools means more people are taking out loans. According to the Education Data Initiative, between 1960 and 2022, the rate of college enrollment increased by 46.8%, meaning more students than ever are borrowing money.
So, how does Biden’s student debt relief plan factor into this situation? Biden’s plan has three main objectives: cancel federal student debt, make the student loan system more manageable, and reduce the cost of college.
Americans who will benefit from debt cancellation include Pell Grant recipients, individuals who make less than $125,000 per year, and couples who make less than $250,000 per year. Pell Grant recipients will receive up to $20,000 in debt relief while other borrowers will receive up to $10,000 in relief. According to the Biden administration’s estimates, if all borrowers claim the relief to which they are entitled, 43 million families will see a portion of their student debt canceled, while approximately 20 million will see their full balances eliminated.
To help borrowers pay off their student loans, the administration plans to cap monthly payments for undergraduate loans to 5% of a borrower’s discretionary income, as opposed to 10%. Additionally, the Public Service Loan Forgiveness (PSLF) program will be revitalized, ensuring those who participate in public service receive credit towards loan forgiveness.
Probably the most overlooked section of the Biden administration’s plan is its provision to decrease the cost of higher education. Recently, the Department of Education “terminated college accreditors” that allowed universities (typically for-profit ones) to defraud their students and Biden has vowed to protect student borrowers from high costs. However, beyond these steps, it is unclear how the administration plans to hold colleges accountable for raising their prices.
Despite the popularity of debt cancellation, Biden’s plan does not come without criticism. One of the biggest critiques against the plan is the impact it could have on inflation. Republicans and some economists argue that canceling student debt will exacerbate inflation as borrowers will have more disposable income. According to economists at Goldman Sachs, however, federal student debt cancellation will only have a marginal effect on inflation.
Unlike stimulus checks, which directly increase income, debt relief increases wealth, which is unlikely to spur spending in the same way. According to the Roosevelt Institute, during these past two years of recovery and uncertainty, there has been little evidence to suggest that an increase in wealth leads to an increase in spending. Recent metrics from the Federal Reserve’s Distributional Financial Accounts also support these findings.
Additionally, under Biden’s plan, only 20 million Americans will have their student debt completely forgiven. The majority of borrowers will continue to have outstanding balances, which will offset any increase in inflation.
While it is unlikely that canceling student debt will negatively impact inflation, it will take its toll on the national debt. The Biden administration has not released estimates on how much student debt cancellation would cost the federal government. However, most economists agree that it would add between $300 billion to $600 billion to the national debt. The danger of accumulating such a high amount of debt is that it increases the risk of a country defaulting – or failing to pay – its debt. While the chance of the U.S. defaulting on its debt is extremely low, the Government Accountability Office has warned that current levels of federal spending are unsustainable and jeopardize the financial health of the country.
However, these potentially negative economic consequences pale in comparison to the dramatic social impacts debt cancellation will have. Debt relief eliminates barriers to higher education, which provides low-income individuals the opportunity to break the cycle of poverty and achieve economic stability. Moreover, debt cancellation is a crucial step towards addressing systemic racism.
Long-standing and institutionalized racial discrimination in education, housing, and property seizures has left Black families with less wealth than white families. As a result, Black students are more dependent on student loans. According to the Education Data Initiative, Black college graduates owe an average of $25,000 more in student loans than white college graduates and are more likely to struggle to pay off their loans, which perpetuates the racial wealth gap. Therefore, Biden’s student debt relief plan will disproportionately help Black borrowers and advance racial equity.
Biden’s student debt plan is truly revolutionary – it extends the hand of government further into the economy than ever before. While some politicians and economists worry about this overreach, the reality is, the student debt crisis can not be solved without sweeping government intervention. The proposed student debt relief plan is in no way a permanent solution, but it buys policymakers time to enact legislation to truly solve the crisis.
While Biden’s plan does have its flaws, it crucially delivers on providing borrowers immediate relief. For too long, Americans have been struggling to balance their budgets under their crippling debt, and Biden’s student debt relief plan is the first step to effectively address this crisis.