In their respective campaigns to beat President Donald Trump in the next election cycle, Democratic candidates have proposed disruptive legislative ideas as part of their campaign slogans addressing America’s out of control student-debt ($1.5 trillion), largest outstanding consumer debt other than mortgages. As of 2019, over 44 million Americans are indebted in student loans with almost 11% delinquent or sustaining through federal aid. Recognizing the cult-of-personality popularity the President enjoys with his core Republican base, the Democrats have strategized targeting major long-standing issues of the American economy in order to attract the millions of voters who have opted out of the election process to be able to beat the President.
The boldest proposals have come from the two candidates who haven’t been shy of leaning towards what their critics call ‘democratic socialism’, involving an active and substantial role of the federal government in managing problems in key sectors of the economy. Back in the 2016 election cycle, Senator Bernie Sanders was perhaps the first major personality in the party to have spoken publicly of this crisis and the need for a federal relief program for delinquent students. In June, he proposed a bill that would effectively cancel the student debt of all 44 million Americans and for families with annual incomes of $25k or less cover all college costs. On the other hand, Senator Elizabeth Warren has a similar plan but a little more progressive in its debt relief in that families with incomes over $250k wouldn’t receive any cancellation although college would become universally free for all. Both campaigns have estimated their plans to cost between $1.5 and $2 trillion which is assumed to be funded by large taxes on the top income brackets either by raising the marginal tax rates or increasing capital gains taxes. Other popular candidates, like Senator Harris and former Vice President Joe Biden, have also announced proposals for debt relief but none have gone to the extent of Senators Warren and Sanders.
This debt crisis has disproportionately affected generations born after 1980 as baby boomers enjoyed decades of low cost and high quality higher education in the post-war period. Recognizing higher education as a source of investment in human capital of workers, the Johnson administration passed the Higher Education Act (1965) which guaranteed student loans by the federal government. President Nixon followed suit bypassing his own Education Act (1972) which permanently placed the government in an active position in the student loans market, even creating Sallie Mae that borrowed from the Treasury at low-interest rates and bought up loans from banks to free up their ability to issue more debt to students. While in principle this system would have seemed promising and was for a few decades, it bore the perfect recipe for cheap money incentivizing bad behavior. With a constant flow of federal money, colleges of all types started competing for federally-backed student loan dollars and figured out ways of making more money by boosting fees and enrollment.
When the Great Recession hit and the job market shrank, student enrollment further increased as workers or potential workers unable to find jobs looked to enhance their skills until the market would start hiring again. President Obama, although recognizing the gravity of the problem, instead introduced regulations that never changed the fundamental structure of the system but continued the government’s loose lending policy. His administration cut the middlemen by directly funding student debt through the Treasury Income-based repayment programs—severing the link between the value of the student’s degree and the degree to which they could borrow and effectively allowing colleges to enroll more and increase tuition fees. By half-heartedly embracing the philosophy of ‘every American deserving a higher education’, the government has created a system of moral hazard which incentivizes maximizing issuance of debt regardless of the ability to pay back in the long run, simply because the taxpayer is there to pick up the tab.
That being said, the only way to ‘fix’ this dysfunctional system is to fundamentally rearrange the incentives that drive it, meaning instead of burdening students with debt that they cannot repay, the government should provide financial planning and training programs that help them better understand debt and its consequences; instead of issuing more and more to profit from the interest payments, loans should be issued when the necessity matches the potential of gains in the future. Although making all colleges tuition-free or canceling all outstanding debt could make that fundamental change, the ability for such proposals to come into action would require fighting an uphill battle against big corporations and financial institutions that have high stakes in such debt markets.
Utkarsh Shalla
