President-elect Joe Biden has joined a chorus of Democratic voices calling for Congress to cancel some student loan debt, bringing a long-held dream of many on the Left closer to reality.
In the primaries, Democratic Sen. Elizabeth Warren advocated for the cancellation of $50,000 for all borrowers with a household income of less than $100,000 per year, hailing it as the “single biggest stimulus we could add to the economy.” Sen. Bernie Sanders has propounded canceling all student loans, regardless of income. Biden’s comparatively modest proposal, canceling $10,000 per borrower, would cost taxpayers a staggering $250 to $300 billion.
The immense cost aside, canceling student loans could have additional, and more damaging, ramifications on the value of education and graduates’ financial situations in the future.
Student loans exist in order to broaden access to education, an education that is meant to pay off financially for students in the end and is thus worth the investment. Canceling student loans would disrupt the already tenuous connection between investment in education and its expected return, discouraging students from making smart investments and discouraging post-secondary institutions from finding innovative ways to increase student success.
Rising tuition costs, extravagant campuses, billions spent on extracurricular activities, and an uncertain labor market make many people wonder whether a college education is still worth the cost. So, let’s be clear: A college education is still worth the admittedly inflated price of tuition.
The earnings premium for a bachelor’s degree (the average income boost you get from holding a bachelor’s degree compared to a high school diploma) fluctuates between $30,000 and $35,000 annually. The return on investment for a bachelor’s degree is nearly 14%, significantly higher than other typical long-term investments such as stocks (7%) or bonds (3%).
Federal student loans give students who are unable to shoulder the upfront cost of education the potential to change their lifetime earnings and socioeconomic status dramatically. Compared to private loans, government-subsidized loans reduce the overall cost of earning a degree and substantially extend the payback period, meaning that loan payments eat up significantly less of students’ future earnings. These guarantees mean that students from low-income families and students pursuing lower-paying careers can afford to invest more into education than they otherwise could.
Government-subsidized student loans have many societal benefits as well: They increase access to education, advance social mobility and equality, and create a more educated populace, thereby benefiting the economy as a whole. However, a generally insufficient understanding of these loans created a disconnect between students’ decisions to invest in education and their imagined financial futures.
Students are notoriously uninformed about the financial impact of their student loan choices. The average recent graduate thinks that he or she will repay student loans in six years, but in reality, the average college graduate takes 20 years to repay all of his or her student debt. In addition, 61% say that their college education was more expensive than they expected, 63% don’t look at average student loans before committing to a college, and 69% don’t know what their monthly payment will be after graduation.
Yet, student preferences drive the decisions of higher education institutions. Student inattention to the economics of educational choices creates institutional inattention as well. If students made choices about college based on their future financial implications, then colleges could afford to invest in more high-touch practices that improve student job market success. Colleges and universities have strong financial incentives to increase applicants, enrollment, credit completion, and retention, but not the career success of their students. While credit completion is important, it does not necessarily translate into post-college success.
Instead of canceling student debt, we should look for ways to strengthen the connection between students’ and schools’ educational choices and the future financial implications of those choices. Efforts that tie public funding to student earnings, for example, can help to ensure that post-secondary institutions have financial incentives to look after the long-term success of their students. Early efforts to increase financial literacy and improved transparency about debt and earnings can help students considering college get a better picture of the long-term impacts of their student loans. We will solve the student debt crisis by curing the faults in the education system itself, not by simply treating the symptoms.
Higher education is plagued by ever-rising costs and doubtful value, but canceling student loans, and thus, the incentive for students to make good choices about educational expenditures is the last thing we should do if we want to reverse that trend. If we remove the expectation of repayment from the student loan transaction, we reduce the incentive for students to think carefully about how their educational choices can improve their earnings capacity and, more importantly, we remove the pressure on colleges and universities to keep costs down and quality high.
Jen Dirmeyer is the head of operations and a senior policy adviser at the Cicero Institute. Annie Bowers is a policy analyst at the Cicero Institute.
