How to Reduce College Debt Burdens — Introduction
Many older voters who borrowed for their education and repaid their loans are unconcerned about the recent increase in student debt. I believe this view is shortsighted. Current and recent college students are incurring more college debt than previous cohorts of college students. This debt will have economic and financial impacts on future generations.
• The average student debt for a person with college debt completing a four-year degree rose from 12,876 in 2003/2004 to 20,163 in 2011/2012.
• The percent of undergraduates completing a four-year program with college debt rose from 60.8 percent in 2003/2004 to 65.2 percent in 2011/2012.
• The percent of parents with dependent students with a PLUS loan rose from 5.06 in 1996 to 9.27 in 2012. The increase in the use of PLUS loans by parents for undergraduates was even larger for parents in the lower income quartile.
• The number of Americans over age 60 with a student debt rose from 700,000 in 2005 to 2,800,0000 in 2015. The average amount of student debt held by borrowers over age 60 rose from $12,100 to $23,500 in the same period.
• The increased use of student debt is having a substantial impact on household finances. People with student debt have a hard time qualifying for a mortgage, may have to pay higher interest rates or will only qualify for a small mortgage and often delay purchasing their first home. These factors will reduce house equity, an important component of retirement savings for future generations.
• People with large student debt totals and limited wage income must choose between contributing to their 401(k) plan at work or maintaining payments of student debt. Financial planners often urge borrowers to emphasize 401(k) contributions over student debt repayments. However, the correct choice is not obvious and given limited wages there is a clear tradeoff between debt reduction and saving for retirement.
I believe that Congress must adopt policies that reduce the costs of college and provide assistance to student borrowers who become over-extended.
In the 2016, presidential campaign Bernie Sanders advocated for free public universities and Hillary Clinton argued for debt-free college tuition at public universities for all students in households with less than $125,000 per year. The free or debt-free college proposals had little support among economists.
First, people have little incentive to wisely consume a free good. Free education would provide a motivation for students to stay in school regardless of whether they were learning. Second, in a world where there are many needs and problems to be fixed free education is wasteful and economically inefficient. An economically efficient subsidy must either persuade people to make a choice that they would not otherwise maker or help people truly in need.
The free college approach achieves neither of these objectives. First, assistance is provided to people who would have completed college under any circumstance. Second, assistance is provided to people who do not help. Third, the offer of assistance will result in people saving less for their own education and the educational needs of their family members.
This paper proposes four types of policy levers to achieve reductions in the number of people with unstainable student debt. The four policy levers are: (1) increased student financial assistance, (2) improvements in loan forgiveness policies, and (3) improvements in on-time graduation rates and (4) increased information on school quality and costs for students and parents.
The four-pronged approach is far less costly than the free-college or debt-free college programs offered by Sanders and Clinton. The four-pronged approach to the student debt problem targets assistance towards those most likely to not complete their education or people with the highest needs or vulnerabilities.
The first three proposals are designed to reduce the cost of college for some students. The first proposal calls for a massive increase in financial assistance targeted towards first-year students
Go here for a description of the program for an increase in financial assistance for first-year students.
Proposal One: Increased Financial Assistance for First-Year Students