What’s Next After Loan Forgiveness

In the aftermath of President Biden’s action on reducing the student loan debts of millions of Americans, like a lot of others, I’ve been wondering, what’s next?

At this point, the question as to whether or not our debt-financed system of individuals financing their educations makes any sense is all over but the shoutin’.

That shoutin’ is coming from those on the right who are demonizing the action for political purposes (often looking foolish in the process), along with folks like Obama administration economist Jason Furman and other centrists who want to argue that the aid is not well targeted to people who need it, blah blah blah, and of course someone is going to find a way to take it to a partisan Supreme Court, which won’t have a problem finding a rationale to strike it down should it want to.

Putting aside that Sturm und Drang, something important has been made clear in this process: a system that requires individuals to take on debt for a benefit that is not going to materialize is fundamentally unfair. I’ve always thought that the most persuasive rhetorical position on the issue was that it is important for the country to hold up its end of the bargain when it comes to its promises. As I said in a previous blog post,

We the people struck a bargain: if you work hard and get an education, whatever that education cost, you will be paid back in increased economic prosperity. For a couple of generations now, that deal has not been in place. Education has become a form of what Tressie McMillan Cottom calls “negative social insurance.” Rather than being a ladder up, for many it has become an anchor holding them down. The high cost to individuals as documented by Sara Goldrick-Rab has resulted in even worse cascading effects for students who could not persist in their studies not because they couldn’t hack it academically, but because they simply could not afford it.

Canceling the debt is a way of saying we screwed up, that we thought this would work, but it didn’t. Our bad.

As Beth Popp Berman argues, the Biden administration action shows that the dominant economic style of thinking was actually sidelined here in favor of an explicit acknowledgment that people had gotten a raw deal. This acknowledgment has much larger implications. Berman again: “The idea that we can more fairly finance higher education by encouraging people to become better investors in their human capital has failed.”

It actually failed a while back, but now, even some economists are recognizing the limits of their previous framework, as seen in a New York Times op-ed by Harvard economist and professor of education Susan Dynarski. Dynarski states up front that her thinking on canceling student loan debt changed explicitly because the bargain that students thought they were signing up for didn’t exist.

Using a framing that I employed a blog post here in 2016 (cough, cough) Dynarski shows how the cost of a year’s tuition at UMass-Boston in the 1970s could be paid for with 375 hours of minimum-wage work. Today, even though Massachusetts has one of the highest minimum wages in the country ($14.25), it would take 1,100 hours of work to fund the cost of a year’s tuition and fees.

(It’s actually much worse in my home state of Illinois for those who want to attend my alma mater, the University of Illinois.)

It is a big deal that Ivy League faculty are now talking about this issue on these terms.

Still, what’s next? We haven’t addressed the underlying problem of college costs, and without doing that, we’re looking at either never-ending cycles of debt acquisition and forgiveness or simply immiserating the next generation with debt.

There are a number of proposals around limiting the interest on student loans or changing the terms for public service loan forgiveness, but as to the latter, Ryan Cooper points out that this may create a situation where institutions are incentivized to jack up tuition in order to realize more revenue, knowing (or hoping) that students will ultimately be let off the hook. To prevent this, he suggests some kind of price controls on tuition for institutions that accept students who receive loans, which is almost every institution.

But as Cooper also notes, there is a shorter route to the goal of making higher ed affordable without burdening successive generations with unpayable debt or requiring elaborate bureaucratic structures to police and manage. As he says, “It would be better and simpler to pay tuition for public schools directly out of tax revenue.” This would also have the benefit of being cheaper and more efficient than the current kludged-together system.

Nathan Tarkus debunks the idea that this is a giveaway to individuals. The system as it has been operating is really a way for students to be given access to credit by the government, money which is immediately turned over to the schools. He argues, “Even what does not go to the school is, in a larger sense, a subsidy to higher education. That’s because those students need to cover their basic living expenses, in order to be able to continue attending school” (emphasis in original).

Tarkus argues that the institutions have income, while students are left with debt, and “If this were simply a direct subsidy paid out to schools for providing students education, everything would be the same—except the student would not have debt, and this transaction would be officially booked as government spending. However, the school’s income would be exactly the same.”

Given that the lion’s share of revenue at public institutions now comes from student tuition, and that the human-capital theory of taking on debt for an education credential has been utterly exploded, what is the remaining rationale for not moving toward a direct subsidy of public institutions in order to make them at least affordable, if not free?

None that I can see.

While there are a lot of moving parts to making this happen, it likely looks something like a federal subsidy that requires certain levels of state contributions to institutions for eligibility. There are all kinds of mechanisms—such as requiring a certain number of in-state students—that will make states funding their own institutions more attractive.

What’s next is showing not only that the way we finance higher education doesn’t make any sense, but that the way we finance higher education creates a fundamental disconnect between institutions and mission.

There’s a quote I often share from Carol Christ, now chancellor of the University of California, Berkeley, who said in 2016, “Colleges and universities are fundamentally in the business of enrolling students for tuition dollars.”

The “sham” of merit aid, explained recently by Kevin Carey at Slate, shows how the chase for revenue privileges the students who can most afford college and leaves many students indebted at the maximum possible level.

Students who must take on debt to attend are put at an educational disadvantage to their peers, requiring them to divide their attention between work and their studies in order to mitigate the amount of debt.

Human-capital theory turns higher education into a great sorting mechanism where the rich get to start at the midpoint of the race. It turns out that lots of people are now recognizing that this doesn’t make any sense.

That’s what we should be talking about next.