Imagine a policy that would provide immediate life-changing economic stimulus to 43 million American families, could have a massive positive ripple effect across much of the rest of the economy, is supported by a majority of voters, and would only require a single signature from President Joe Biden to enact, with no exhausting battle over the filibuster or messy reconciliation process needed. Sounds like it’d be a political no-brainer, right?
As with most things that involve the Democratic Party, would that it were so simple.
The debate over canceling some or all of Americans’ $1.7 trillion in outstanding student debt emerged again on the national stage last week. It was revived when President Biden was asked at a CNN town hall in Milwaukee whether he’d be willing to use executive authority to forgive up to $50,000 per debt-holder, as proposed by Sens. Elizabeth Warren and Chuck Schumer. Though Biden’s response wasn’t a surprise, its meandering and inaccurate particulars drew plenty of pushback and are worth examining for the sake of clarifying the terms of the debate.
But before I get to that economic data, a bit of context:
When he was a senator from Delaware, Biden represented the home of the credit card industry, and in 2005, he pushed hard for a law that made getting a fresh start via bankruptcy far more difficult, in part by making nearly all student debt ineligible to be discharged in the process. This is what began his rivalry with Elizabeth Warren, who was a professor testifying against the bill back then.
That said, circumstances are quite different now, over 15 years since that bankruptcy law was signed by George W. Bush. Student debt numbers have exploded since 2009, largely as a result of policy failures by the federal and state governments, a private sector choked by big business, and an arms race in higher education. As a result, student debt has been transformed from a nuisance into a massive financial anchor weighing down two generations of already disadvantaged Americans. The larger economy is also suffering from the ripple effect, and as always in the United States, people of color are experiencing the worst of it.
It’s no accident that young people are marrying later, delaying home-buying, and in many cases, not even having children. Financial insecurity fuels each of those economy-draining trends, and there is no greater source of financial insecurity for people under 40 than student debt.
With so many misnomers out there about student debt cancellation, here’s a primer on the circumstances that created this crisis and what ending it might look like.
Why Has Student Debt Ballooned?
The average student debt load is now a whopping $36,000 for the 43 million people with federal loans. The cause and effect here is deceptively simple: “The higher education attainment of the population has increased a lot and yet wages are stagnant. Consequently, people are carrying more debt than they were.”
That explanation, offered to me by Dr. Marshall Steinbaum, an economics professor at the University of Utah who has studied and published extensively on the topic, is borne out by some distressing top-line data: National median income has inched up 2.43% since 2009, while median student debt balance has skyrocketed by 17.97%.
The median income numbers for young people (25-34) who worked full-time between 2000 and 2018 are even more distressing:
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Some college education but no degree declined from $42,100 to $36,300 (-14%).
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Associate’s degree declined from $43,700 to $40,000 (-9%).
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Bachelor’s degree declined from $58,200 to $54,700 (-6%).
Here it is, visualized:
The income numbers are pretty straightforward, but that’s only half the equation. As wages have gone down, the cost of higher education has exploded, with the increase in tuition and fees most pronounced at public colleges:
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Private universities: +144%
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Public universities (out-of-state tuition): +165%
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Public universities (in-state tuition): +212%
Tuition increases have coincided with an accelerated demand for higher education since the Great Recession. Since then, graduating millennials (I can attest to this, I graduated in 2008) have been faced with the worst economic prospects since the Great Depression, necessitating higher degrees to have a shot at a higher income. It’s a situation that has continued to get worse.
“That mountain of student debt that we have right now is basically the result of a few different phenomena,” Steinbaum says, “especially the withdrawal of state funding for public higher education systems as well as the credentialized labor market, where workers need to get more education to get a job and thus take on more debt while tuition is going up.”
Another major factor: Interest rates. As people struggle to pay back their loans, interest continues to compound, which winds up increasing the actual debt load. Many borrowers spend their time paying off accruing interest and never actually touching the principal. More on that in a bit.
Who Is Most Impacted by Student Debt?
With 43 million debt-holders, it touches people of all demographics. But given the rising costs of education, wealth stratification, and the difficult job market in the United States, the burden is increasingly shifting to those with fewer resources.
“Rather than being a sign that somebody is more well-off than the population as a whole,” Steinbaum says, “having student debt is now a sign that they are worse off than the population as a whole.”
Again, the numbers are striking:
As you can see, the debt-to-income ratio for those with lower income levels is overwhelming and flat-out unsustainable. And the numbers on the higher end of the table are actually somewhat misleading, in that the people in the top two income brackets are actually less likely to have student debt altogether. Plus, they’re more able to quickly pay off the debt, which helps them avoid the huge interest rates that make these loans even more onerous.
“The people who don't have student debt are increasingly people who came into contact with a higher education system and were able to do so and exit it without having to take on student debt,” Steinbaum says. “Whereas people who do have student debt are increasingly people who come in contact with the higher education system and take out debt.”
Translation: Family wealth is a huge factor in determining whether someone takes out student debt, how much they take out, and how long it takes them to pay it back. In a 2019 report, Steinbaum found that
Where Does Race Come Into Play?
Simply put, in the United States, the average white family is far wealthier than the average minority family. As a direct result, student debt is far more burdensome to people of color, which in turn exacerbates the racial wealth gap.
In 2016, a Brookings Institute study found that the average Black student graduates with $7,400 more in student debt than the average white student, a difference that then explodes to $25,000 more within the next few years. Another study found that 20 years after graduation, the median white student has paid back about 94% of their loans, while the median black student still owes about 95%, or just over $18,500.
Even for Black borrowers who can pay, the debt acts as a reminder of the structural disadvantages that persist throughout the country. A study published this past winter noted that the average white family has a net worth of $171,000, while the average Black family’s savings is at just $17,500.
As a result, over 50% of Black people who have student debt say they owe more than their own net worth.
It’s also worth noting that we’re not just talking about young people. While people ages 25-34 owe $500 billion in federal student loans, adults between 35-49 owe $600 billion. Even seniors have a crush of student debt, with $262 billion on the ledger.
The crisis is overwhelming and all-encompassing, with few good available options. Even the most prominent repayment plan has fatal flaws that make it unsustainable and not particularly helpful for most borrowers.
How Do Income-Driven Repayment Plans Work… And Not Work?
There are a number of different repayment plans available to borrowers who qualify, the most prominent of which are the federal government’s four income-driven repayment programs. The program for low-income borrowers, Income-Based Repayment, caps monthly payments at 15% of one’s income (and it’s 10% for loans taken out after 2014) and offers plans that stretch up to 25 years. At that point, whatever is left of the loans is forgiven. Other plans offer similar terms.
Here’s the problem, though. As Steinbaum points out, interest rates continue to compound on the principal, and because people are making smaller payments, their total debt continues to rise over time. The programs are built around the assumption that people will quickly find jobs after graduation and be able to pay off both the principal and interest. But the credentialized job market and stagnant wages — not to mention the racial discrimination baked into the labor market — means that borrowers’ balances continue to rise.
As a result, people wind up simply throwing money at interest rates without ever touching the principal, forcing them to often pay more than they owed in the first place. And so, the offer of $10,000 in debt cancellation, as Biden has floated, would thus do little to help the people who need it most.
“It doesn't really solve the problem that IDR created, which is that the balances are rising over time and not being paid down,” Steinbaum says. “People in that situation, they're just waiting out the clock on IDR, so the $10,000 is essentially a meaningless thing for them.”
Why Is the Rich Kid Thing a Misnomer?
Raw numbers show that higher earners have a higher level of student debt, but as we’ve shown, income does not equal familial wealth. In many cases, those who hold the highest student debt numbers are from disadvantaged families and were unable to pay for their graduate degrees right away or pay off their debts soon after graduating. In particular, people of color who get higher degrees are more likely to get saddled with debt because they had to take out larger loans to attend those graduate programs.
It’s also worth noting that student debt cancellation applies to only those in the federal loan program, which is increasingly devoid of more wealthy graduates.
“The people who've already refinanced out of the federal system are likely the best credit risk, which means the best-off borrowers,” Steinbaum explains. “So the statements that have been made about how cancellation shouldn’t exist for well-off borrowers ignore the fact that a lot of well-off borrowers are already out at the federal system, which means that they're not eligible for cancellation, anyway.”
Plus, the more debt you forgive, the more disproportionate the help given to the disadvantaged borrower.
So why so much pushback? It’s not as if banks or creditors are likely to care much about the debt cancellation — they don’t own the debt, and in fact, they could reap big profits if young and middle-aged consumers all of a sudden gain about $1 trillion. It’s more likely that those with skin in the game at institutions of higher learning are afraid of what would come next: Regulations that ensure that the price of college stops spiraling and is in fact capped at a reasonable rate.
Biden could make this happen tomorrow if he wanted. It would relieve the debt burden on 43 million people and provide an unprecedented shot in the arm to the economy. People who are unable to pay rent, buy homes, have children, or start their own businesses would be free to pursue the American dream. Far from being regressive, loan cancellation would be a particular boost to people of color, who have been exploited and/or cast aside by banking, the labor market, and higher education for generations. There is no economic downside and it would cement support for Democrats for years to come.
P.S. This is an excerpt from my political newsletter, Progressives Everywhere, which focuses on health care, voting rights, workers’ rights, and criminal justice reform—especially in red states. We’ve raised over $5.9 million to help flip seats in tough districts and red states and help progresive causes. A few weeks ago, I did a big story on progressive ballot initiatives in red states with a leader of the ballot movement. Three weeks ago, I reported this feature on fixing the Supreme Court. Last week, I reported on the Covid cover-up scandal in New York. I’ve helped put the spotlight on then-unknown progressive candidates like AOC, Mondaire Jones, Katie Porter, and many others during their primaries. It’s news you won’t find anywhere else—or at least, it’ll be in the newsletter before you’ll find it anywhere else.
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