Dominic de Bruyn | United States Fellow
Upon signing the Higher Education Act in 1965, United States President Lyndon Johnson proclaimed “the path of knowledge is open to all that have the determination to walk it.” The legislation was designed to reduce financial barriers to attending college by establishing low-interest federal student loans. Today, the federal government administers 93 per cent of student loans and the private sector lends the remaining 7 per cent. Federal student loans are accessible through the Department of Education, with several options available depending on financial need. The student loan system undoubtedly provides an avenue for students to attend college. However, it has also led to a different problem which has bubbled away for decades before reaching boiling point.
That problem is the student debt crisis facing the US tertiary education system. Today, around 44 million Americans owe a combined US$1.7 trillion in student loan debt, with the average loan balance at graduation of a bachelor’s degree almost tripling between 1995 and 2020, from US$12,600 to US$30,000 per student. According to the Bipartisan Policy Centre, collective student loan debt increased by 144 per cent between 2007 and 2020. Compounding this trend is the fact that wages for workers aged 22 - 27 rose by just 19 per cent between 1980 and 2019. Over the same period, college fees increased by 169 per cent.
Amid rising debt levels, the idea of student loan forgiveness has become an increasingly salient political issue. In August 2022, President Biden announced that the Department of Education would cancel up to US$20,000 in federal student debt for Pell Grant recipients (a need-based grant program for students from low-income families) and up to US$10,000 for non-Pell Grant recipients. Borrowers are eligible for debt cancellation if their individual income is less than US$125,000, or US$250,000 for married couples.
The White House estimates the cost of the program to be around US$240 billion over a decade, leading to criticism that debt cancellation will pour gasoline on the inflationary fire in the US. The Committee for a Responsible Federal Budget asserts that Biden’s plan will consume nearly ten years of deficit reduction achieved through the recently-passed Inflation Reduction Act. However, research by the Brookings Institution suggests that debt reduction among low-income households leads to increased savings, as borrowers use the relief to build up a financial buffer, as well as service other debts. Given weak wage growth, a one-off cancellation of a single source of debt is unlikely to spur significant consumer spending. Furthermore, the decision is broadly popular with American voters, with a Data for Progress poll showing that 60 per cent of voters support eliminating some or all federal student debt.
Critics further claim that debt forgiveness will disproportionately benefit high-income and well-educated borrowers. Indeed, Americans with a bachelor’s degree earn an estimated US$1.2 million more over the course of their lifetime than those with only a high school diploma, while graduate degree holders earn between US$1.6 million and US$3.1 million more. However, the Penn Wharton Budget Model estimates that 74 per cent of Biden’s debt forgiveness program will go to those earning less than US$82,400, and under 5 per cent will go to those earning above US$141,000. The targeted nature of Biden’s plan ensures that borrowers struggling to re-pay their student loans will benefit most from the program.
While student debt forgiveness will reduce the immediate burden on college graduates, it will do little to address the underlying problem of college affordability. A significant driver of the student debt emergency has been ballooning tuition costs in the wake of deep cuts to state government funding for tertiary institutions. In 2018, overall state government funding for public two-year and four-year colleges was US$6.6 billion lower than in 2008. Colleges have responded to funding cuts by charging higher tuition fees. Between 1992 and 2022, average tuition prices at public four-year colleges more than doubled from US$4,160 to US$10,740 per year. As a result of higher tuition costs, new student debt will continue to accumulate and constrain the ability of graduates to fully realise the benefits of their education.
The Higher Education Act of 1965 placed the burden of financing college degrees primarily on individuals rather than the state. With deep cuts to public funding for colleges contributing to soaring tuition costs, there is a significant risk that debt cancellation will only alleviate a symptom of the problem while failing to address the root cause. A more comprehensive solution may be for the federal government to treat tertiary education as a basic public good and provide free access in the same way as it does primary and secondary schooling. This would reduce systemic inequality while equipping the American workforce with the skills and knowledge to thrive in the modern economy.
Such a far-reaching reform will face substantial challenges in the hyper-polarised US political environment. However, a college education gives students from low-income families an opportunity to escape the bounds of poverty and achieve material success. A more constructive approach to the student debt crisis would be to recognise the system’s inherent defects and explore ways to make college affordable for future generations.
Dominic de Bruyn is the United States Fellow for Young Australians in International Affairs. The views expressed in this article are those of the author’s and do not reflect those of any other entity.