SHIROFF: The answer to the student debt crisis is affordability, not forgiveness
Every now and then the question of what to do with the student loan debt – a $ 1.71 trillion problem shared by 44.7 million Americans – is coming back. Should the government just write off this debt and write it off? Should relief be more targeted at who can’t afford pay off their debt? These questions are tricky because they treat different people differently. They also do not deal with the problem properly.
Instead, the problem of college affordability should be solved with permanent, practical and effective solutions. A combination of lowering tuition fees with proper funding, forgiving the excessive debts of fraudulent schools, and tightening the regulation of these schools would be a good start. Other options? Not really.
For starters, proposals to eliminate all student debt ignore a downside reality – $ 96 billion in federal student loans were issued in 2017 alone. Give it 17 years, and we’ll get back to where we are now if we just offer to write off the debt. That’s not to say that every relief program is unwarranted – instead, any relief program should be a permanent solution. Debt relief alone is not enough.
Congress has taken steps to permanently ease the burden of student debt. For example, the Bipartite Student Loans Certainty Act, 2013 tied student loan interest rates to general market interest rates, rather than being arbitrarily set by law. These interest rates have fallen on average, making interest payments more manageable. Having said that, it does not make the college more accessible if it is the loan amount itself that is at issue.
Arguably Rutgers’ most influential and influential graduate, economist Milton Friedman, introduced the idea of revenue sharing agreements (ISAs) in 1955.
In ISAs, the government provides students with money to pay for their education, which they repay after graduation, just like student loans. The main difference is that borrowers would only be required to pay a fraction of their income and only repay debt after earning a certain amount of money.
Friedman’s idea has caught on over time and is similar to the scheme used in the UK and those proposed by Democratic Party primary candidates Mike Bloomberg and, at one point, President Joseph R. Biden Jr. But this solution introduces a new problem: adverse selection.
Those who expect to earn the most income from their degrees – future doctors, lawyers, computer scientists, etc. – would be the least likely candidates to enroll in ISAs, as they would have the most to lose.
Those who expect to earn less, perhaps below the limit at which one would even need to repay, would be most inclined to enroll in ISAs – this could give them free college education as long as they do not earn enough to have to pay it back!
It creates a problem. Lenders would have little interest in lending to applicants who are unlikely to repay them. To compensate for this, they should raise borrowing costs on everyone or just not lending to those with lower expected incomes. It is a horrible and very inefficient business.
With that in mind, the solution to student loans isn’t just to write off debt or to smartly try to make payments more affordable. Instead, the solutions should hit the heart of the matter: Tuition fees are too high, and many schools offer high-cost programs with poor results hidden from potential students.
It’s no secret that tuition fees are much more expensive than before. State institutions, like Rutgers, should work sincerely and carefully with state governments to increase funding. New Jersey is in the bottom half in terms of funding its higher education programs – a fact disappointingly highlighted at Rutgers’ bottom budget.
Columbia University, an Ivy League school founded 12 years before Rutgers, was recently revealed by the Wall Street Journal to have started its prestige and its integrity through its various master’s programs. Graduates of Columbia’s film program had a median debt load of $ 181,000. Half of graduates earned less than $ 30,000 after graduation.
This problem is not unique to Columbia – The Wall Street Journal found that very similar examples can be found in all Ivy League schools, with more serious problems at Columbia and the University of Pennsylvania. Similar stories can also be found at the undergraduate level, where for-profit colleges accounted for 16% of outstanding student debt in 2017. Regulators must step in and step in – these students are getting ripped off.
The student loan crisis is both serious and significant enough to require urgent action. Such an action must be carefully calibrated and executed. A simple student loan forgiveness is not enough, but it might perhaps be appropriate for those who have indeed been ripped off by their institution. Revenue sharing agreements look good, but in practice they make things worse for everyone.
Instead, clean institutions should work with government to provide appropriate levels of funding to reduce tuition fees, and regulators should intervene strongly against schools that place students in heavy debt in return for poor performance. It is in everyone’s interest. After all, when these students cannot repay their loans, taxpayers have to absorb the cost.
Taylor Shiroff is a graduate school of arts and sciences with a major in economics and a minor in mathematics and political science. His column, “Policy Matters,” is broadcast every other Tuesday.
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