Student loans are in the news and I feel like I should say something about them, even though every time I do, someone (usually several someones) gets irritable.
Readers are likely familiar with the basics of this story, but just in case, I’ll recap “how we got here,” so to speak.
Most borrowers weren’t required to make payments on their loans during the pandemic, so many didn’t. It was hard to blame them: Interest didn’t accrue during the payment pause.
We’re all going to die at some point, some of us sooner others later, and generally speaking, there’s no way to know which. In that context, there’s a very real sense in which making payments on a loan when you don’t have to and interest isn’t accruing is a stupid thing to do.
I can hear the protestations now, and even if I couldn’t, I heard them when I made this point previously. Here’s the angry, shrieking rebuttal: The best time to pay down a loan is when interest isn’t accruing, because that’s when you can really “attack” the principal!
Ok, sure, fine. But if you make, say, $5,000 in loan payments during a period when no one was requiring you to pay and then you get terminal cancer… well, let’s just say there were funner ways to spend that $5,000. Of course, you could say that about any loan payments made in the months leading up to a devastating health diagnosis, but the difference here is that interest wasn’t accruing and all non-payment penalties were suspended.
There was another wrinkle. Progressive Democrats wanted badly to forgive those loans. There for a while, the political momentum was moving in that direction. With apologies to myself and everyone else out there who’s paid off a student loan or paid one off on behalf of a spouse or child, you’re a moron if you make payments on a loan during a grace period where no interest is accruing and the President of the United States is leaning towards canceling your whole balance, as Joe Biden was for many borrowers.
So, please: Let’s not be obtuse. The argument for not making payments during the pause was at least as strong as the argument for making them. While we’re determined not to be obtuse, let’s admit that students, current and former, aren’t going to pay back most, let alone all, of the $1.8 trillion in outstanding student loans. Pretending they are is to persist in a fantasy.
On that latter point, note that there’s a difference between saying something’s a shame and pretending it doesn’t exist or somehow isn’t the case. I think we can all agree The Godfather Part III‘s a shame. But we can’t deny the reality of it. Same’s true with student loans. It’s a shame — on all sorts of levels — that Americans are saddled with a near $2 trillion debt burden that’s never going to be paid back. It’s also a shame that, conceptually speaking anyway, the inevitable write-down will come at taxpayers’ expense. But that’s the reality.
The difference between The Godfather Part III and $1.8 trillion in student debt is that unlike the worst sequel ever made, we can wish away that debt pile. We can’t pretend it’s going to be paid down, but we can make it disappear. The arguments against disappearing it are myriad. They run the gamut from moral (“To forgive all student loans is to annul personal responsibility!”) to macroeconomic (“Disappearing $1.8 trillion into the void is inherently inflationary and will anyway serve to validate concerns about America’s fiscal trajectory!”).
I don’t deny — or not completely, anyway — most of the arguments against across-the-board student loan forgiveness. But at the same time, I don’t fully buy them either. I don’t know about anyone else, but when I go out into the world, I don’t see a lot in the way of personal responsibility. And while I suppose forgiving student loans would only reinforce the generalized lack of accountability across society, it can’t do any more damage in that regard than, say, failing to prosecute anyone of any stature on Wall Street after the financial crisis.
As far as the inflation argument, I think the direct impact of putting more money in people’s pockets (which is what you’re doing when you announce a no-interest payment pause on loans a lot of people carry) has already been felt. Americans lived for years as though those payments don’t need to be made, so while restarting them can slow the economy, not restarting them isn’t likely to speed it up. I’ll concede the optics aren’t great, but let’s face it: When it comes to frittering away a few trillion, America’s done far worse than forgiving student loans without calling into question the value of the dollar.
To me, the biggest problem with student debt forgiveness is that canceling outstanding loans without a plan to prevent the problem from recurring is pointless. So, if you’re going to cancel $1.8 trillion in student debt, college pretty much has to be free after that. And look, it’s already free for a lot of people. What are you doing when you extend education loans to borrowers you damn well know aren’t going to pay them back? You’re giving them free tuition. There’s not a lot of recourse here. You can’t repo a diploma, nor can you repo skillsets and knowledge.
What you can do, though, is put students who don’t pay into collections. Or, if you’re feeling especially aggrieved about the situation, you can seize their tax refunds and garnish their wages. What’s wrong with that? Well, plenty actually, but I’ll stick to the macroeconomic consequences for the sake of brevity.
Payments resumed in late 2023, but it’s only recently that the full complement of pandemic-era protections rolled off entirely, facilitating the snapback in delinquencies illustrated below.
As The Wall Street Journal — not exactly a bastion of Progressive thought — noted, “the collections process was standard before the pandemic, but it is still likely to be a shock to those who haven’t experienced it before, or who forgot what it was like.”
That’s a simple point, but it’s crucial. It’s easy enough to imagine these are all just lazy good-fur-nuthin’s with theater degrees. Now they’ll have to get off their asses and pay us upstanding taxpayers back for the money we loaned them instead of — you know — spending their Starbucks paychecks on weed and Taylor Swift tickets.
But that’s just not the case. Most of these people are out there, in the economy, trying to get stuff done. Stuff like buying a house. Yes, they should’ve assumed they’d have to start making these student loan payments again eventually. And sure, they should’ve factored that into their personal finances and monthly budgeting process. But that’s not how human psychology works.
Now, millions of Americans are either i) making payments they weren’t making previously, which is money they can’t spend into the economy, ii) not making the payments and risking collections and/or seeing their wages deducted by the federal government or iii) both in cases where borrowers are paying what they can, but it’s not enough to stay current.
Before you write this off as inconsequential or as a “too bad, so sad” development, consider that, as the New York Fed wrote, “2.4 million of the newly delinquent had [credit] scores above 620 before these delinquencies were reported” and as such “would have qualified for new auto, mortgage and credit cards.” “Would have,” past tense. Now they can’t. Those are cars not being bought, homes not being sold and credit cards not being opened.
Have a good, long look at the figure above. Although the share of the suddenly delinquent with a prime credit score is unsurprisingly low, the hit to those scores from the delinquencies is -177 points on average. That’s enormous.
If you were shopping for a home at the top-end of your budget as a prime borrower and your credit score drops 177 points all of a sudden, you have a problem. Potentially a serious problem that’s going to impede your ability to obtain financing. At the least, you won’t be shopping in the same neighborhoods.
In the same linked article, the NY Fed said that all told, “more than 2.2 million student loan borrowers who became newly delinquent saw their credit scores drop more than 100 points and more than one million saw drops of at least 150 points.”
I don’t have any answers here, and neither does anyone else. To reiterate: Even if the political will were there to cancel this debt (and it obviously isn’t right now), there’s no point unless the political will’s also there to make college free going forward.
One way or another, this isn’t sustainable and everyone knows it. Sadly, that puts college in the same category as housing and health care: Things that everyone needs, but almost no one can afford in the richest country the world’s ever known.
One alternative is to write down part of the principal extend the term and greatly reduce rates for those who resume payments and stay current. Like a 1/3 discount at the end of the term, 25 years to pay and 2% rate. That’s realistic and fair. And in the future the federal government should make matching grants paired with state grants. No loans
Cost is another issue. When I went to college–admittedly some time ago–my tuition and fees were about $750 a quarter at a good state university. At the start, I had financial-aid that included a grant and a loan, so I was only paying about 1/3rd of that out of pocket. By my junior year I had a good part-time job and no longer qualified for the financial-aid, but I was still able to cover the costs of attending part-time. Yes, it took me longer to finish school that way, but I actually managed to pay back my student loans before I graduated. (I did not live on campus by the way.)
School choice is another consideration. Current tuition at “my old school” (to quote Steely Dan) is about $8,000 a year. That is a far cry from the $35,000 a semester that seems to be ubiquitous now at “more prestigious” universities. If you envision it takes about five-years to graduate–or four-years plus some summer school–that is $40,000 vs. $350,000 in tuition from start-to-finish.
Very few students/parents pay the published tuition rate these days. Most international students do and those families who make $500K plus and have assets do. The average family is getting significant financial aid grants at high-tuition private schools. So your 350K to 40K comparison isn’t really apples to apples. If you’re paying full-freight, you and your family can afford it.
There is no good answer to the student-loan issue. I’m a fan of just forgiving it (at least at the undergraduate level), but it doesn’t solve the problem as mentioned in the article. And the biggest issue is that we’re asking a 17 / 18 year old kid to make a huge financial decision that they can’t possibly be equipped to make at that age. Solid parental advice, etc., might mitigate awful decisions, but at the end of the day there’s no real solution to that hurdle.
Perhaps I have given a poor example. My point was really more that not every university is worth the price of the student loans people are taking out in order to attend them. When prestigious schools raise their tuition, other (often “for-profit”) schools raise their tuition as well. Higher costs = bigger loans.
I’m sympathetic to your arguments. But I’m stuck on how we’d solve the (awful) political optics of endorsing a one time, 1.8T wealth transfer from all taxpayers exclusively to those who’ve attended college. That’s a big ask. Even with the “AI is eating all the white collar jobs that you went to college for” narrative, you’d have to pair this with a (deserved) boost to the social safety net (at far greater cost).
Principal only loans.
Doge apparently laid off many of the workers that are needed to help people start a payment plan that want to. Evidently nobody can get in touch with anybody to find out what their payment plan is.
This is the correct answer. Make student loans interest free. One time adjustment to current outstanding loans to correct for the interest already paid and all future payments go directly to principal. Newly issues loans accrue no interest. We can even go back and say all interest paid on closed loans originated after dd/mm/yyyy (or some phasing in) will be reimbursed via tax credits. This is absolutely doable and solves most of the identified problems without taxpayers footing the entire bill.
I, and many others of my generation, are willing and able to repay the loans we accepted for higher education. That said I know a disturbing amount of people who are stuck in negatively amortizing loans. I have a friend who has made payments totaling ~25% of the original principal of his loan, but his current balance is ~20% HIGHER than the original amount. Negatively amortizing loans are illegal in many places, but the federal gov’t doesn’t seem to think it’s a problem.
One other point to head the boomers off at the pass: Do a quick google search for “tuition growth vs. wage growth” or something similar and you’ll see why the narrative of “I worked to put myself through college” simply doesn’t apply anymore. The math has changed.
I don’t feel the least bit sorry for those students that piled on student debt in order to attend expensive private institutions. I pounded it into my kids that state universities offer good educations and charge a fraction of what private institutions charge. They both followed my advice and obtained STEM degrees from NCSU. They have both paid off their student loans and are diligently working to become debt free with their cars paid off and making major reductions in their mortgages. They never would have made that type of progress if they’d gone to MIT, Yale, or Harvard.
+1.
Germany considers education a human right, we should all consider that while we’re attacking people who seek to make a better life for themselves and their families. It’s farcical to sit here and say “we” can’t afford for people to be able to go to college for free while Germany has solved that problem and is the economic powerhouse in the EU. Oh, and they also have figured out how to give people healthcare too, gosh I guess we’re just too damn rich to solve these problems.
My first priority would be to ensure affordable college options for current and future students. Not that the Ivy League needs to be affordable – there will always be a range of pricing – but via smaller and public institutions.
My second priority would be to ensure more technical and trade education options.
My third priority would be to provide some relief – not necessarily complete loan forgiveness – for existing loan holders, starting with the more recently graduated.
As often happens I just got a crazy idea. What if instead of playing the part of an angry jerk, Trump and his henchman would create a program designed to get colleges to set aside part of their excess endowment cash to temporarily fund their current government grants? The grant allocations could then be shifted to pay off student loans. So in essence, the grant money is still around and the loans would slip away. Finally, add in a partnership program creating tax advantages for large donors to education to help their recipient colleges make up some or all of the lost funds. Win, win, Trump would even look generous (something he tries to avoid) the schools would get a nick, but the ones he’s targeting can afford it. Also this would placate who wish to raise taxes to the rich. Force them to participate by giving to education, give them delayed tax credits for doing so and unwind the problem. Lots of political capital could be created for both sides of the aisle, companies could get a ton of goodwill. Bessent could spend the rest of the first term working this out. Just thinking out loud.
I was curious as to why University Education costs have risen so much over the past 40 years. From ChatGPT – here’s a simplified list of the main reasons university costs have increased, each with a short explanation: the % at the end is the number Chat attributed to each category (recognizing it would be different for every University).
Reduced Government Funding – Public universities get less money per student from the state, so they charge more tuition, approx. 25% less adjusted for inflation. 25-30%
Administrative Bloat – The number of non-teaching staff has grown significantly, increasing payroll costs.15-20%
Luxury Amenities – Schools compete with upscale dorms, gyms, and dining, which are expensive to build and maintain. 10-15%
Faculty Costs – Some professors earn high salaries, though most teaching is now done by lower-paid staff, 5-10%
Regulatory Compliance – Legal requirements mean schools spend more on lawyers, safety, and reporting systems. 5-8%
Expanded Student Services – Mental health, tutoring, and career support services add to operating costs. 5-10%
Technology Investments – Universities spend heavily on digital infrastructure and IT support. 5-8%
Less Efficient Instruction – Smaller classes and niche programs are more expensive to run. 3-5%
Higher Demand and Degree Inflation – More students see college as essential, pushing demand and prices up. 3-5%
Easy Access to Student Loans – Generous loan availability enables schools to raise tuition without losing enrollment. 10-15%
Focus on Research and Prestige – Elite schools spend more on research and branding than on teaching. 2-5%
Great post and great comments. I’ll state at the outset I don’t have any answers on par with the actual solutions offered here. But it’s disheartening at this particular moment to be adding another log to our already-blazing fire of unsustainability (immigration, tariffs, budget deficits (in mind if not reality), housing, climate change, oil and gas drilling/transport, transgender high school sports).
In an increasingly partisan government driven by an increasingly minority party, however, it’s not really that surprising that we’re devolving to government by crisis, the delightful conjuncture where we have to do something meets with we could try anything. Trump has obviously recognized that by hysterically deeming everything an emergency to grease further one-sided power grabs. I just hope Treasury Secretary Quint
knows how to drive a bigger ambulance. So far, the jury is out.
And so crisis it shall be with this latest self-own on student loans. As I said, I have no answers and can only underscore that notions of forgiveness or free future education are running headlong into a greedy and dogmatic effort to “fix” education by making it as private, for-profit, and fundamentalist Christian as possible. Betsy DeVos, I’m looking at you.
While I don’t have any meaningful solutions, everyone likes an -ism these days, so can I recognize a gift jingoism in the mouth by counter-offering yet another MAGA alternative? (h/t to H): Make America Determined Not to be Obtuse. Not sure it’s doable, but it certainly seems more realistic than MAGA at this point, and it would make me a lot happier than getting Greenland.