Image by: The James G. Martin Center for Academic Renewal
Abstract:
Student loan debt has become a pressing issue in recent years, as more high school graduates pursue higher education in universities and colleges. This article explores various strategies for managing student loan debt and analyses the ongoing debate surrounding forgiveness policies. We examine the effectiveness of different repayment plans, income-driven repayment options, loan refinancing, debt consolidation, and government programs like Public Service Loan Forgiveness (PSLF) and Teacher Loan Forgiveness. We also discuss the potential economic and social implications of implementing wide-scale student loan forgiveness policies.
Section One: History Behind Student Loan Crisis
In 1967, the Bank of North Dacota issued the first student loan, which was then followed by the Student Loan Marketing Association becoming the first major US government student loan program. In the years following, student loans increased in popularity, as households with insufficient income to provide their children with college education borrowed money to pay for the education bills. According to the Education Data Initiative, student loans have aggregated to over 1.7 trillion dollars in 2021, a 2.33 per cent increase compared to the previous year. This view is supported by the Federal Reserve, with their estimate of 1.75 trillion dollars in student debt. Student loans are estimated to be equivalent to 7.42 per cent of the GDP in the United States.
Section Two: Federal vs Private
In the case of the United States of America, student loans are generally repaid during a period of between 10 to 25 years. However, there is a large variety of different loans.
Firstly, it is important to consider whether the loan is federally or privately issued. Federal loans are given out by the government, whereas private loans are issued by private firms. Private firms are often more incentivized to gain profit, so they offer larger interest rates and lesser repayment periods. Federal loans are much more flexible for the borrower, though, it comes with a trade-off of a generally smaller amount of cash being given out.
Secondly, different repayment plans must be considered. Federal loans have many different options of plans that could be chosen. Some of the most common include Graduation Plans, where the loan is paid back when the student graduates, or Income-Based Plans, where the loan is paid back in a period depending on the income that the graduate earns once they finish college. All of the above means that federally issued loans offer more flexibility compared to privately issued ones, as they mainly come with fixed repayment deadlines.
Thirdly, interest rates are also a big difference between the two distributors of loans. As mentioned earlier, federal loans often involve much lower interest rates, due to them being backed by the US government, as well as being considered lower risk to lenders, hence enabling them to offer lower rates. To offset that, Private Loans are based on credit scores, so in most cases, a higher interest rate is placed on them.
Section Three: Forgiveness
Forgiveness is a policy that enables borrowers of student loans to have a certain fraction, or the full amount of their debt cancelled, meaning they will no longer have to pay it back to the lender.
To begin with, an example of such policies may be Public Service Loan Forgiveness, which lets workers in the public service sector have their student debt forgiven. Such jobs may be a policeperson or a non-profit company worker.
Another example of such a policy is Closed School Discharge. In this policy, a debtor that had their educational institution shut down before they were able to complete their education may claim forgiveness on their loan, as the education they intended on completing was no longer available.
It must be pointed out, that such policies often only apply to Federal Loans, as private companies providing loans simply do not offer forgiveness, due to private companies being under no legal obligation to forgive loans. Thus, unless argued in court, private loans have to be paid in full by the borrower.
Section Four: Crisis
The student loan debt crisis refers to the increasing burden of student loans on society. In the United States, an estimated 43 million people have chosen to take on student loans, a staggering 13 per cent, or in other words 1 in every 8. On average, 38,000 dollars were borrowed according to the US Department of Education, however, this varies a lot depending on the degree of education undertaken.
The impacts of the crisis are immense. 54% of millennial borrowers stated in a survey that their student loans have delayed them buying their first homes. In addition to that, debt delays them in starting their first businesses or making investments, which for many were prime reasons to undertake higher education in the first place. Furthermore, students that have borrowed money are likely to have a lower credit score than their peers that didn't.
Overall, such great amounts of debt among the younger generations build up to a likely slowdown of economic growth due to a relative lack of demand from the millennial generation. In addition to that, such debt may have longer-lasting effects, as the children of the debtors will not grow up in optimal financial situations, hence needing to loan money out as well once they choose to undertake higher education.
Section Five: What can be done?
First of all, subsidising higher education institutions must be done. Funding accessible universities will not only increase the quality of education provided by them but will also decrease the prices of education. Thus, fewer loans will have to be taken out to afford such education, leading to a decrease in the amount of new debt taken out. This also will have a longer-term effect of increasing the Aggregate Supply and Demand in the economy, as the more educated workers will be more productive, increasing the output of the economy, as well as earning more in wages, and having more disposable income. All of the above will increase economic growth without corresponding inflation.
Another possible policy is implementing more income-tailored student loans. Adapting the pay-back period and capping the amount paid monthly to a certain value will minimize the percentage of debtors that end up defaulting due to insufficient monthly income, which will also lessen the need for expensive forgiveness policies. This has the benefit of lower costs to the lender, who will no longer lose out on payments, and will also not run low-income families out of money in the case they do not manage to pay back the loans.
Conclusion:
Overall, student loans have the obvious advantage of the accessibility of higher education, however, it also has many flaws due to high expenses, due to the regressive effect of such loans. Tailoring loans individually to the debtors' income and subsidizing educational institutions will ensure the minimal necessity for loans as well as also decreasing prices for education in general.
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