Should Student Debt Be Forgiven?
The latest rallying cry for politicians is a proposal to forgive all student debt. This is obviously popular and garnering a lot of attention because we all like free stuff, right? I think we can all agree that there could be a better system at this point. But, as the saying goes, nothing is free. Someone has to foot the bill! The problem with something this is where do we draw the line? Debt forgiveness like this can come with all sorts of moral hazards. I didn't want student debt so should I get a credit for my years at Illinois State University because I joined the military to help pay for my education? Not to mention being called to participate in Operation Iraqi Freedom. What was the cost of that? How do you even begin to calculate something like that?
Should current borrowers all stop paying their loans in anticipation of future forgiveness? What about all our mortgages? Should we consider forgiving all that debt as well? At $9.2 trillion the mortgage debt market covers a much broader subset of the American population. It's a slippery slope for sure.
Here are some highlights from an interesting article by Pragmatic Capitalism and a few statistics on student debt as well as an interesting proposal from the article.
Student Loan Median Balance is around $19,000
First, the student loan market is $1.6T spread out over 44MM people. That's an average balance of $36,000 and a median balance of $19,000. Overall, college is still worth it for most borrowers. According to the STL Fed, college graduates earn 80% more than high school graduates.
So, if total college costs are $24K per year on average and the average college graduate is taking on $19K in debt to earn $66,000 vs the alternative of having no debt and earning $37,000 with a high school degree, even with the rising cost of college and student loans the wage premium from college still outweighs no college at all.
Keep in mind these are merely statistics and there are always outliers.
22% Of The US Population Has a Bachelor's Degree Or Higher
Now, only 75 Million Americans have a bachelor's degree or higher. That's only about 22% of the US population. The big problem here is that the earnings of the graduates are uneven. So student loans are disproportionately burdensome upfront when the graduate can least afford it. According to some studies, this is suppressing GDP and negatively impacting social outcomes.
The problem here is that forgiving student debt doesn't solve the underlying problem which is the high cost of college. In fact, if you cancel student debt there is a strong likelihood that the cost of college will rise in the future since borrowers will simply increase their demand for college loans knowing that it will all be forgiven.
Pragmatic Capitalism then states that Australia has set an interesting precedent for student loans that is quite sensical. In Australia, you don't pay your student loans until you reach a certain income level and you don't pay any interest. This would seem to solve a lot of the problems expressed by the pro-forgiveness crowd without going down the slippery-slope where "everyone gets a handout."
There Isn't A Student Debt Crisis
The bottom line is that there isn't necessarily a "crisis" in student debt. It's actually a fairly small portion of the household debt market and it is made up of people who will be America's upper middle class and upper class in the future. Further, forgiving student debt doesn't actually solve the root of the problem which is the high cost of college and could actually make that problem worse.
As mentioned, the real concern here is the disproportionate manner in which student loans hurt graduates when they can least afford it. And this could be addressed by enacting policy similar to Australia where paying student debt is more directly tied to incomes without the burden of loan interest that can make student loans so harmful.
Anyway, I am no politician, but this is certainly an interesting proposal for a popular problem at the moment.