Student Debt: Forgiveness Is To Err Not Devine

Politics and government spending never end well for taxpayers.  Since January, Congress is on a deficit-busting spree, shoveling out trillions of dollars practically every two months in the name of economic recovery and stimulus.  Now Democrats are advancing the idea of student loan debt forgiveness.

Senate Majority Leader Charles Schumer and fellow Democrat Elizabeth Warren are torch carriers for the concept, a key plank in the platform of vanquished presidential candidate Bernie Sanders. Politically, the scheme makes sense: 44.7 million Americans owe college debt.

That's a lot of votes.  But loan forgiveness rewards fiscal irresponsibility.  Colleges, the federal government and private lenders are guilty of coaxing, or preying upon if you prefer, young people and their parents to pile up mountains of debt. Taxpayers are on the hook for most of the debt.

Here's a current snapshot of student loan debt from recent reports from the Federal Reserve and First Republic Bank:

• Current student loan debt: $1.71 trillion, projected to hit $2 trillion next year  
• Student loan debt is about $739 billion more than the total U.S. credit card debt
• 69% of college students took out loans in 2020
• Average student debt for the most recent graduating class: $39,351
• 91.8% of student loans are underwritten by the federal government

Those are scary numbers.  More frightening is the collusion between colleges and government. Colleges raise tuition and fees. These institutions of higher learning pitch students on the easy availability of loans. Then government raises borrowing limits to accommodate rising education costs.      

Students and their families are often willing accomplices, borrowing hundreds of thousands of dollars for an Ivy League degree.  No one bothers to ask students the difficult question: What job do you plan to seek that will allow you to pay off your loan?  Music and Art majors should think twice.

Ballooning costs of a college education are at the heart of the debt issue.  Since 1980, college tuition and fees have spiraled 1,200%, while the Consumer Price Index (CPI) has jumped 236%.  The average undergrad tuition and fees in 1980 for a public college was $1,856, compared to $9,403 in 2020.

Cost of an education at a private institution over the same period has skyrocketed from $10, 227 for tuition and fees to $34,059.  Tuition and fees are expressed in constant 2018-2019 dollars for a fair comparison. The data was published by the National Center for Education Statistics. 

Looking beyond the headline figures, a clearer picture emerges of student borrowers and the amount of debt.  Here are some eyeopening numbers, courtesy of The Brookings Institute:

• 6% of student borrowers owe more than $100,000 in debt, including 2% who owe more than $200,000.  They account for a third of all outstanding student debt.
• The vast majority of those students borrowed money for graduate school.  Loans for graduate school account for 50% of the total outstanding student debt.
• An estimated 75% of student loan borrowers assumed debt for two-or-four year colleges. These undergrads account for one-half of the outstanding debt. 

The data reveals an indisputable fact: Student borrowing averages are heavily skewed by graduate school debt.  The cost of an advanced degree is escalating at a rate faster than tuition and fees for undergrads.  The federal government and private lenders need to cap borrowing for grad school.

While it's difficult to pinpoint a single reason for the surge in college costs,  these factors are often cited by the education industry as a defense for the hikes: Decreases in state funding; increases in student enrollment; and, a boost in available federal aid.  Note: colleges admit federal aid is a factor.

A study by the New York Federal Reserve found that for every $1 in subsidized federal student loans colleges increase tuition 60-cents. The relationship could not be clearer: the federal government loan policy is providing the money and air cover for colleges to continually increase prices to students.

This insidious partnership between the federal government and colleges never attracts interest from Washington's pedantic lawmakers. Instead, they politicize the debt issue, labeling it a "social injustice" or "income inequality" problem to obscure the duplicity of colleges and the feds.  

A form of forgiveness already exists. During the pandemic all payments for certain federal student loans were suspended until September 30. Last week, the president extended the freeze on payments through January 31 of next year.  Interest will not accrue, thus providing students and parents an added benefit.

While clamoring for loan forgiveness, partisans fail to point out the majority of borrowers are repaying their debt. Only 15% of student loans are in default at any time. Arts and Humanities majors are the most likely to default on their student loans, according to EducationData.Org.

Under the Democrat loan forgiveness plan, the bulk of benefits would go to the top 40% of households because they hold the plurality of debt.  Borrowers with advanced degrees represent 20% of  borrowers but would receive 37% of the forgiveness benefits, according to Brookings estimates.

Loan forgiveness will not resolve the current dilemma: federal student loans incentivize colleges and universities to raise tuitions without fear of losing students.  Students can always borrow more money.  But is that in the best interests of already indebted students? The answer is unequivocally: NO. 

Washington lawmakers have a duty to scrutinize the cozy relationship between the federal government and colleges and demand changes. Under the status quo, Americans can expect a continuation of mounting colleges costs and mushrooming student debt underwritten by taxpayers.