Student Loan Debt

The views expressed are those of the author and do not necessarily reflect the views of ASPA as an organization.

By Tyle Sova
September 30, 2019

Student loans are the ubiquitous burden of younger generations. Their $1.6 trillion balance looms over the lives of millions of borrowers. The average student loan debt is roughly $25,000 per person. The ever growing balance has been deemed a crisis by the media and politicians, and that language has spurred a multitude of policy proposals. The goal of these policies is to unburden millions from student loan debt in the hopes that their suddenly free cash is pumped back into the economy in the form of housing and consumer spending. 

The current proposals are from Senators Bernie Sanders and Elizabeth Warren. Sanders calls for all $1.6 trillion to be cancelled, and Warren proposes $640 billion to be cancelled. Under Sanders’ plan, all student loan debt is forgiven; under Warren’s plan almost all loan debt would be forgiven, excluding some graduate and Ph.D. debt. 

The Reality of Student Loan Debt 

There are about 44 million student borrowers, and it’s predicted that nearly 40% could default. Where does this debt come from? It may seem obvious that undergraduate debt makes up the majority, but the truth is that graduate schools and programs are where much of the money comes from. The Department of Education reports that 40% of student loans are used to attend graduate or professional school (Ph.D, Law, MBAs, MDs). Graduates can borrow at the full cost of tuition, as well as living expenses, causing loan balances to skyrocket. 45% of loans are used to attend public schools—the rest is used at for-profit and private colleges. The question of equality and fairness a key concern for student loan forgiveness policies.

How the Government Decides Rates

Congress sets the loan rates, which are tied to the 10-year treasury note plus a fixed amount. 

• Direct undergraduate loans: 10-year Treasury + 2.05%, capped at 8.25%
• Direct graduate loans: 10-year Treasury + 3.60%, capped at 9.50%
• Direct PLUS loans: 10-year Treasury + 4.60%, capped at 10.50

Does the government make money off these loans? The answer is complicated. Student loan debt is not an obvious revenue stream. The Congressional Budget Office (CBO) uses two different estimates for student loans. One shows a modest profit of $1.6 billion (2016), while the other shows a $20.6 billion-dollar loss (2016). The CBO uses the loss estimate when forecasting for the future of student loan debt. With the amount of defaults (about 40%) on the rise, the revenue outlook looks are grave. Not only is the Federal government losing money on student loans, they are saddling millions of Americans with unmanageable debt. 

Debt Forgiveness Issues

Tax policy would need to be updated and changed. Both proposals from the Senators use taxes levied on higher incomes as the funding source for debt forgiveness and for other education proposals. Tax policy is difficult to pass, and it needs to be written in a way that loopholes are not created or unclosed in order to collect the estimated tax revenue. Equality is called into question with policies. The policies would end up cancelling debt for a large portion of decently well off families and those who are well educated—the majority of the funds would go to the people in the second highest income quintile. People who have already paid off their loans, didn’t attend college or saved for college are also feeling the unfairness of the proposals. “You’re asking people who haven’t gone to college, or have gone to college and repaid their loans, or have saved and gone to college, to repay the loans of people who did go to college,” said Adam Looney, the Joseph A. Pechman senior fellow at the Brookings Institution. 

Next Steps Forward

Each of these proposals is radical in terms of policy changes. They will most likely take a long time and many revisions in order to be passed. In the meantime, student loan debt help is needed. Expansion of the The Public Service Loan Forgiveness (PSLF) Program, which allows certain public servants to have loans forgiven after 10 years of on-time payments, to all public servants would potentially help thousands of people and drive talented young professionals into the public sector. Tighter regulations on for-profit schools, who often have the worst outcome statistics but the highest costs could steer more students to affordable community and local colleges. Another idea is to allow people with student loans to pay for loans with pretax dollars. The money goes into government coffers anyway, but would help students pay off loans faster.

No matter the potential solutions, what remains clear is that student loans are an economic burden to younger generations. There can be endless debate about who is at fault, but it matters little. What is important is that there is a concerted effort to educate students in an affordable manner so they can quickly gain skills and contribute to a modern economy.

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Author: Tyler Sova received his Bachelors in Finance from Duquesne University and his MPA from West Chester University. He is a Financial Management Analyst for the Federal Government and involved with the Pennsylvania Chapter of ASPA. He can be reached at [email protected].

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