Forgive or forget? No end in sight for the student debt crisis

Of the 140,000 Americans who expected that after graduation they would join the more than 43 million Americans making monthly payments on their student loans, approximately 150 – those graduating from the Otis College of Art and Design in Los Angeles, California and Wiley College in Marshall, Texas – were among the luckiest.

At the graduation ceremony on 9 May, the students who took out loans to attend Wiley, an historically black college founded in 1873, heard President Herman J Felton, say: “You are debt-free. You do not owe the college a penny” – courtesy of an anonymous gift of US$300,000.

A few days later, students at Otis College’s graduation heard President Charles Hirschhorn say that Evan Spiegel, co-founder of the social media platform Snapchat, and his wife Miranda Kerr, founder of the beauty product company Kora, were paying off the student loans of this year’s graduating class.

After the graduates finished cheering, Spiegel told them and their families how taking courses at Otis College while he was in high school challenged him to grow and how the donation was his and his wife’s chance to give back. They hoped paying off their debts would “empower graduates to pursue their passions, contribute to the world, and inspire humanity in the years to come”.

It was left to Hirschhorn to state succinctly the situation faced by tens of millions of Americans: “We understand that this debt can compromise your future and limit your creative ambition.”

Student debt politics

Dealing with the decades-old student debt crisis was part of President Joe Biden’s platform in the 2020 election. At the time, he proposed forgiving US$10,000 of debt, which can range from the average of approximately US$37,000 for an undergraduate degree to hundreds of thousands of dollars for graduate, professional and medical degrees.

Progressive Democrats, such as majority leader in the Senate Chuck Schumer, have called for Biden to use the “flick of [his] pen” to forgive US$50,000 of debt. Congressperson Alexandria Ocasio-Cortez of New York has called for the cancellation of the entire US$1.7 trillion debt sitting on the federal government’s books as an asset.

(Since the onset of the COVID pandemic, debt payments and interest accrual have been paused twice: once by the Donald Trump administration and once by Biden. Biden’s pause is due to expire at the end of August. Unless the government acts, interest will start accruing again on 1 September and payment will be due that month.)

Republicans oppose any move to forgive student debt. Speaking from the Senate floor on 28 April, Senate minority leader Mitch McConnell strongly condemned the idea in terms that linked any plan to aid debtors to Americans’ fear of communism, even as he sought to rally the party’s anti-elitist populist base.

“Student loan socialism would be a giant slap in the face to every family who sacrificed to save for college, to every graduate who paid their debt, to every worker who made a different career choice so they could stay debt-free…

“Democrats want construction workers, police officers, and small business owners in Kentucky to effectively eat the student loans of surgeons, corporate lawyers, and the people in New York City who choose to borrow US$180,000 for a masters degree from Columbia Film School with no plan whatsoever for paying it back.”

Referencing the ancient and medieval practice of forgiving loans on, for example, 49-year cycles among the Ancient Israelites or specially declared years in the medieval period, the senior senator from Kentucky added: “This jubilee year for the elites would do nothing to combat the master’s runaway cost in higher education.”

Who is in debt and how much

McConnell’s swipe at film studies majors at Columbia aside, his claim that the average debt was US$20,000 was incorrect; the actual figure is almost double that. Further, his criticism misrepresents both the impact of the debt and who holds it.

According to Charlie Eaton, assistant professor of sociology from the University of California at Merced, 10% (4.4 million) Americans are either still paying off or are unable to pay off student loans dating back to the 1990s.

“Our research has shown that huge shares of the 43 million people in the United States are [financially] distressed and unable to repay. It was unfair to ask people to take out those loans in the first place. It’s disproportionately people from working class and black Americans who borrow and assume debt.”

“People aren’t able to make the payments. You can’t get blood from a stone, right? But the Feds [the United States federal government, which holds almost all of the debt] can ruin peoples’ lives by, for example, ruining your credit score and making it impossible for them to get consumer credit,” he says.

A survey conducted last January for CNBC and the non-profit community organisation collective ACORN, shows that the stories that appear regularly in American media, about how deeply indebted graduates are and how unable to reach the usual milestones of adulthood such as having a child or buying a home they are, are not just anecdotal.

The study, entitled “Invest in You”, conducted by the online polling company Momentive (formerly SurveyMonkey), found that 81% of people with student loans have put off buying a home or saving for retirement. Even more striking is the fact that more than 60% of those holding student debt say that it negatively affects their mental health. Among those who earn less than US$50,000 this figure rises to seven in 10.

On average, women borrowed only slightly more for their undergraduate education than did men, US$31,276 versus US$29,270. However, according to a study entitled “Deeper in Debt; 21 Update”, by the Boston-based American Association of University Women (AAUW), women find it significantly more difficult to repay their loans because of the gender pay gap; one year out from university or college, female graduates earn only 81% of what their male peers do.

The study also showed that a year after graduating, women spent an average of US$920 a month on housing, US$396 per month on car loans or leases and – for the 16.3% of women who have a child – US$520 a month on child care and US$387 per month for food.

“When you factor in an average of US$307 per month on student loan payments, the numbers add up to an unsustainable budget.” Women without childcare have US$148 remaining per month while those who pay for childcare have a US$372 deficit per month.

Beneath the pie charts that graph these figures, the study adds in bold type: “These figures don’t include other basic expenses, such as clothing, personal care and household products, gas, tolls or emergency savings.”

Further, the study shows that women who go on to graduate school borrow a total of US$51,035 for their education. However, since interest accrued on their undergraduate debt while they were in graduate school, the average debt upon completion of graduate school is US$61,626.

These figures explain why the CNBC-ACORN study found that the percentage of women who reported their mental health was negatively impacted by their debt was 20 percentage points higher than their male peers: 65% versus 54%.

Situation is dire for minorities

The situation is even more dire for minorities. According to the New York-based Roosevelt Institute, 20 years after graduating, 94% of the median white borrower has paid off his or her student debt. The numbers are reversed for African Americans: 95% still owe money a generation after they threw their mortar boards in the air at the end of the pomp and ceremony of graduation.

One year after completing graduate school, black women owe US$75,085.58. Asian women owe slightly less, at US$70,797.01, while American Indian and Alaska Native women owe US$61,830.45. A year after graduation, black people earn 10% less than do whites, meaning that black women earn almost 20% less than do white male graduates of the same year.

When we spoke, Dr Richelle Brooks, who is a school principal in California and founder of ReTHINK It, a non-profit organisation that fights systemic racism in education, told me she owes the government US$237,580.83, a debt that at US$596 per month could take her 33 years to repay.

On paper, because she is a public school principal, Brooks might receive loan forbearance after 10 years of paying US$596 per month or US$71,520 under the Public Service Loan Forgiveness programme. Since the programme’s inception in 2007, 6.7% of borrowers have applied for forgiveness. Of these, 2.16% of applications have received forgiveness. (Another plan has granted a total of 32 forbearances.)

“I believe that this is another form of enslaving black people,” she says. “After the abolition of slavery, the government became more innovative in the ways to enslave us. We see this in the evolution after slavery of segregation, Jim Crow [the laws that stripped away African American voting and other rights] and red lining,” the practice of denying African Americans loans so they could not move into ‘whites only’ areas.

“We have racism in health care, environmental racism [African Americans live in the most polluted parts of towns and cities] and the school to prison pipeline. This indebtedness is another form, what I call, ‘Jim Crow 2.0’, that keeps blacks at a disadvantage.

“It’s intentional, because it serves the needs of a capitalist society, which needs to have a group of people who are so indebted they have to go to work every day without questioning the economic structure of the society.”

Brooks also drew attention to the intergenerational effect of extreme indebtedness by referencing her 14-year-old daughter who wants to go into medicine. Given Brooks’ indebtedness, she told University World News she will not be able to help her daughter, thus recapitulating her situation: her poor single mother was unable to help Brooks finance her education. The only option, Brooks says, would be for her to take on the same sort of debt she herself struggles under.

Many reasons for crippling debt

There are several reasons why American college and university students end up with such crippling debt loads. One is tuition. For in-state students, tuition and room and board at Iowa State University is US$18,722. At Smith College, a small elite private college in Northampton in Massachusetts, tuition and room and board is US$70,820.

However, notes Professor Phillip Levine, the Katharine Coman and A Barton Hepburn professor of economics at Wellesley College in Massachusetts and author of the recently published A Problem of Fit: How the complexity of college pricing hurts students – and universities, not every student pays these amounts. “They’re charging that much to higher income students who have a greater ability to afford that amount.”

At Iowa State, for example, approximately 80% of students are on some form of student aid; the average financial aid grant (scholarships and grants) is US$15,774. In 2019, at Smith, approximately 64% of students receive financial aid with the average award being US$37,230.

The difference between the awards and the tuition and other fees is most often made up by federal student loans. “Where we really struggle,” notes Levine, “is at the lower end of the income distribution, with students who have to take out loans.”

(According to Levine, one of the sources of revenue that supports financial aid is the wealthy students who pay the ‘sticker price’. Likewise, he explained, to attract these students, colleges and universities have had to upgrade dormitories and other facilities such as gyms.)

Another reason that American colleges and universities are so expensive, notes Dr Terry Hartle of the Washington-based American Council on Education (ACE), is that “states have systematically disinvested in higher education for generations. They put money into Medicaid, they put money into prisons and law enforcement, they put money into elementary and secondary education. Higher education typically ends up getting the short shrift over time”.

In Pennsylvania, for example, 30 years ago the grants from the state government paid for 70% of the cost of the state’s university system while tuition paid for 30%. Today, the state pays approximately 25% while tuition (US$11,000) accounts for 75% of universities’ income.

Unlike, for example, in Japan where students whose test scores warrant admission attend university free of charge, Americans, Hartle says, “have basically decided that higher education is a private benefit even though it has significant public benefits. Therefore, the individual ought to pay more money for it.

“This has never been an explicit policy decision, but it is essentially the choice that policymakers have made”. Among the private benefits, studies have shown, is an approximate US$10,000 raise in pay for each year of post-secondary education.

The structures of the various federal student loan programmes have also greatly contributed to the crisis. The law that governs these programmes mandates that whatever rate the government borrows at, it charges further interest.

Until the recent rises in the prime interest rate, for the past few years the US government has borrowed at around 0.5% – but it has been charging 3.73% interest – although, as noted above, both Trump and Biden placed temporary pauses on the accrual of interest; loans to graduate students are at 5.28%.

Further, US government student loans charge an origination fee of 3%. In other words, if a student borrows US$10,000, the student must pay US$300, an amount typically added to the loan. The most important structural reason student loans escalate, however, is the fact that interest accrues even when the student continues on to postgraduate studies.

Nor does the ability to deduct US$2,500 of interest charges materially help people like Brooks.

As Carl Romer, a researcher formerly of the Washington-based Brookings Institute explained, the greatest benefit of this tax break goes to those who have borrowed less money. “If your loan is US$100,000 and you are paying 6% interest, then you are paying US$6,000 in interest. But you are still allowed to deduct only US$2,500 in interest. This penalises households with high amounts of student loans, which are disproportionately black households.”

The inequity is even more striking if we look at it over 20 years, Romer told University World News. Wealthier students who borrowed US$100,000 but can refinance their debt at 1.8% interest, repay the debt at the rate of US$496 a month and pay US$19,150 in total interest. Students whose debts are repaid at 6.8% interest pay US$763 per month and over 20 years pay US$83,000 in interest – more than four times the amount their peers from better-off families pay.

Forget forgiveness?

Eaton and the AAUW both support complete forgiveness. According to Eaton, over the next 20 years the government expects to collect only about 68% of the outstanding US$1.7 trillion or about US$1.1 trillion or US$50 billion per year.

“It’s the amount of collections that we’ve worked on for the last two years without student loan repayment pause. So, in a way, it would be a continuation of the status quo.”

In a webinar on 16 May entitled “The Policy and Politics of Student Loan Forgiveness”, with his ACE colleague Jon Fansmith, Hartle stressed the politics driving the proposal for forgiveness, chiefly Biden’s campaign pledge and the president’s need for a signature policy win in advance of the November midterm elections to shore up his base with younger voters.

Because of pushback from the Republicans, Hartle doubts the government will forgive US$50,000 of debt, still less will it move to wipe out the US$1.7 trillion of student debt. What he’s most concerned with is the roll-out of the programme and whether it will be means tested, which might mollify some opposition.

The problem with means testing the programme goes beyond the tricky politics of deciding whether the family income limit is US$100,000, US$125,000 or more, Hartle explained. There are legal hurdles too.

One of the most important being that the Education Department (DoE) has no way to access income data on the 44 million Americans with outstanding loans. The Internal Revenue Service is enjoined from sharing income data with other agencies.

Further, to judge each of the tens of millions of loans, the DoE would have to create a bureaucracy from the ground up, and the rules it would apply would be daunting since there are 16 different loan programmes and several different forbearance programmes. In addition, many people’s loans have undergone consolidation over the decades and different parts of their debt are under different administrative regimens.

“I think one of the things the DoE particularly wants to avoid is complicated administration so that they don’t have a repeat of the disastrous rollout of the ObamaCare website during Obama’s first term,” said Hartle.

Overhaul of federal HE financing needed

No matter what the Biden administration decides, most critics agree that going forward the government must overhaul federal financing of higher education.

Part of this, says Hartle, requires completely reworking the way the federal student loan programme works. First, he thinks the government should come to a new understanding about the relationship between the rate it borrows money at and the rate it charges in student loans.

Second, the government should simplify the loan, repayment and forgiveness options because they overwhelm people as they are. “And it would require colleges and universities to do things like more extensive [financial] counselling of people before they take out loans.”

Levine, Eaton and the AAUW all call for increasing the Pell Grant, the federal grant made to students whose family income is below the median income. Levine calls for a doubling from US$6,500 in the coming academic year to US$13,000.

Eaton goes further, essentially calling for free tuition, at least for public universities, by making the Pell Grants and other aid cover the cost of a public university education. This proposal, which is normally associated with Bernie Sanders, Vermont’s senator who caucuses with the Democrats but considers himself a democratic socialist, would no doubt enrage Republicans like McConnell. But, as Eaton notes, it’s hardly revolutionary.

“The US Congress should pass one of the many proposals for making college debt-free by increasing Pell grants and other financial aid to cover the cost of a public university education like we used to do in the 1970s.”