Fixing Higher Education: Looking at the Costs and Benefits of Erasing Student Debt

Pay as you EarnThe ever-growing sum of national student loan debt (now at a mind-boggling total of approximately $1.2 trillion) is one of the greatest burdens currently confronting this country. Coinciding with major increases in college tuition and the decreased value of a bachelor’s degree, the student debt crisis will have lasting effects for decades to come. Yet, without a tenable solution in sight, this crisis promises slowed economic growth in the near future, and therefore suboptimal job growth and rising interest rates.

To resolve this problem, the Obama administration has expanded previous administrations’ income-based repayment plan. With his Pay As You Earn (PAYE) relief program, the President, through the Department of Education, has limited monthly student loan payments to 10 percent of a borrower’s income. Additionally, this program allows the federal government to forgive any remaining loan balances after only ten years for individuals working public sector and nonprofit jobs and 20 years for all other jobs. With this program of loan forgiveness, however, the federal government can expect to rack up huge deficits in the student loan program, making this practice potentially unsustainable.

For those concerned with the state of the federal deficit, the financial shortcomings of the President’s student loan programs are highly evident in the administration’s budget proposal for the 2016 fiscal year, released last month. In the budget, the administration revealed that its student loan program had a 21.8 billion dollar shortfall last year, a sum that will be added to the federal budget deficit. The Department of Education has also determined that this astounding increase in student loan spending has been due primarily to past and future policy changes by the President, and much less so from borrowers defaulting on their loans. In essence, the problem is not a structural one, but rather the fault of insufficient programs implemented by this administration and those prior. It is not clear, however, if such large deficit spending will persist. Some estimates claim that this could be a one-time expenditure that reflects new loans under the expanding PAYE program. Others are more ominous, such as a report by Barclays Capital that estimates that the program could end up pegging $250 million to the federal deficit.

Certainly, however, the federal government’s attempt to reduce student debt is a step in the right direction. This is a problem that many politicians refuse to address, and the President’s work to ameliorate the student debt crisis is a positive development for students. The forgiving terms of loans outlined in the Pay As You Earn program will allow countless Americans to manage their loan payments and eliminate their debts in a timely manner.

Clearly, the federal government has an important yet limited role in helping to solve the student loan crisis currently plaguing higher education in the United States. Certainly, by expanding student debt relief programs, the Obama administration has increased the unstable practice of deficit spending. But by actually confronting this issue, the President and the Department of Education have helped those who need it most: the American workforce of tomorrow. So, while overall said policy is a positive development, the President and future leaders must look to attack the student debt crisis at its source—the rising cost of college tuition—in order to truly confront a problem that, if left unaddressed, will have harsh consequences for future generations.

Matthew Schneider