Student Student Loan
Op-Ed

Written By:

Laura Ruzicka

Publishing Date: 

July 19, 2021

As of this year, the national debt has accumulated to $23.3 trillion, with student loans occupying a startling $1.7 trillion in outstanding debt. For most high school graduates, college is not cheap. According to a US news survey “the average cost of tuition for the 2020-21 school year is $41,411 at private colleges, $11,171 for state residents at public colleges, and $26,809 for out-of-state students at state schools”. The fact is that even though the average rate of increase in tuition and fees has dropped during the pandemic, the overall cost is still higher than most can afford without financial aid. As a result, students continually feel pressured to take out loans to fund an education that is getting increasingly expensive. In his article, Ezra Marcus (2020) says that “college students, in general, are often misrepresented as more privileged than they are – and that was even before the pandemic.” Some first-time borrowers lack the financial education to fully comprehend the deal they made. Others take out loan after loan with the hopes of acquiring a well-paying job in the future. Like many others, I was naïve and did not realize the full extent of what I was signing up for until it was too late. After four years of hard work, I graduated in 2019 with a debt of $7000 in student loans; this may seem small to some, but it is still a debt I need to contend with in the future.

According to Insider (2021) “currently about 45 million people hold student loan debt with a total national outstanding amount over 1.7 trillion.” Looking at 2019 federal data provided by the Board of Governors of the Federal Reserve System, the overall average education debt typically held by students is between $20,000 and $24,999. However, COVID-19 proved to be both a blessing and a curse as it gave some temporary relief under the CARES Act to individuals with student debt, putting about 23 million loans in forbearance until September 30th, 2021. Unfortunately, the pandemic also left college students who depend on campus housing struggling to find their footing after campus closures, with a lack of financial security and loss of jobs. Neha Tallapragada, a sophomore at Rice University emphasizes that very point in Marcus’s article (2020) saying that “the pandemic has obviously exacerbated a lot of the inequalities that exist on college campuses.” One is limiting access to higher education based on your socio-economic status, which became apparent during the height of the pandemic.

For many students the financial instability and campus closures that they endured had an in-direct impact on their education, magnifying the deep rooted inequalities of our nation’s education system. According to a Liberal education blog (2020) “even though colleges have put in place remote learning and sheltering in place are, unfortunately, very different experiences for students who depend on libraries, computer labs, internet connectivity, and other on-campus services like food pantries, counseling, and financial aid.” For some, studying remotely can be difficult due to a variety of circumstances, one being poor wifi connection depending on where a student lives, as well as students in lower income families that can't afford a laptop. Some students are parents as well that have to juggle watching their kids and their online schooling. To compensate, students have created mutual aid networks where students raise money to cover housing, medical, and food costs. Upon request, network organizers distribute funds to fellow peers through payment apps, like Venmo or Zelle.

Repayment plans were another saving grace for students looking for other ways to eliminate their debt. There are four income-driven repayment plans: Revised Pay as You Earn (REPAYE), Pay as You Earn (PAYE), Income-based repayment, and Income-contingent repayment representing a total of 8.29 million borrowers since early June of this year. These repayment plans make your monthly payments more affordable if you are unemployed or earn less than 150% of the poverty threshold. With the job market hitting an all-time low, borrowers can switch to these plans if they are unemployed, can not afford their current payments, or have a large amount of student debt in combination with a low income. The purpose behind these plans is to limit the borrowers’ payments between 10% and 20% of their disposable income and to possibly forgive any future remaining balances after 20-25 years. Unfortunately, switching to a repayment plan is not a perfect solution. One obstacle that is not clearly mentioned prior to signing up is paying more interest over time due to the extension on the payment period from 10 years to 20-25 years. Other potential snags include allowing interest to accrue on your loans until they are eventually paid off, and possibly having to pay taxes on the forgiven balance.

Fortunately, as of June 2nd, Biden’s administration announced that they will be doing a thorough review of all the federal student loan programs, including the repayment programs. The president and his team will use a process called ‘negotiated rulemaking’. The process requires reviews and possible rewrites of federal regulations. The rulemaking system was used under the Obama administration, which established the PAYE and REPAYE programs we have today. Similarly, President Biden can utilize this to improve other facets of income-driven repayment plans. For example, borrowers have to pay 10-20% of their disposable income under all the repayment plans. But President Biden proposed a new plan that will only require borrowers to pay 5% of their disposable income. If this happened there would be a significant reduction in borrowers’ payments.

Once the moratorium on loan forbearance ends, the idea of loan forgiveness will become critical, especially if the job market for students and recent grads does not improve dramatically. For most, the prospect of loan forgiveness would be extremely beneficial, and the possibility of it is slowly progressing. President Biden wants to cancel $10,000 of student debt per federal borrower, which would erase about 15.3 million borrowers with outstanding federal debt.

However, we would then have to ask ourselves what forgiving all student loan debt would cost us in the long run. Would it add to national debt, increasing our already sizable debt to an even bigger one? The answer: yes, eventually. All federal student loans are tied to the national debt. While debt increases when the loans are created, the deficit decreases slightly. When borrowers make loan payments, they are inadvertently paying off a small portion of the national debt as well. According to Urban Wire (2020) “Cancelling student debt has no immediate impact on the national debt”. When the government cancels the student loan debt it will immediately increase our federal deficit. Deficits occur when you are spending more than what you are bringing in--(Spending - Revenue = Deficit). To understand the significance of our nation’s deficit, consider what would happen if your family continually spent more than they earned? Sooner or later, their debts would be so great that they would go bankrupt. When the government spends more than it takes in, it has to borrow money to make up the difference. Our government spending is divided into two types. The first is discretionary spending for such things as funding our national defense, education and transportation. The second is mandatory spending which funds social security, medicare, as well as interest on the national debt. All this spending currently totals $6.55 trillion. When you subtract the government spending from its total revenue of $3.42 trillion, which is collected from the taxes that Americans pay, you get a national deficit of over $3 trillion. Over time, all the borrowing the U.S government has done becomes the national debt, as a result of our recurring deficit and money owed to our creditors. Further stating that “The debt will eventually be higher because the debts don’t get paid back. The increase shows up over time when expected future loan payments do not get made.” According to Forbes writer Zack Friedman (2020), President Biden eventually authorized the cancelation of $1 billion of loans from 72,000 students, in cases of fraud or unexpected school closures, and another $1.3 billion from 41,000 student borrowers with total and permanent disability. However, even though this collectively wipes out $2.3 billion in student debt for more than 110,000 borrowers, that money has not vanished entirely. Instead, that $2.3 billion has been immediately added to our federal deficit, which will gradually increase our national debt.

On the flip side though, as loans are forgiven, this frees up money that people could then spend on other things, potentially stimulating the economy and letting the government bring in more tax revenues. In his article Zack Friedman (2021) “student loan cancellation will lead to new business formation, increase consumer spending, increase geographic mobility, increase the marriage rate, help people buy more homes, and save for retirement, among other benefits.” For those 44.7 million Americans weighed down by their debt, forgiveness can rid many of the stress, fear, and overwhelming anxiety that comes with every looming payment. It allows for people to save and spend money that they weren’t able to before. This became evident as borrowers began saving a total of $5 billion a month for loans that were put into forbearance due to Covid.

It’s important to note that when dealing with student loan debt there is no perfect solution. As I’ve said, loan forgiveness would give borrowers financial freedom, letting individuals save and spend money as they choose. However, all that money would be added to our national deficit, eventually increasing the national debt. Most (myself included) would say cancelling that amount of student debt is worth all the good that can benefit them individually without considering what the long-term effects to the national debt would be. Even though there is no perfect solution, it still needs to be discussed at the national level and addressed in a timely fashion. For more information regarding student loan relief, the deficit, or repayment plans you can visit https://www.concordcoalition.org/ a bipartisan political advocacy group dedicated to stimulating financial awareness among individuals. Their mission statement is to educate "the public about the causes and consequences of federal budget deficits, the long-term challenges facing America's unsustainable entitlement programs, and how to build a sound foundation for economic growth."

Sources

Powell, F & Kerr, E. (2020, September 17). What You Need to Know About College Tuition Costs. https://www.usnews.com/education/best-colleges/paying-for-college/articles/what-you-need-to-know-about-college-tuition-costs

Lane, R. & HelHoski, A. (2021, June 16). Income-Driven Repayment: Is It Right for You? https://www.nerdwallet.com/article/loans/student-loans/income-driven-repayment-right

Baum, S. & Marron, D. (2020, December 22.) What Would Forgiving Student Debt Mean for the Federal Budget? https://www.urban.org/urban-wire/what-would-forgiving-student-debt-mean-federal-budget#:~:text=Cancelling%20student%20debt%20has%20no,payments%20do%20not%20get%20made

Hoffower, H. & Hoff, M. (2021, February 17) The case for cancelling student debt isn't political — it's practical. Here are the benefits of erasing $1.6 trillion, no strings attached. https://www.businessinsider.com/economic-benefits-of-student-debt-forgiveness-2020-12

Friedman, Z. (2021, March 29) Biden Cancels $1.3 Billion Of Student Loans — His Plan For Student Loan Cancellation Is Becoming Clear. https://www.forbes.com/sites/zackfriedman/2021/03/29/biden-cancels-13-billion-of-student-loans---his-plan-for-student-loan-cancellation-is-becoming-clear/?sh=6cc78e5979c4

Friedman, Z. (2021, March, 18) Biden Cancels $1 Billion Of Student Loans. https://www.forbes.com/sites/zackfriedman/2021/03/18/biden-cancels-1-billion-of-student-loans/?sh=231bf7372460

Marcus, E. (2020 November 23) How College Students Are Helping Each Other Survive. https://www.nytimes.com/2020/11/23/style/college-mutual-aid-networks.html

Sullivan, P & Tinberg H. (2020 October, 29) The Covid-19 Pandemic and Structural Inequalities in American Higher Education. https://www.aacu.org/blog/covid-19-pandemic-and-structural-inequalities-american-higher-education

Friedman, Z. (2021 May, 14) Student Loan Cancellation Called Both A Stimulus And Massive Wealth Transfer. https://www.forbes.com/sites/zackfriedman/2021/05/14/does-student-loan-cancellation-stimulate-the-economy/?sh=770559f75e0b