A Cause of Inequality: Student Debt


The Supreme Court may have decided that President Biden overstepped his authority when he tried to forgive hundreds of billions of dollars of student debt. But even if it had decided that the President needn’t consult Congress to offer reprieve to families, the whole situation would have remained a mess for millions of students past and future. That mess, in turn, goes back to the poorly thought-out rationale for the massive increase in student debt in recent decades.

One can argue—and many of my fellow economists do argue—that those who benefit from higher education should help pay for it. The same argument could be made for public education from Kindergarten to 12th grade. Why don’t we make families pay for those services as well? The answer is simple. Many of the gains from a more educated population benefit society more generally. Education is one of the reasons our nation, whatever its limitations, became much wealthier than nations with less educated populations.

We have in place, moreover, a simple mechanism for garnering a large share of the personal gains that students receive. It’s called the income tax, which for the most part extracts much higher payments from those who make the higher incomes that higher levels of education make possible.

Much of the rise in student debt did not come about as a way to foster more investment in education but rather as a way to take away the supports that government used to provide. There is no evidence that the new lending made more than a minimal difference in educational outcomes. In fact, it has probably discouraged many from pursuing higher education. In that sense, the assets—counting higher levels of knowledge or what is sometimes called human capital—of the young weren’t increased, but their debt was.

Put another way, their net worth declined. This also plays in later years, as payments of interest and principal on student debt displace what young adults otherwise would have invested earlier in homes and retirement accounts. When stories arise about the increase in wealth inequality in the U.S., student debt offers one explanation. The financial net worth of the young has declined remarkably in recent decades relative to older populations.

It’s not that government wasn’t dishing out more money in other areas, such as healthcare and retirement, or tax cuts. Those simply took precedence over net investment in the young.

Relative to a world where government—that is, taxpayers—helped pay for a much larger share of higher education, one further consequence has been a significant redistribution of the cost of higher education. Black graduates, for instance, end up with higher student than white graduates and are more likely to delay buying homes and marrying.

It’s not surprising that the President wanted to do something about the situation. But the problem was and remains huge and any solution costly. The President didn’t want to say directly to current taxpayers that they should take on the student debt, so he simply tried to transfer it onto future taxpayers in the form of even more national debt. He couldn’t logically try by executive order to do much more than the Supreme Court already declared was a legislative, not executive, matter. For instance, he couldn’t set up a policy that forgave student debt for future students, which would mean a permanent conversion of future student debt to a grant. And his lawyers probably told him that it was way beyond his authority to legislate an equal justice regime that made grants also to students and supportive family members who had already paid off their student debt, borrowed against their home rather than take on the student debt, worked their way through college, or simply saved enough to avoid acquiring debt.

Though there are no easy short-term solutions, Congress and state legislators that cut back on their support for public higher education should recognize that much of this mess belongs to them. Grants can gradually replace loans. Student loans and grants can be paid for either directly through the income tax or some small add-on percentage tax rate. National service, such as suggested by Richard Reeves and Isabel Sawhill, among others, could be used to pay for tuition-free college.

Unfortunately, every day that legislators fail to put in place a reasonable long-term policy, this student debt problem only gets worse.

Source: Eugene Steuerle


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