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Student loans were originally created in the 1960s to aid students who were short only a small amount from covering their tuition costs. Since then, taking out loans has become a prominent strategy for college funding. People are becoming increasingly less eligible for more traditional forms of financial aid, and must rely more heavily on loans. This has resulted in a student loan debt crisis that has spun out of control.
Having blossomed from an amalgamation of stagnant wages and increased tuition, it deprives the nation from education and in turn, steady, long-term economic growth and development. The rise of student loan debt has also triggered a movement that attempts to fix the imploding debacle that is the college loan system. The second largest source of debt in the U.S., which amounts to $1.3 trillion, student loan debt has become the subject of policy, with presidential candidates planning for a better future for college students and graduates.
Among notable ideas for fixing the issue is making college tuition at two- and four- year public institutions free. While this option has garnered a significant number of supporters its consequences parallel those of high tuition rates because proponents of free tuition fail to recognize other sources of college expenses, such as textbooks and room and board.
There is a fundamental disparity in the understanding of the relationship between student loan defaults and wage earnings. People automatically assume that larger loan amounts account for high default rates. According to a paper from the Brookings Institute written by Susan M. Dynarski, a Faculty Research Associate at the National Bureau of Economic Research and the Center for Analysis of Postsecondary Education and Employment,
Of those borrowing under $5,000 for college, 34 percent end up in default. This default rate actually drops as borrowing increases. For those borrowing more than $100,000, the default rate is 18 percent. Among graduate borrowers—who tend to have the largest debts—just seven percent default on their loans.
People borrowing in the lower ranges are typically students who either dropped out of college early or attended either a non-selective institution or a for-profit institution. In each of these scenarios, the students’ accumulation of debt is rather low, but the amount of human capital accrued by way of education is also sufficiently low. Students entering the repayment of their loans from such circumstances have less leverage in the job market because of their lower human capital, but face the non-discriminatory wrath of loans. They are unable to cover their monthly debts and eventually default.
People borrowing larger amounts to cover costs of tuition, unlike small borrowers, are students who attend either more selective four-year universities (whose tuitions are sufficiently higher than those of non-selective institutions,) or students who are in their graduate education, whether it be a prospective doctoral or masters’ degree. These students accrue large amounts of human capital from their education along with their higher debts and, as a result, are more valuable to employers. As more desirable job candidates, people with higher loans are able to get higher-paying positions, enabling them to pay off debts.
In the past decade, according to Dynarski, studies have shown that community college students, who earn low wages—approximately $22,000 for students leaving school in 2010—are part of the reason for increased default rates since “Half of the increase in borrowing between 2003 and 2013 is driven by surge in borrowers at these colleges, where enrollment exploded as workers fled a weak labor market.” The other significant part of increased default rates is the amount of students who attend for-profit universities, which account for 44 percent of defaults in recent years.
As more undereducated workers with low human capital enter repayment, the more default rates will rise. Free tuition is limited in its solutions because it does not neutralize the root of the problem— the cost of attending college, which is not exclusively tuition, and the disparity of earnings as a result of the college attended.
While free tuition does not and cannot have any impact on the level of earnings, it does play a significant role in the case of cost. People are not truly cost free because free tuition does not cover book costs or the cost of living at a university. Policies that propose free tuition also do not apply to private universities, rendering students at those universities helpless in terms of lower payments. Since it leaves people to contend with other, non-tuition related expenses, people who benefit from it the most are likely unable to cover the remainder of the amount, and must turn to financial aid. Financial aid in turn encompasses grants, scholarships, and loans, meaning that students, who do not qualify for grants or scholarships, will still end up borrowing, resulting in the very same issue that started the crisis.
Free tuition does allow students to borrow sufficiently less amounts of money, but it does not help people contend with those amounts. It is limited in that it does not provide the structural change needed for long-lasting stability. A policy that enacts free tuition can be changed far more easily than a policy that changes the system.
Free tuition can work as a temporary fix for students entering the job market today by easing the amounts they must pay, but since the policy ends there, it is not reliable for students who enter the market a decade down the road. It can easily be repealed just as every year government funding for public institutions continues to fall.
A more realistic approach, akin to the Australian repayment plan, allows borrowers to pay based on their income rather than a flat monthly rate, despite how much or how little they earn. The Australian system prioritizes people’s needs over loan repayments. Student loan payments vary based on income, and if someone cannot pay the loan that month, the payment is not taken from his/her paycheck. The system that allows for that acts like the American Social Security payment system, in which payments are automatically withheld from monthly paychecks, and change based on current earnings.
In the United States, student loan bills arrive every month, no matter the financial situation of the borrower. While a Pay As You Earn (PAYE) does exist in the United States, the process is extremely tedious and involves a 12-page application. The system itself does not truly follow an income–based plan because payments are not based on current information. They are based on incomes from the previous year, and are flat for each year. New paperwork is required every time debtors’ wages change and they want to adjust their payments. This process can take months to complete, and in the worst case, if earnings change again, they have to resubmit another set of paperwork.
This is especially true, according to Dynarski. “For those patching together several part-time job,” Dynarski states, “hours and earnings can bounce around weekly.” This can result in payments that “can actually consume a much larger share of a borrower’s earnings in a given year.” In the case where someone earns higher in the previous year than this year, and must pay according to earnings from the past year, the amount of disposable income spent relative to this year’s wages will be much higher in proportion than for someone who spends disposable income based on current earning. Current earning enables borrowers to spend more accurately, allowing them to purchase goods and services, which in turn helps the economy.
The United States’ version of earning based repayment is highly cumbersome and flawed. It lacks the proper organization needed to help people manage their payments and not default on their loans.
Payroll withholding, a similar yet functionally reliable version of PAYE would reorganize the system for the purpose of benefiting both state and student. Payroll withholding binds incomes to payments and ensures that changes occur continuously without interference. It minimizes wasted pay on the part of borrowers and enables the government to be reimbursed accurately. Payments decline when income declines, and rise when income rises, giving people with the means to pay, the opportunity to pay off their loans faster, and those with lower wages, the chance to be protected from default. It provides a more workable solution, adapted to deal with modern issues.
The student loan system in the U.S. is the product of a time when people borrowed very little and is no longer sustainable. The failure of government and school institutions to adjust to stagnant wages, tuition hikes, and the rising cost of living has created a debt crisis that falls on and encumbers the nation’s students. In response to the needed change politicians have proposed many plans to modernize the system.
Democratic nominee Hillary Clinton produced a comprehensive plan joining refinancing, income-based repayment, employer contribution with debt relief, rewards for public service, and entrepreneurial relief. She is also promoting the elimination of tuition for families that make up to $125,000 per year, and the provision of help for students to contend with the cost of college attendance.
While most of her policy may help bring up the morale surrounding student loans and their debts, true change will only come with a significant system-based alteration that provides for increased opportunities for repayment. Such change is based on understanding that the crisis is not the result of human shortcomings; rather it is a consequence of an outdated, obsolete system that perpetuates an issue bound to a crucial faction of the U.S. economy.
-Louisa Saakian
Sources:
The Washington Post:
Hillary Clinton:
Forbes:
The Brookings Institute:
https://www.brookings.edu/research/the-trouble-with-student-loans-low-earnings-not-high-debt/
The New York Times: