Sunday, March 26, 2023 | 2 a.m.
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America’s student loan crisis continues to vex lawmakers and American families.
U.S. borrowers currently owe an estimated $1.75 trillion in education-related debt. Prior to the COVID-19 pandemic, approximately $5 billion in interest accrued on student loans in the United States each month. With the cost of education continuing to rise, those numbers are only going to increase.
This debt leaves families unable to invest in homeownership, retirement savings or other long-term investments that build equity and wealth.
It also harms the American economy, as student debtors have less disposable income to dedicate to consumer products and services. Even worse, predatory interest rates and compounding interest formulas have made it impossible for some borrowers to get out from under their education-related debt. Even after a decade of on-time payments, some borrowers owe more today than they did at graduation.
The cycle of debt, interest and increasing balances is not unlike what many consumers experience with credit cards. But unlike credit cards or most other forms of debt, student loans cannot be discharged in bankruptcy. Moreover, educational loans are not used for the purchase of assets that can be returned, borrowed against or sold like a car or house.
The combination of these factors means that when 18-year-old high school students fill out student loan and financial aid applications, they may be unknowingly signing up for debt that will follow them for life, with few options for relief.
The Biden administration has proposed a one-time student loan forgiveness of up to $20,000 per borrower. This is a good plan for providing much needed immediate relief to millions of borrowers, but it does not address the long-term systemic issues surrounding how we finance education in the United States. Nor does this proposal address the feeling that it is fundamentally unfair to forgive one specific group’s debt at the expense of all others — or the feeling that when people voluntarily sign up for a loan, they should be responsible for paying it back.
The administration’s plan was recently challenged at the U.S. Supreme Court and many legal experts anticipate the court will strike it down, leaving borrowers, yet again, with few options.
The challenge for many borrowers is not their inability or unwillingness to pay back the money they borrowed, it’s that high interest rates, compounded daily, leave many borrowers unable to catch up with the runaway interest on their loans.
Remember, prior to the pandemic, more than $5 billion in interest accrued on student loans in the United States each month.
Unsurprisingly, students who come from low-income backgrounds are the most likely to take on large amounts of education-related debt. The least wealthy 20% of Americans hold 55% of all education-related debt in the United States. Over their lifetimes, these borrowers might earn higher-than-average income, but the massive financial hole they start off in after college is often too much to overcome. Students who borrow $50,000 or more can easily accrue five-figures worth of interest over the life of their loan.
Meanwhile, many lenders and debt collectors are raking in massive profits on the backs of student borrowers and government guarantees. According to Reveal and the Center for Investigative Reporting, prior to the pandemic-related freeze on student loan interest, payments and debt collection, student debt was a $140 billion annual industry.
That’s why Congress should act now to limit interest on all education-related debt, including debt related to programs at community colleges, trade schools and technical schools, to a simple 3% annual administrative fee that does not compound. This fee should be reduced to 1% upon successful completion of the educational program the money was used for.
Under this structure, students would be incentivized to borrow less, graduate on time and pay off the principal on their loans as quickly as possible. Students who borrowed less would have lower fees than students who borrowed more, as would those who complete their certificates or degrees.
It’s a win-win solution that promotes education, the economy and innovation without asking taxpayers to fund their neighbor’s prosperity or letting borrowers off the hook for debt they signed up for. It also ensures no one is profiting on the backs of low- or middle-income students looking to build a better life for themselves or their family.
Whether through a traditional four-year degree, an advanced graduate degree or practical training from community colleges and technical schools, education is the most reliable predictor of future financial success and stability. According to the Brookings Institution, over the course of a full-time career, the typical U.S. worker with a bachelor’s degree earns nearly $1 million more than a similar worker with just a high school diploma.
Education is also essential for protecting our nation’s economic and security interests. After all, our economy cannot thrive, and our military cannot stay ahead of our enemies, without innovation and expertise. Nor does innovation sustain itself. An educated workforce is needed to repair, maintain and adapt products, systems and technologies to ever-changing circumstances.
Perhaps most important to policymakers, tackling student debt is a winning issue politically. According to Brookings, two-thirds of Americans say that student loan debt is a serious problem.
No matter what decision the Supreme Court makes regarding President Joe Biden’s proposed loan forgiveness plan, Congress should proactively address America’s education debt crisis by dramatically reducing interest on loans. In turn it will release the giant economic power of educated citizens by funneling the wealth they create into the active economy rather than flushing it into the pockets of financial institutions that did nothing to earn it.
