Is rising student debt hurting the US economy?

Is rising student debt hurting the US economy?

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Student loan debt in the United States has grown significantly in recent years and is now one of the largest forms of consumer debt in the country. Although the benefits of a college education often outweigh the costs, many graduates worry about entering a weak job market and worry that lingering debt could hinder their financial future.

Most economists see the student loan program as a good investment for U.S. workers and necessary to maintain the nation’s competitiveness, but questions remain about the appropriate level of federal involvement. There is also debate about whether the government should forgive student loan debt, or how much it should forgive. In 2022, President Joe Biden enacted a student debt relief plan that was later struck down by the Supreme Court, leaving the future of reform efforts uncertain.

How much student debt?

Student debt has doubled in the past two decades. As of March 2023, forty-four million U.S. borrowers owe more than $1.6 trillion in federal student loan debt. Additional personal loans exceeded $1.7 trillion, more than car loans and credit cards. Home mortgage debt alone is even larger, at nearly $12 trillion.

Student debt is mounting and college is on the way. In the late 1980s and early 1990s, most high school students did not enroll in colleges or universities; those who do, less than half take out credit for it. By 2022, two-thirds of high school graduates are enrolled, and many are taking out student loans.

Average students are taking on more debt, according to US News & World Report: From 2009 to 2021, borrower balances increased by 25 percent. Students generally take on more debt because college tuition has increased many times faster than income. College costs, and consequently debt, are higher in the United States than in other wealthy countries, where higher education is often free or heavily subsidized. Meanwhile, US states cut funding for public universities and colleges after the Great Recession.

Who owes?

According to the Washington Post, by May 2022, borrowers who attended two or four years of college or university will have nearly half of their student loans outstanding. the rest are from graduate school borrowers. While most college students end up with less than $20,000 in debt, a minority of borrowers have the largest share of student loan debt. More than a third of the total debt is held by 7 percent of borrowers who owe more than $100,000. However, borrowers with a small amount of debt often find it more difficult to pay off their debt because the debt is higher than a graduate or professional degree can be repaid with a higher income. undergraduate students often struggle the most; the initial level is three times higher than that of graduates.

In addition, the type of institution changes how much debt is owed. Private school graduates, especially those who attended for-profit schools, often have more debt than those who attended public schools.

There is also gender disparity in student loans, which many experts say is a problem and the result of decades of persistent discrimination. Black college students generally take on more debt than white students and have a harder time paying off debt after graduation due to lower levels of family wealth. Black, Latino, and American Indian students are less likely to repay their loans than white students.

Do students take out loans?

Many US students are motivated to take out loans because higher education is required for the highest paying jobs. According to the US Bureau of Labor Statistics, workers with a bachelor’s degree earn 1.8 times more than someone with a high school diploma, and those with a doctorate or professional degree earn twice as much.

However, analysts warn that the return on investment in terms of future earnings may vary depending on the major of the student and the institution attended. A 2019 study by the Federal Reserve found that while a college education provides income, the wealth provided by a degree has declined significantly over the past fifty years due to rising and rising college costs. Another type of consumer debt.

Does the government give out student loans?

The US government invests in much-needed higher education for its people through grants, student loan programs, veterans’ benefits, and research grants because an educated and skilled workforce drives national prosperity. Highly educated workers increase their tax revenues, are often more productive and socially engaged, and rely less on welfare programs. In addition, many professionals consider it fundamental to a dynamic and innovative economy. Major US research universities such as Duke, Harvard and Stanford often support regional innovation clusters.

What is the history of the US student loan program?

The federal government began to play a major role in higher education funding after World War II. The Servicemen’s Amendment Act of 1944, also known as the GI Bill, provided nearly eight million veterans with numerous benefits, including tuition assistance and preferential home loans. The program continues to pay tuition for hundreds of thousands of service members and veterans each year.

However, federal student loans did not begin until the Cold War. In response to the Soviet Union’s launch of Sputnik in 1957, Congress passed the National Defense Education Act, a federally funded student loan program that supports fields related to national security such as science, mathematics, and foreign languages. In 1965, the Lyndon B. Johnson administration expanded federal involvement in all levels of education with the Higher Education Act (HEA), which laid the foundation for the current student loan system. Since then, Congress has passed legislation that expands credit rights and allows parents to take out loans on behalf of their children.

The federal government also provides much-needed aid in the form of Pell Grants, which were established in 1972 and are free for students. But the level of funding for the program has not kept pace with rising tuition costs, leaving many students with debt.

The US government used to guarantee or subsidize private loans through the Federal Family Education Loan (FFEL) program, but critics such as President Barack Obama said that this had been handed over to commercial lenders and the program ended in 2010. After that, the loans were issued directly by the Department of Education.

In response to the COVID-19 pandemic, Donald Trump’s administration took the extraordinary step of providing tens of millions of student loan borrowers with temporary relief from paying off their loans. In one of his first acts in office, President Biden extended the federal student loan repayment moratorium until October 2021. It also included private loans under the discontinued FFEL program, closing the gap for those most affected. a million borrowers. The Biden administration has extended the freeze several times, with the latest extension set to expire in October 2023.

Some education finance experts say the increase in federal student loans makes too much sense by allowing institutions to artificially raise tuition. William J. Bennett, President George H.W. Bush argued in 1987 that federal aid protected colleges from market pressures and allowed prices to rise. The so-called Bennett hypothesis continues to be debated by academics. A 2014 study found that federal aid only led to tuition increases at private, for-profit schools, but another study found a link between aid and tuition increases at public schools.

What is the current debate?

Most experts and policymakers agree that the problem of rising college costs and loan debt must be addressed. They agree that rising student debt hurts the younger generation by exacerbating gender inequality and preventing them from reaching their financial goals. While the older generation is often able to pay for school or get a job that allows them to pay off debt, the latter cannot, he said. Rising tuition costs and the recession caused by the 2008 financial crisis and the COVID-19 pandemic have particularly affected millennials and the next generation. In addition, student loans are more difficult to discharge in bankruptcy than other types of consumer loans because borrowers must prove “undue hardship” of their debts in court.

However, experts and politicians differ in their recommendations on how to solve the problem. The latest debate has focused on debt relief: some are calling for universal debt relief of varying amounts, while others are calling for just debt relief. Other experts suggest systemic reforms instead of canceling existing debts.

cancellation of large debts. Total debt relief requires blanket cancellation of existing student loans. The larger plan requires forgiveness of up to $50,000 for all borrowers. Proponents argue that massive debt relief will promote gender and socioeconomic equality and help grow the economy. If student loans weren’t as high, more people could afford to buy homes, take business risks or save for retirement, he said. Opponents argue that it’s unfair to impose widespread write-offs on people who have successfully paid off their student loans or avoided debt altogether. It also said it would equally benefit high-income Americans, such as doctors and lawyers, who may have large debts but are not struggling with their payments. Worryingly, the cost is estimated at hundreds of billions to trillions of dollars.

Loan concession target. These plans will forgive most or all of the debt for borrowers with certain incomes, and supporters of targeted assistance often prefer income-driven repayment (IDR) plans. An IDR allows borrowers to pay down an amount proportional to their income and pay off the remaining balance after ten years, assuming they make all qualifying payments. While supporters say targeting the lowest-income borrowers is the fairest approach, critics say it won’t prevent universities from raising tuition and other fees.

Systematic reform. The Aspen Institute’s 2020 report proposed systemic reforms such as capping tuition at public colleges, increasing aid to low-income students, encouraging employer tuition assistance, and limiting the distribution of federal loan funds to institutions with a history of cost of graduate work and other poor results for students. Some politicians have proposed reforms to treat student loans like other consumer loans, meaning they would be discharged in bankruptcy court. Experts and other lawmakers say more state funding is needed to make public colleges and universities free.

Some analysts say the perception that college is the only path to a well-paying job increases demand and hurts students who might be better served by other forms of education. In recent years, politicians from both parties, including former President Trump, have advocated increasing access to career and technical education (also known as vocational education) as an alternative to college. Indeed, enrollment in trade programs has increased since 2020, even enrollment in two- and four-year public institutions has not recovered from the pandemic.

What is Biden proposing?

In 2022, Biden issued a landmark order to donate up to $20,000 for Pell Grant recipients and up to $10,000 for Pell Grant recipients who earn less than $125,000 a year. The program is expected to help nearly forty million borrowers, nearly half of whom will have their loans forgiven. In total, the program will cancel nearly a third of the federal government’s student loan debt, totaling $441 billion. Meanwhile, the Congressional Budget Office [PDF] estimates that spending will total more than $400 billion over the next three decades. The spending has drawn fierce opposition from critics who see it as inflation for taxpayers. In June 2023, the Supreme Court struck down the plan in a 6-3 vote, saying the president had no legal authority to cancel student loan debt.

In response, Biden proposed an ambitious new plan to reduce US student loan debt. In the plan, called Savings Plan, borrowers with bachelor’s loans will see their monthly payments cut in half, and the loan balance will be forgiven after ten or twenty years of payment, depending on their income level. White estimated the plan would allow borrowers to pay $0.71 for every dollar borrowed, but some analysts expect the cost to be lower. Estimated program costs vary, but some places are higher than the first loan forgiveness plan.

Opponents worry about the cost of the savings plan, but experts say it’s more legitimate than previous debt forgiveness plans. Critics say the new plan still burdens taxpayers and does little to curb rapidly rising tuition. While some progressive lawmakers applauded the plan, they said it was not radical enough to tackle the growing credit crisis. At the same time, many analysts say that any plan aimed at ending credit relief broadly could face legal challenges regardless of the law.

For other professionals, student loan forgiveness cannot solve systemic problems. CFR’s Roger W. Ferguson Jr. he wrote that such programs “miss the basic weaknesses of higher education: unacceptably low attainment, dependence on college loans, and high and fast rising costs”.

However, proponents say that IDRs like SAVE are the best option for reducing student debt. They argue that the Biden administration should focus on reducing administrative barriers to enrolling in the program. A 2022 investigation by the Government Accountability Office found that thousands of borrowers eligible for forgiveness under existing IDRs are still paying off their loans and that the Department of Education “does not do enough to ensure that all borrowers are eligible for forgiveness.”

Recommended Resources

CFR’s Roger W. Ferguson Jr. writes that debate over student debt relief should shine a light on low completion rates of higher education.

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