Presidential hopefuls — especially Democratic — have started to pay more attention to higher education, as the student debt crisis becomes an increasingly large national problem. There are over $1.6 trillion of outstanding student loans, owed by nearly 45 million people across the country. The average student loan for a student in the Class of 2018, according to a study by Student Loan Hero, was $29,800, and students are becoming even more dependent on loans to pay for their education. Further, around one million people default on their student loans each year, and it is estimated that 40 percent of student loan borrowers may default on their loans by 2023. Indeed, student debt has reached crisis level.
The cost of tuition has been rising in the US for a number of decades. the US spends more on higher education than any other developed country (excluding Luxembourg), at around $30,000 per student, according to the OECD’s Education at a Glance 2018 report. Many students are still struggling to complete higher education or find a well-paying job in their field of study after graduation. Around six in 10 students fail to graduate within six years, and some institutions like community colleges can have even worse graduation rates. Even though the US spends so much on education, the system is failing to achieve some of its core goals. While attaining a college degree is still worth it for many people, that fact has recently been called into question, as the price of tuition increases. Why does the US depend so much on loans to finance higher education?
How Did the Federal Loan System Start?
The federal government is now at the center of higher education financing — the federal student loan portfolio is worth around $1.5 trillion. Demand for loans that could be used to pay for college was a recent development. In 1944, Congress passed a bill now referred to as the GI Bill, which made grants to veterans who had finished their service. The idea behind this bill was to help veterans acquire the educational skills they required to thrive in the changing workforce, and provide them with an opportunity to attend college that they may have missed. However, this legislation only covered veterans, which meant that the general public was interested in other ways that they could access money for college. Some states, following the GI Bill, began to create their own student loan programs, but higher education financing was ultimately taken on by the federal government a few years later.
During the Lyndon B. Johnson administration, more people became interested in attending college. Higher education was seen as a safe investment for people that would allow them to access better jobs and higher salaries. The American economy was growing and changing as more new technologies were developed, and economists saw education as the key to unlocking the full potential of the labor force. The Johnson administration explored how students who were typically underrepresented in higher education — poorer students, first-generation students, and some members of the middle class — could also access college, which would help them advance in society.
This lead the Johnson administration to work with Congress to pass the Higher Education Act, which provided the government with the funding they needed to guarantee student loans made by banks. At the time, banks believed student loans were too risky to issue, but the Higher Education Act eliminated this issue and would open up a large amount of new funding for students. Johnson predicted that “In the next school year alone, 140,000 young men and women will be enrolled in college who, but for the provisions of this bill, would have never gone past high school.”
The Higher Education Act
After the first Higher Education Act was passed, the Johnson administration started to look at how a longer-term strategy could be developed. With the support of a panel of economists and education experts — the Rivlin panel — the administration found that offering loans and grants directly to students from the federal government would be prudent. After the Rivlin panel announced their findings, the Nixon administration — which had only just taken over the Johnson administration — passed a new Higher Education Act which legislated many of the changes proposed by the Rivlin panel. Notably, the Student Loan Marketing Association, also known as Sallie Mae, was passed. This was a semi-public entity that could borrow money from the US Treasury at reduced rates to buy student loans from banks, which would allow them to issue more loans to students.
At this point, the federal government was fully involved in higher education financing. However, the changes they made had resulted in some unexpected side-effects. Most notably, the new student loan system created perverse incentives for colleges to increase their tuition because the federal government would be helping students pay for their education. Many colleges decided to reduce the difficulty of entering their institution, so they could access even more federal funds. Colleges could raise new money by admitting students who previously would not have passed their admissions criteria, because the federal government was guaranteeing loans for most people interested in college. Ultimately, this was the result of creating a system where no academic criteria were in place. Students who were not academically capable of going to college started to attend, and many started to drop out and could not pay the debt they owed.
Direct Lending and Income-Driven Repayment
The student debt crisis continued to evolve in the early 2000s. The price of tuition was increasing significantly, and taking out a student loan started to become a normal part of going to college — students could no longer afford it by themselves, as they often could in the past. The recession in 2007 marked a pivotal point for the higher education system. During this time, workers who couldn’t find jobs or who had been laid off due to the recession started to turn to college — people saw college as the key to accessing better jobs. Students were enrolling in a system that was broken, and so the Obama administration had to make changes. The first change was to take power over the student loan system away from banks, which meant the federal government would be directly issuing all loans. The administration also piloted new repayment programs including income-based repayment in various forms, which meant that students would make payments as a percentage of their income. After making payments for a certain number of years — between 20 and 25, depending on the program — a loan would be forgiven. Today, around one-third of federal loans are enrolled in a version of this program.
The federal loan program largely achieved its goal — to expand access to a quality college education. College graduates are continuing to command high salaries, and are finding it easier to get a job. The median usual weekly earnings for a high school graduate, according to a 2018 report by the US Bureau of Labor Statistics, is $730; the median weekly earnings for someone with a bachelor’s degree is $1,198. Further, the unemployment rate for high school graduates is at 4.1 percent, whereas only 2.2 percent of people with a bachelor’s degree are unemployed. More than one-third of Americans over the age of 25 have a college degree or higher credentials. Although the system has achieved its goals in some respects, it has also harmed millions of people around the country. More students are dropping out of college due to the larger amounts of money they need to borrow, who are saddled with loans they will likely be unable to repay. Recent tuition increases have families considering other options such as going straight into a job or attending vocational or technical training programs, which are more affordable.
Solving the Student Debt Crisis
There have been a few proposed solutions to the crisis. Perhaps the most common — and the one which has attracted the most publicity — is to offer free college to students. Democratic presidential hopeful Sen. Elizabeth Warren (D-MA), has proposed a plan where students whose families earn under $100,000 per year can apply for up to $50,000 in student loan forgiveness; those with families earning up to $250,000 per year can apply for partial forgiveness. Sen. Bernie Sanders (I-VT) has proposed a plan that would eliminate college debt for all, and has joined Warren in calling for free tuition at certain institutions. Of course, these programs have a few problems. Most prominently, making college free will not guarantee college quality will improve — indeed, colleges are no longer held accountable by students who pay out-of-pocket for their education.
More moderate proposals include giving colleges more “skin-in-the-game” and holding them more accountable for their outcomes. Sen. Josh Hawley (R-MO) is considering legislation that would make colleges and universities financially responsible if a student defaults on their loans. In his proposal, Sen. Hawley outlines a program where colleges would have to repay 50 percent of the balance for any defaulted student loans that students took out to attend their school. This type of risk-sharing model is designed to incentivize schools to provide better quality educational experiences — if graduates don’t succeed, the school’s balance sheets will suffer. Sen. Lamar Alexander (R-TE), chairman of the Senate Health, Education, Labor, and Pensions Committee, has recently proposed a new accountability system that would focus on student outcomes, and retract federal aid from institutions who have low default rates.
Another proposal that has gained traction would be to expand access to Income Share Agreements, or ISAs. ISAs allow students to borrow the money they need to pay tuition upfront, and share a percentage of their future income as payment. Students who earn under a certain amount in an ISA will not have to make payments, which protects unemployed and underemployed graduates from making payments that they cannot afford. ISAs can hold colleges directly accountable for their outcomes, as if a student does not succeed, they will pay back less — or even nothing — to their college. So far, institutions like Purdue University and Messiah College have explored ISAs as a method of student financing. This model also has a few problems. Borrowers could end up paying more through an ISA than they would with a traditional loan, and the lack of legislation has made many students hesitant to enter into the agreements. That being said, a bipartisan group of Senators recently proposed the ISA Student Protection Act, which would create a clear regulatory framework under which these agreements would operate.
The Problem of Student Debt is Deep and Complex
The student loan system, with its roots planted in the 1940s, suffers from a variety of different problems. Schools are not being held accountable enough for their outcomes, and recent rises in tuition have made college unaffordable for many people. Indeed, the current student loan system is the result of dozens of different laws, which has resulted in a large amount of systemic problems — there are dozens of repayment plans, and Congress has failed to close older plans. Although plans like Income Share Agreements and risk-sharing models do start to address some of the problems with the student debt system, they do very little to support current borrowers. And, more changes need to be made to ensure the higher education system is continuing to yield quality graduates. These proposals include expanding access to short-term training programs, revising tenure, revising rules around how much federal aid students can access, among other things. The US student loan system is broken, and there is no one solution to the problem.