Student Debt Relief and Unintended Consequences
"I was always taught that I would be able to get anywhere I wanted with hard work and determination . . . I worked for four full straight years and only had to take out two loans to pay for my room and board ... but my debt is above and beyond measure for what I can afford . . . Every week I have to listen to the same caller reading off of a prompt telling me that I need to pay a balance I can't pay . . . How can I save money for my future if my student loans want me to pay them an unreasonable balance that my current job can't cover?" - Coquina Healy Restrepo
Student loan debt is a crushing burden. More than a million people a year default on student loans. By 2023, more than 40 percent of borrowers are expected to be in default. Outstanding education debt is more than $1.5 trillion. Americans owe more on their student loans than on either credit cards or cars. Bankruptcy can't save them - it is prohibited as relief from education debt.
The consequences for students, former students, and sometimes family members who co-signed loans affect everything from their living standards, present and future, to their physical and mental health. On a macroeconomic level, student debt retards economic growth and American competitiveness.
This has spawned proposals from Democratic elected officials running for president. Sen. Bernie Sanders argues for tuition-free undergraduate education at four-year public colleges and universities, to be paid by taxes on Wall Street firms. Sen. Elizabeth Warren would cancel up to $50,000 in student debt, depending on one's income, thus wiping out the entire debt for about three-fourths of all borrowers. Sen. Kirsten Gillibrand supports the Debt-Free College Act, introduced last year by Sen. Brian Schatz (D-HI), which would incentivize states, with federal matching grants, to cover not just tuition but college living expenses as well.
Such proposals would no doubt offer relief to millions. But what might be the unintended consequences?
Cancelling debt sends two messages that ought to give us pause. The first is that it's acceptable to take on a debt that you would now have no obligation to discharge. The second is that you're a sucker if you actually paid for college since those with loans now wouldn't have to. It's also conceivable this kind of relief would encourage irresponsible borrowing by future students in anticipation of similar relief for them.
Making college tuition-or expense-free, paid by government, also sends two troubling messages. The first is that individual families and students can look to the state to pay these costs, relieving them of responsibility. Arguments that this is what we now do for elementary and secondary education miss the point that in that case, many parents pay local property taxes for schools. Further, free-college proposals could discourage the useful moral habit of saving for future consumption. The second troubling message is that institutions of higher education might count on government to cover increases in tuition, room, and board, lessening their incentive to be cost conscious.
There are other possible unintended consequences. Free tuition creates an incentive to go to college, rather than considering other choices. It would be a massive government subsidy or higher education. It would offer no comparable support for trade schools, apprenticeships, or other sources of preparation for jobs that do not require college (see The Once and Future Worker, Chapter 6). A third of all American workers are in such jobs. It would reduce the need for students and parents to weigh the costs, benefits, and value of a range of alternatives to four-year colleges and universities, such as much less costly two-year community colleges.
If increased government support for higher education is to be pursued, could it not be tied to obligations for those who receive it? Proposals might be accompanied by some requirements of students. No-interest loans or volunteer/public service in lieu of governmental loan payments (either during or after college) would be more consistent with the social and moral development of students than pure handouts. Similarly, they might require more of institutions of higher education, in regard to cost containment, since recent decades have seen costs rise faster than inflation and wages.
Coquina Restrepo is no doubt typical of others who deserve our attention and help. She is clearly willing to do her share. We need cures for this problem that address her needs and support her responsible behavior but that do not produce unintended side effects that warp society - and the character of the very students and families they are designed to help.
Photo Credit: Sharon McCutcheon
