When it comes to student loans, do we need more individual responsibility or more compassion? Probably both.
We’ve celebrated college degrees in the United States to the point that young people see it as the only pathway to a prosperous career. So it’s no wonder why they have been willing to borrow ever larger sums each year to cover the rapidly ballooning costs of tuition and housing.
For the most part, the borrowing has been worth it. On average, going to college leads to higher earnings that more than offset the cost, even accounting for the additional expense of using debt to finance enrollment.
The New York Federal Reserve estimates that the rate of return on an associate’s or bachelor’s degree is approximately 15 percent — that’s about double the typical return in the stock market.
But those statistics aren’t any consolation to the 1 million new borrowers who default on their student loans each year, often because they didn’t complete their degrees. These individuals are perhaps the worst off: They have taken on debt, but they don’t have the earning power to pay it back.
So what are we to do about it? Some, including most of the Democratic presidential candidates, think we should simply wipe it away — perhaps the ultimate act of compassion for borrowers.
Others, more concerned with efficient spending of tax dollars, oppose these efforts on the grounds of individual responsibility.
They argue that these students took this debt on willingly, after all, and with full knowledge of where it would lead. They feel that those who can pay, should. It’s hard to argue with that.
Yet it’s no golden-mean fallacy to say that in this case, the best answer lies somewhere in the middle.
Some borrowers do need help. These include those who borrow but fail to earn a degree and those who have attended some of the high-cost, low-reward programs often offered by for-profit colleges.
We rely on our system of higher education to provide economic opportunity, and when it fails, the government should step in. But that doesn’t have to mean across-the-board debt forgiveness. In fact, the feds are already playing an important role — the system just needs a few tweaks.
The US currently has robust safety nets on federal student lending that should be providing the relief that distressed borrowers need.
For example, income-driven repayment plans for federal student loans allow borrowers to make payments that are determined by their ability to pay, based on their earnings and family composition. If a borrower continues to find repayment unaffordable for an extended period, they’ll have their debts forgiven. (Forgiveness comes after 10 years of repayment for borrowers working in nonprofits and government and after 20 years for borrowers working in the private economy.)
The system is designed to relieve borrowers of debt when it is truly unaffordable — in contrast to more universal loan-forgiveness proposals, like the one floated by Sen. Liz Warren, which delivers taxpayer-funded benefits even to borrowers with sky-high earnings.
Though it may be cleverly designed in theory, the system isn’t working well for many students. The program’s administration is clunky and many who need the benefit don’t know that it exists.
This is because it was established in response to the rapid tuition inflation seen over the past few decades by a series of partial legislative changes and executive orders that lacked the authority to make sweeping change. The result is a patchwork of programs that are universal in theory but leave huge coverage gaps in practice.
To fix the system, Congress needs to reauthorize the Higher Education Act, which has been due for nearly a decade, so that a streamlined safety net can be put in place to protect borrowers who are in trouble and support borrowers with the means to pay.
Ultimately, the answer to our current student-debt troubles is both more compassion for borrowers who really need the help and demanding individual responsibility from those who can afford it. We can implement that by making the existing safety nets work for borrowers, while not letting liberal politicians use rhetoric about student debt that pretends these avenues for relief don’t already exist.
Beth Akers is a Manhattan Institute senior fellow.
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