Student loan debt: What it is, how we got it, and why it’s so hard to cancel
Pausing student loan payments is easy. Fixing the system will be much harder.
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The yearslong debate about what to do with over $1.5 trillion worth of student debt may be coming to a conclusion — or at least a partial one. The Washington Post reported Friday that the White House was planning on canceling $10,000 of debt per borrower, with some income limits for who would receive the partial forgiveness.
Considering the lopsided nature of student debt — many borrowers have relatively modest outstanding debts, while a smaller percentage has quite large ones — this policy would, depending on how it’s implemented, wipe out all or a substantial portion of many borrowers’ debts while leaving the total amount of student debt at over $1 trillion.
The Federal Reserve Bank of New York has estimated that blanket $10,000 forgiveness would wipe out around $320 billion worth of loans and would totally eliminate around 12 million borrowers’ debt, just under a third of all borrowers. According to Education Department data, more than half of all borrowers have debts under $20,000.
Others say the best option is to eliminate all of it, a position championed by Sen. Bernie Sanders (I-Vt.) and Rep. Alexandria Ocasio-Cortez (D-N.Y.). (Democratic Sen. Elizabeth Warren of Massachusetts advocated forgiving up to $50,000 per person.)
The idea of student loan debt cancellation is extremely popular among some groups. A Morning Consult poll found that 62 percent of voters supported some student debt cancellation and 28 percent supported none, but that cancellation for all borrowers and for low-income borrowers garnered only 19 percent and 15 percent respectively. There are also substantial differences in opinion that reflect both age and political ideology — 45 percent of Baby Boomers supported no cancellation, while only 13 percent of millennials did.
Some have even speculated that the Biden administration could extend the pause well into the future, with Sen. Patty Murray (D-Wash.) asking for an extension until 2023 so Congress can address the underlying issues with the system.
“When you look at debt trends overall nationally, it’s people with low debt amounts that tend to suffer the most from it,” Raphaël Charron-Chénier, a sociologist at Arizona State University, told Grid.
“[It’s] Black, low-income, first-generation [students] who are really getting crushed,” said Adam Looney, an economics professor at the University of Utah who served in the Obama Treasury Department.
One point that advocates on both sides agree on is that, even if there are disputes over the value of student debt, there does seem to be something unique about the looming nature of its ability to cause psychological harm to those who carry it, along with potentially delaying family formation and even homeownership.
“There are some things like having your credit score impacted and having constraints on what you can borrow that are non-monetary,” Looney said. “There’s clearly a psychological burden. People feel oppressed by their student loans.”
Student loan debt cancellation is an issue that has gained traction in the public conversation, but both the politics and the policy of broad-based forgiveness are uncertain. Many policy analysts and economists who specialize in these issues are dubious about whether broad-based debt forgiveness is the right starting point, anyway. If the goal is to help borrowers hobbled by debt, an across-the-board policy may not be necessary, these critics argue; instead, a more targeted approach would reach those who need it without a windfall toward the already or soon-to-be well off.
Small-dollar student loan borrowers are squeezed the hardest
The student loan program, which was essentially brought under the direct control of the federal government in 2010, disburses almost $100 billion a year in aid that not only funds the education of students but has direct effects on the design and cost of higher education.
“One of the biggest problems for the current system is that colleges and universities are capturing federal financial aid,” Constantine Yannelis, an economist at the University of Chicago, told Grid. “There’s robust empirical evidence for every dollar they raise loan limits, colleges and universities raise prices by 15 cents. It’s much higher at institutions like for-profit [schools], closer to dollar-to-dollar.”
In the 2019-2020 academic year, federal student aid consisted of just over $90 billion in loans and over $60 billion in grants, federal work-study and tax benefits, according to an analysis by the Bipartisan Policy Center. The accumulated pile of student debt has more than doubled since 2007, even if the rate of growth has slowed.
When the Congressional Research Service examined who was borrowing, it found that about 7 million undergraduates were borrowing on average $6,700 in the 2015-2016 academic year; almost 1.5 million graduate students were borrowing an average of almost $24,000. And among those borrowers, there are differences in borrowing based on race: Black students are more likely to take out loans, and they take out larger loans compared with white, Hispanic and Asian borrowers.
While there are borrowers with huge, even six-figure, debts, a relatively small number of borrowers, many on the lower end of the debt scale, are in the unique position of having taken out loans and then having gotten little to no boost in the labor market. These borrowers are disproportionally low-income, nonwhite and first in their family to go to college.
“It’s these borrowers who should be the focus of most policy interventions,” Yannelis told Grid.
According to the Education Department, about $280 million, or 12.5 percent, of the $1.6 trillion in federal student loans goes to for-profit institutions; almost a third of outstanding debt is in forbearance, default or deferment (although the freeze in payments has fixed these figures in place for now); about 20 million borrowers have less than $20,000 in debt, making up $200 billion of the total outstanding federal student loan balance.
Graduate student debt is behind the biggest numbers
One reason the top-line numbers have gotten so big is because of a policy change around graduate student borrowers.
Congress created a new type of loan, known as Grad PLUS, in 2006 that has no cap on the amount students can borrow — but rather than relieve aspiring graduate students, the program seems to have saddled them with debt.
The number of people earning master’s degrees has climbed over the last 20 years. But without a limit on borrowing, graduate debt skyrocketed. Today, graduate students account for 15 percent of students enrolling in higher education but 40 percent of all debt issued each year. Graduate school students who borrow carry more debt than undergraduate borrowers, and professional school students even more so.
The Congressional Research Service found that, in the 2015-2016 academic year, master’s degree holders with federally funded or subsidized debt had on average $63,700 in debt, while doctoral students had $107,600 in debt and borrowers with professional degrees like medical and legal degrees and federal loans had $181,400 in debt on average. Overall, according to Looney’s figures, “households with graduate degrees owed 56 percent of the outstanding education debt.”
Looney has calculated using Federal Reserve data, any unilateral loan forgiveness would include the 20 percent of debt represented by professional and graduate degree holders or the 56 percent of student debt owed by the top 40 percent of households.
When you look at debt payments, Looney said, these high-dollar borrowers are even more concentrated among well-off borrowers, as they are not eligible for debt-payment-reducing programs like income-driven repayment or public service loan forgiveness. It’s precisely these borrowers that have led to so much consternation largely among progressives and liberals interested in debt forgiveness.
Laura Beamer, a researcher at the Jain Family Institute, said that we should instead look at why students end up in debt. These borrowers — especially graduate student borrowers forced by the decreasing value of an undergraduate credential and, if they’re from a marginalized background, disadvantages in the labor market — pursue graduate education in the hope of higher wages.
“They think, ‘OK well maybe I should go to graduate school in the hopes of getting a better credential, and that will secure a better financial footing.’ It’s a vicious cycle of financial ruin. The people that are hurting the most in terms of debt burden are those that are trying the hardest to make ends meet,” Beamer said.
Beamer argued that any sort of debt cancellation will have the highest impact on these lower-income borrowers who are most burdened by their debts: “Low-income and especially Black borrowers are seeing their debt-to-income ratios go up considerably more than high-income borrowers.”
Another line taken up by progressives who favor more expansive debt cancellation is that borrowers with debt are typically worse off than those who went to college debt-free. They also argue that among higher-income and higher-wealth households in general, they are less likely to carry student debt.
There are also smaller-scale steps the federal government can take. That includes across-the-board loan forgiveness of $10,000 per person, like President Joe Biden has proposed, or a targeted program forgiving debt for people who didn’t graduate from college and are unable to pay back their loans.
Last year, the Biden administration streamlined its Public Student Loan Forgiveness program — designed for forgiving the balance of those who had served in the public sector (as a teacher or in the military, for example) and consistently made payments for 10 years — and so far, 100,000 borrowers have seen about $6 billion of debt relief. More could qualify if they submit a waiver to ask for partial or late payments to be counted.
It’s unlikely Biden would opt to go full-bore and forgive all $1.6 trillion in debt or embrace progressives’ proposal to cancel $50,000 in debt per borrower, said Robert Shireman, former Obama administration deputy undersecretary of Education.
“The government does forgive debts. It’s not necessarily unheard of,” said Shireman. “But taking an entire program and saying all of that debt is gone is unprecedented, and that has potential implications for the rest of the federal government.”
The legal argument is straightforward, but the politics of federal student loan debt are complicated
The legal case for student loan cancellation is relatively straightforward. Luke Herrine, who is currently working on a Ph.D. at Yale Law School, is the chief thinker to advance the loan cancellation theory. He wrote a 2017 article, a 2019 white paper for the progressive Roosevelt Institute and a 2020 law review article.
His main argument is that, according to federal law, the Education Department has the authority under the Higher Education Act to “compromise, waive, or release” federal student debt held by the Education Department. In other words, the federal government holds the loans, so it can decide what to do with them.
There are some questions at the margin surrounding whether and how specific federal loans would be covered by such a move, but supporters argue that most federal loans would be able to fall under this authority.
The Biden administration’s Education Department, according to a New Yorker article published last fall, was preparing a memo, “The Secretary’s Legal Authority for Broad-Based Debt Cancellation,” in the opening months of the Biden administration. That memo has not been made public, except in almost completely redacted form.
But though Herrine’s aggressive writing on the issue argues that the administration has broad authority on this front, he acknowledged three possible complications.
The first is that the Education Department itself issued regulations in 2016 that could be read to limit the department’s authority over its debt. The limits require any compromise of debts over $100,000 to be authorized by the attorney general and certain conditions to be met before a compromise of a debt is allowed.
A 2020 memo from the Legal Services Center of Harvard Law School supporting Warren’s loan cancellation efforts countered, however, that nothing in the 2016 regulations limits the Education secretary’s authority to modify loans — up to and including “to zero.” Herrine additionally argued that the regulatory limits could be gotten around if the move is done in consultation with the Justice Department or that the Education Department could reverse the 2016 regulations altogether, a process that takes time and requires a public comment period.
The other possible complications relate to the interplay between the Education Department’s move to address student loan debt and the requirements such a move would trigger from two other agencies. The first is a financial requirement administered by the Office of Management and Budget known as “Administrative PAYGO,” which limits moves that increase government spending without offsets (which debt cancellation could be determined to do), and the second is the question of whether the Treasury Department would classify the move in a way that would treat the canceled debt as taxable income.
If student loan cancellation were administered as an administration (and not just Education Department) priority, Herrine argued in the 2020 law review article, both of these issues could be resolved: by waiving the PAYGO requirements, if they even apply, and by not assessing the canceled debt as taxable income.
In addition to the legal complications raised by Herrine, however, is the larger question of whether the new Supreme Court would allow such a move. The 6-3 conservative majority has been open to decisions severely limiting executive action. Already this year, the justices ruled against the Biden administration’s attempt to use federal workplace safety rules to require large employers across the country to require their employees either be vaccinated or regularly tested for covid-19. Under the “major questions doctrine,” which Justice Neil Gorsuch said controlled that case, big administrative actions can’t be authorized by vague statutory authority.
In the 2019 white paper, Herrine acknowledged that the Education Department has exercised the discretion to cancel debts only in very limited ways in the past. This — a dramatic change in how a long-standing law is being employed by the administration — played a significant part in the Supreme Court’s decision to stop the workplace vaccine-or-test rules and could, at the least, prompt challenges to a student loan cancellation policy.
Beyond the actual question of whether the policy would be upheld are the questions of whether litigation would hold up implementation and — even if ultimately upheld — for how long. While the possibility of litigation certainly doesn’t stop executive action, it can at times figure into whether and how a policy is implemented.
Black student loan borrowers think of a degree as a buffer against labor market discrimination
Last year, Jalil Bishop, an assistant professor at Villanova University, co-authored a report finding that student loan debt “reproduces and heightens” systemic inequality Black borrowers face due to redlining, the racial wealth gap, a discriminatory job market and more exclusionary practices.
“While student loans may be able to be leveraged by a middle-class white family, for Black families, student loans become another debt entangled in other economic inequalities,” Bishop told Grid.
Student loans have long been considered “good debt” because higher education can bring higher salaries. However, studies have shown that advanced degrees increase salaries and debt, creating a financial burden that could cancel out what extra income graduates receive.
Black Americans in particular face pressure to obtain a college education. It may increase their chances of becoming upwardly mobile and building generational wealth. As a result, they take on more debt than their white peers. Black graduate students, for example, tend to borrow about 50 percent more than white students in similar fields for either less pay or underemployment.
While 54 percent of all student loan debt is borrowed by white graduates, Black borrowers owe $25,000 more on average than their white counterparts for an undergraduate degree four years after graduation. According to a Brookings Institution study from 2016, Black graduates also owe $7,400 more on average than their white counterparts, and the gap between Black debt and white debt triples in the years following graduation due to interest and loans from graduate school.
“Black borrowers are really feeling a lot of anxiety around the labor market discrimination that they are preparing to face,” Bishop said, “which means that they are willing to borrow student debt at high costs to earn a degree, to be a buffer against labor market discrimination.”
A 2019 study found that Black workers are twice as likely to be unemployed as white workers regardless of education level. Black college-educated workers are also almost 10 percentage points more likely to be underutilized in the workforce, often taking jobs that don’t require a degree in the first place.
Bishop said that the gap is also circumstantial: More students of color attended college as the cost of higher education skyrocketed. “You didn’t have to borrow loans of any type to afford college until about the 1980s,” he said. Enrollment from students of color rose in the late 1980s, the New York Times found.
“So, in a moment where our students who have the lowest means are able to access higher education,” Bishop said, “it’s also the moment where we start to fund higher education through student loans.”
Even if the student debt issue were to be “resolved” in some way, whether through cancellation or adjusting payments based on borrower income, there’s still the question of how to build a higher education system that doesn’t leave a large portion of borrowers systematically mired in large amounts of debt.
There are several ways Congress could lower debt for students going forward. With a sustained influx of federal funding, public colleges and universities could lower their prices. But federal lawmakers have shown virtually no interest in creating such a large investment. Significantly increasing the amount of Pell Grant money available to low-income students could similarly help students who may otherwise be unable to pay for college.
“In terms of the pipeline, there’s more accountability needed in higher ed, and we need to have better funding for higher ed,” the Jain Family Institute’s Beamer told Grid. “There’s no limit on the amount that they’re willing to extract from the student debt, especially for graduate degrees.”
Advocates on either side of the debate agree that many graduate programs in particular are too expensive to the point of exploitation, whether of students, taxpayers or both.
A way for Congress to curb the amount of future debts across the board would be to limit the amount of money graduate students are allowed to take out in Grad PLUS loans. Experts like Shireman believe that capping loans would give graduate programs an incentive to charge less money for degrees rather than counting on students to go six figures into debt to attend.
“The colleges that are bringing in that revenue, they would fight like mad and talk about it eliminating access,” said Shireman. “But there’s no question that at some of the graduate school programs, the prices are being pumped up significantly by Grad PLUS loans.”
Lawmakers could also try to target low-income, Black and minority borrowers who are the most likely to be aided by student debt relief — though canceling student debt in any form is likely to be met with legal challenges and financial complications in the federal government.
The University of Chicago’s Yannelis has called for, at the least, more transparency into college programs, especially the earnings of students after they graduate. But here he cautioned that systems that direct state funding based on the ability to produce high-earning students could end up cherry-picking.
Without reform, the University of Utah’s Looney said, “it could be way worse,” with universities systematically sucking up student loan money with little or no prospect of it being paid back.
“The idea of continuing to issue $100 billion in student loans every year under this system that we think is terrible,” Looney said, “it would only get worse.”
Thanks to Lillian Barkley for copy editing this article.