Pursuing Serious Student Loan Reform

The first 100 days of the Biden administration have been marked by extraordinarily costly pieces of legislation, led by the passage of a  $1.9 trillion COVID stimulus bill, with another $2 trillion infrastructure proposal currently under congressional consideration.  Thus, you can be forgiven if, amidst this spending bash, you happened to overlook another radical proposition from the administration: student loan forgiveness, which, if enacted, would cost an estimated $1 to 1.7 trillion.

Student debt statistics are indeed sobering: the average college graduate owes roughly $30,000, and student debt has doubled within the past ten years.  Although these numbers are deeply troubling, there are innumerable reasons why student debt cancellation is terrible policy.

The most basic argument is to note that students and their families willingly and knowingly agreed to the terms of their loans, and therefore are fully responsible for paying off their own debts.  Of course, the trillion dollar price-tag of debt relief is a major cause for concern that will impact the long term health of the economy.  Moreover, because the wealthiest in our society tend to have the highest amounts of student debt, student debt cancellation would simply exacerbate economic inequality, and would do little for those in our nation who are most in need.  Finally, and perhaps most importantly, debt cancellation will only incentivize future generations of students to take on more debt, rather than alleviating the underlying factors that have contributed to the current student loan crisis.

The cost of higher education has risen dramatically over the past 30 years, with tuition costs increasing eight times faster than wage growth.  Over the past decade, public colleges, which are supposed to provide a low-cost option for students, have increased tuition by 55%.  Meanwhile, the financial benefits of having a college degree have stagnated since 2000.  In tandem, college enrollment has been on the decline since 2011, and a survey this month indicated that a majority of graduates aged 33-40 felt that their degree was not worth the accompanying debt.  Student debt cancellation does nothing to address the obvious flaw of higher education: the benefits of a degree, on average, are not keeping pace with the costs of a degree.  In fact, loan forgiveness may have the opposite effect; there is evidence that government-sponsored loans, intended to expand college access, have contributed significantly to rising tuition costs.

If students are to receive loans for post-secondary education, it is important that that education be viewed, first and foremost, as a financial investment.  The lender must be confident that the borrower will gain skills with sufficient economic value as to be able to repay the loan.  Unfortunately, too often students choose to attend colleges based upon social pressures and the perceived prestige of an institution, failing to consider the financial implications of their chosen academic program. The result?  Many students decide to attend college but are not academically prepared for the rigors of college coursework. An estimated 30% of students will decide to change their major, which increases both the time and cost of earning a degree.  Attending college simply for the sake of attending college has created an influx of workers with skills that are not essential to economic needs, which has resulted in “degree inflation.”  In other words, employers now demand college degrees for positions that historically have not required higher education.  Meanwhile, there is a glaring need for domestic workers with STEM (science, technology, engineering, and mathematics) backgrounds.  Demand is similarly soaring for skilled labor, while other industries are also suffering from labor shortages.  Policymakers should therefore reform our financial aid system to incentivize students to pursue degrees based upon labor market demands.  In other words, tie financial aid awards to the economic importance of the degree being pursued.  Decrease financial aid for degree plans where there is a labor surplus. By obtaining degrees in areas with high job demand, students would be more likely to repay loans, and the nation as a whole would benefit by addressing labor shortages with domestic workers.  Some efforts in this direction have been explored in the past, and are worthy of stronger consideration at the national level.

Making wiser loans will reduce student debt by ensuring that more students are able to obtain well-paying jobs post-graduation.  However, this policy alone will do little to drive down the costs of attending college.  Free market economic models are, unfortunately, no longer applicable to higher education due to the massive expansion of government loan programs over that past few decades.  While not ideal, the next best option may be to leverage federal loan access to incentivize lower tuition prices.  For example, the amount of financial aid available to a given university could be tied to that university’s tuition price: the higher the tuition, the less aid available to students at that university.  Such hardball policies will incentivize higher education institutions to cut costs and streamline, a trend that is already beginning to emerge in universities around the country.

It is evident that our system for funding higher education is broken.  While momentum for some form of student loan forgiveness continues to build, radical steps must be taken to ensure that similar bailouts won’t be considered, or needed, in the coming decades.  Such an overhaul of the education system cannot simply increase funding (see, for instance, the Earn to Learn Act proposed by Sens. Romney and Sinema). Instead, legislation must focus on lowering tuition costs and ensuring that students are pursuing degrees that are likely to offer financial security. The strategic leveraging of federal financial aid provides a path toward accomplishing both goals.

J. Allen Cartwright is a chemical researcher in the energy sector. His interest is in the interplay of politics with cultural and scientific institutions.

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