The federal student loan system is a disaster. The federal government makes loans to students who enroll in programs that it knows many won’t finish, and those who do finish probably won’t find a decent job or one that pays enough to cover loan payments. It forces many low-income students to choose between taking out loans they probably can’t pay back or missing out on the economic opportunity a college education provides. The result is millions of Americans drowning in student debt.
If that were the whole story, there would be a good case for widespread debt forgiveness. But it’s more complicated. While some borrowers struggle, others are earning a handsome return on their investment in higher education. The white-collar executive with an MBA is not in the same boat as the for-profit school dropout struggling to find a job. They shouldn’t be treated the same.
The federal government should target any debt forgiveness to those who truly need it.
It is important to remember that student loan borrowers are different from most Americans: They’ve gone to college. College students, as a group, earn more, are better educated, live longer, and come from more affluent backgrounds than other Americans. Those advantages are apparent among student loan borrowers.
More than half of student debt — 56 percent — is owed by households with a graduate degree. That’s in part because the programs where students graduate with the most debt are mostly professional degree programs like the MBA, law school, or medical school. Indeed, a disproportionate amount of student debt is owed by borrowers at a handful of elite colleges with prestigious graduate programs that charge astronomical tuition. As a result, about 36 percent of all student debt is owed by individuals in the top 20 percent of the income distribution.
And it’s not just that borrowers do well after college; they often grew up in affluent households. There’s no income or wealth test for who can get a federal student loan, and affluent students are more likely to go to an expensive college, complete a degree, and go to graduate school. The typical student who grew up in a high-income family owes about 27 percent more than the typical student from a low-income family.
In contrast, borrowers who struggle with student loans are different. Almost 90 percent of borrowers who default on a student loan received a Pell Grant because their income and wealth was low when they applied to college. About 46 percent of defaulted borrowers went to a for-profit school, but they represent only 9 percent of all borrowers. Half of defaulters never completed a degree, but nationally only 8 percent of student debt is owed by households without a degree. Other than the fact of having a student loan, the economic circumstances of struggling borrowers has almost nothing in common with their high-income peers.
Helping struggling borrowers should not require providing a windfall to high-income, well-educated students from affluent backgrounds. In other contexts — as when the federal government’s Supplemental Nutrition Assistance Program helps families put food on the table, or laid-off workers pay their bills with unemployment insurance, or working families are supported with the earned income tax credit — student loan aid is targeted to households in greatest financial need. It’s especially important for student loan relief because the dollar amounts are so large: Full forgiveness of student debt would cost more than the cumulative amount spent on each of those programs over the last 20 years.
Targeting loan forgiveness to those in need isn’t complicated. There are income-based repayment plans that limit student loan repayments to 10 percent of a student’s discretionary income (income minus 150 percent of the poverty line) and forgive undergraduate debt after 20 years. That program ensures that higher-income borrowers contribute to the cost of their postsecondary education but provides relief to those who are less fortunate. Too few students enroll in the program because of administrative barriers, but those problems should be fixed so that current and future borrowers benefit.
More immediate relief could be offered to borrowers unlikely to repay their loans through income-based plans. Every student loan borrower has filled out an application for financial aid documenting their income and wealth so the government knows whether the loan financed a high-paying professional degree. For students enrolled in income-based repayment plans, the government knows their financial circumstances after college. The information about a student’s income, economic circumstances, and educational attainment could be used to focus relief on groups of borrowers who need it most, in the same way a judge might discharge onerous debts in bankruptcy court.
Deciding which students deserve federal support and which do not is an unpleasant task that policy makers might delay with a one-size-fits-all approach to forgiveness, but it is one they cannot put off indefinitely. Each year the federal government makes $100 billion in new loans, knowing that millions of new borrowers will struggle in the future, making the situation worse. To address that, Congress must decide which students, institutions, and degree programs taxpayers should pay for and which should be on future students. They should do the same for existing borrowers.
Adam Looney is a professor in the department of finance, and executive director of the Marriner S. Eccles Institute for Economics and Quantitative Analysis, at the University of Utah.