Student loan plan with lots of consequences

Student loan debt is so often described as a “crisis” that saying so has become cliché. Responding to such cries, President Biden has pushed the bounds of his powers to forgive federally backed higher education debt. Some even believe that university education should be free, or near-free, as it is in many other countries (though these nations’ university systems are notably less vibrant and prestigious). But what do the facts suggest about how bad things have gotten — and what to do about it?

Forty-four million U.S. borrowers hold federal student loans — adding up to more than $1.6 trillion in debt. That is actually a tad lower than the total amount Americans owe in auto loans; home mortgages total a whopping $12 trillion held in debt. As for whether the problem is getting worse, the total amount given in federal student loans by the U.S. government has decreased in the past decade, by 35 percent. And the average amount of loans per student has decreased, too, illustrating the broader downward trend in borrowing.

Today, the average amount of debt a student leaves a U.S. college with after completing a four-year bachelor’s degree is around $30,000, largely because there’s a federal limit — $31,000 for dependents — on the loans students can take out in the first place. (One caveat: Almost half of students who went to for-profit schools owe $40,000 or more.)

Borrowers with more than six figures of debt do exist. Indeed, what they owe makes up 35 percent of all the student loan debt in the United States. But that’s not because there are a lot of them; borrowers with more than $100,000 in debt represent less than 10 percent of all borrowers. It’s because they owe a lot of money. And they owe a lot often because they’ve paid for more education. Americans with professional or doctorate degrees are only 3 percent of the population but hold a vastly disproportionate share of the total debt. These borrowers also make more than twice the average earner does, usually just over six figures in annual salary. Graduate borrowers rarely default on their debt; those who default most often, in contrast, didn’t complete their degrees at all.

So, is student debt a crisis? It depends on who’s in debt. People who complete their degrees, particularly if they didn’t come from poverty, tend to pay off their debt over time. That makes sense: In general, higher education is worth the cost. Forgiving loans, meanwhile, results in those who didn’t go to college subsidizing the tuition costs of those who did.

That doesn’t mean it’s never a good idea. On the contrary, it’s precisely because a college education is so valuable that the government ought to make it easier for Americans to enroll. But the fairest system is one in which those whose degrees land them in comfortable circumstances pay off their loans — and those who are struggling, and therefore at most risk of default, don’t. Janitors’ paychecks should not end up in dentists’ pockets.

Biden’s Save plan, whose enrollees were treated to an additional $7.4 billion in debt cancellation this month, gestures at this principle with its focus on income-based repayment. And parts of the proposal, such as wiping out debt that has been held for more than 20 or 25 years while giving enrollees who borrowed relatively small amounts of money a chance to have debt canceled sooner, also make sense.

But the terms are too generous toward those who can do without the government’s beneficence. The income maximum is set at a very comfortable $125,000 for single people and $250,000 for married couples and heads of household, and the Urban Institute found that nearly half of bachelor’s degree recipients will end up paying less than half of their loans back. The result is not merely to provide a safety net to those for whom higher education proves a poor investment, as ought to be the case. It’s also to give a freebie to those whose plans worked out just fine.

Another problem: If loans seem to have no downside, colleges have scant incentive to contain tuition. Students won’t worry about sticker price if they feel they can get whatever they require to afford school for what will, in the end, amount to little or nothing.

There are ways to adjust the program so that it helps those who need it most — while costing the public less. For instance, upping the share of income paid by better-off borrowers, relative to the share paid by those who earn less — similar to how the progressive income tax works. Most important, policymakers should focus on a connected, more acute crisis: those rising tuition rates that an unreasonably charitable student loan policy could encourage to continue upward.