Student Loan Debt

Student Loan Debt

On December 22, the Biden administration has extended the federal student loan repayment moratorium until May 1, 2022. It was originally set to end on Jan. 31, 2021. This is good news for students who have government financed student debt, but it is not a solution to the problem and the reason we haven’t seen a solution to the student debt problem is that there are significant policy implications in eliminating significant amounts of student debt.

The fact that the size of student indebtedness poses a problem for the nation and the individual student is well known, what is less well known is the size of the problem. Currently 43 million students owe $1.57 in government student loans which is 91 percent of all student debt. Of the 43 million, 15 percent are behind in their payments. The US average federal debt level is $37,693, in Arkansas the average student debt level is only $33,300, or $3,200 less, and while this sounds like good news for Arkansas graduates, the average salary of Arkansas college graduate is $6,250 less than the US average for college graduates.

Government and financial experts recommend paying off student loans over a ten-year period, in reality the average time to payoff for student loans is 20 years, where 67 percent of the total cost of repayment is interest.

The average student monthly loan payment is $393, but loan payments can be as high as $1,200 per month.
Joe Biden campaigned on a promise to forgive $10,000 in student debt, while other candidates, specifically Elizabeth Warren, advocated for, and continued to advocate for the administration to forgive $50,000 in student debt. Others, farther to the left than Senator Warren, are pushing the administration to forgive all student debt. So far the administration’s response has been to extend the debt moratorium until May 1.

In the US the average college graduate makes $1840 per month or $22,020 more per year than the average high school graduate, in Arkansas that difference between a college degree and a high school degree is $1,606 per month or $19,272 per year. What these number’s show is that higher education is worth the cost, what they don’t tell are how the cost of higher education should be allocated between the public sector (the government) and the private sector (the student).

Those to the left of Senator Warren are seeking forgiveness of all student loan debt. This will benefit students and stimulate economic growth since student loan dollars will now be spent in the private sector. But if we forgive all current loan debts, we’re obligated to do the same in the future, in essence we will be turning higher education into a public good treating it the way we do K-12 education where the entire cost is borne by the government similar to the way higher education is treated in Germany and Scandinavia.

Senator Warren wants to forgive $50,000 in student loan debt, not as beneficial to economic growth as a total forgiveness of debt, but there is still an implied commitment to forgive the first $50,000 of future student loan debt. Neither of these two proposals is bad, they both stimulate economic growth by giving students a financial break, which in turn will allow them to move forward in terms of family formation and all that it entails.

The problem with both proposals is not the economics but the politics. Both proposals are a fundamental change in how we finance higher education. What’s being proposed for higher education is similar to the proposal to move to Medicare-for-All. In both cases the provision of services would still come from the private sector, but the financing would, by and large, come from the federal government, and we’ve seen how controversial Medicare-for-All was.

A better solution would be to eliminate the interest on student loan debt payments. Interest payments are additional burdens on students and a drag on the economy. Repayment need not be over a ten-year period, but instead should be spread out over the students remaining work life.

After graduation the average college graduate has a 43-year work life. With a zero interest loan totaling $37,693 (the US average) students would have to pay only $73 per month. In Arkansas the repayment of a $33,300 zero interest loan would only be $64 per month, monthly payments that could easily be paid via an additional income tax withholding.

This plan would reduce student loan payments allowing students to move forward with their lives which in the normal course of events leads to family formations which in turn generates large increases in aggregate demand and economic growth. It’s a simple solution in which everyone benefits.


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