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Student debt: the next taxpayer bailout

More than 10 years ago, taxpayers bailed out banks and auto companies that were reeling from the Great Recession. More recently, farmers, who have been hurt by the trade war with China, are being bailed out. The next taxpayer bailout could be for those who are burdened with student loan debt.

College costs rising faster than income

Over the last 30 years, the cost of college has far outstripped family income. According to the College Board publication “Trends in College Pricing 2018,” the inflation-adjusted cost of tuition and fees at in-state, four-year public colleges increased at average rates of:

¯ 4.1% from 1988 to 1998

¯ 4.2% from 1998 to 2008

¯ 3.1% from 2008 to 2018.

Meanwhile, inflation-adjusted, median family income increased by only:

¯ 0.9% from 1988 to 1998

¯ 0.0% from 1998 to 2008

¯ 0.8% from 2008 to 2018.

Given those trends, it’s no surprise student loan debt has more than tripled over the last 14 years, soaring from about $500 billion in 2006 to more than $1.6 trillion in 2019 (see chart).

It’s actually worse than that. Besides student loans, students often take on other forms of debt to pay their college expenses. The Federal Reserve’s “Report on the Economic Well-Being of U.S. Households in 2018 — May 2019” notes, “Student loans are by far the most common form, held by 93 percent of those with their own education debt outstanding. In addition, 31 percent have some other form of debt for their education, including 24 percent who have borrowed with credit cards, 7 percent with a home equity line of credit, and 12 percent with some other form. The typical amount of education debt in 2018 among those with any outstanding was between $20,000 and $24,999.”

Surprisingly, those with the most student debt handle their debts better than those with less debt. The Federal Reserve report also notes, “This is likely to be the case because the level of education, and the associated earning power, generally rise with debt levels. Eighteen percent of borrowers with less than $10,000 of outstanding debt, and 22 percent of those with between $10,000 and $24,999 of debt, are behind on their payments. Among those with $100,000 of debt or more, 16 percent are behind on payments.”

Proposals for reducing college debt burden

The Trump administration and the Democratic contenders for president have proposed a dizzying array of proposals to reduce the burden of student debt. Their proposals include cancellation of student debt, tuition-free college education, debt forgiveness in exchange for public service, and refinancing of student loans, among other proposals.

The most generous plans appear to be those of Sens. Elizabeth Warren and Bernie Sanders; both have proposals for making two-year and four-year public college tuition free. Warren’s plan would also forgive up to $50,000 of existing student loan debt, while Sanders’s plan would forgive all of the current $1.6 trillion of existing debt.

Somewhat less generous plans have been touted by South Bend, Indiana, Mayor Pete Buttigieg and Sen. Amy Klobuchar. Klobuchar’s plan includes refinancing student loans at lower interest rates, loan forgiveness for college degrees in high-demand occupations, expanded Pell grants, and tuition-free, one- and two-year community college programs. Similarly, Buttigieg’s proposals include making public college tuition free for low- and middle-income households; increasing Pell grants to provide basic living expenses for low-income households; canceling debts of borrowers in low-quality, overwhelmingly for-profit programs; and providing more support for students entering public service.

The Trump administration supports eliminating the Public Service Loan Forgiveness program but proposes that “borrowers would pay 12.5% of their discretionary income, and would receive student loan forgiveness on their federal undergraduate student loans after 15 years and receive student loan forgiveness on their federal graduate student loans after 25 years.”

Democratic candidate Andrew Yang has touted a similar proposal. His 10×10 Student Loan Emancipation Plan would require borrowers to make payments of 10% of their salaries for 10 years, after which their loans would be forgiven. To reduce costs, Yang’s plan would also require colleges to reduce their number of administrators based upon student enrollment.

Political divide

The partisan political divide over college education extends beyond proposals to lower the cost of college.

According to the Pew Research report “The Growing Partisan Divide in Views of Higher Education,” by Kim Parker, “there is an undercurrent of dissatisfaction — even suspicion — among the public about the role colleges play in society, the way admissions decisions are made and the extent to which free speech is constrained on college campuses.” Parker’s contentions are based on Pew Research surveys of Americans’ opinions about how colleges affect American society. Over the last five years, the surveys showed a striking change in Republicans’ opinions. According to Parker, “The increase in negative views has come almost entirely from Republicans and independents who lean Republican. From 2015 to 2019, the share saying colleges have a negative effect on the country went from 37% to 59% among this group. Over that same period, the views of Democrats and independents who lean Democratic have remained largely stable and overwhelmingly positive.”

Should the taxpayer get stuck with another bailout?

Statistics on earnings by educational attainment show a college degree is still a worthwhile investment. According to the Bureau of Labor Statistics, in 2018, median weekly earnings of those with college degrees was significantly higher than those with only a high school diploma. Compared to workers with only a high school diploma, workers with an associate’s degree earned $132 more per week; likewise, those with bachelor’s degrees earned $468 more, master’s degrees $704, professional degrees $1,254 and doctorates $1,095. Given the increased earnings associated with education, college graduates would appear to have enough increased income to repay their student loans. For some, especially those who have not completed their college degrees, apparently not. According to the Federal Reserve’s report, “Among those with outstanding student loans from their own education, 2 in 10 adults are behind on their payments. Those who did not complete their degree are the most likely to be behind. Thirty-seven percent of adults with college student loans outstanding, not enrolled, and less than an associate degree are behind.”

It’s clear college costs and the burden of college debt is greater than ever. Given the partisan divide over whether colleges exert a positive or negative influence on our society, it’s less clear whether politicians can deliver on their promises and proposals to reduce that debt or even whether taxpayers should get stuck with another bailout.

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