In the Debate Over Loan Forgiveness, Let’s Not Forget the Underlying Problem

In the Debate Over Loan Forgiveness, Let’s Not Forget the Underlying Problem

Jun 01, 2023
Student doing calculations at a desk

The current public debate about President Biden’s plan to forgive federal student loan debt is an important one. The plan would provide relief for borrowers at a time of rising higher education costs. However, some critics say the plan is unfair, while others believe it is an inefficient way to address inequity. Experts on both sides of the debate gathered on May 24 to discuss the plan at an event co-hosted by the Association for Public Policy Analysis & Management, American University’s School of Public Affairs, and Mathematica.

As the controversy over loan forgiveness continues, it is important to step back and recognize that loan forgiveness is ultimately a Band Aid on a larger problem of college affordability. Many policy choices have led us to this point, and new choices are necessary to address this challenge.

Changes in public funding for higher education have shifted the burden to borrowers

Between 1970 and 2020, the average annual tuition and fees at four-year institutions tripled from $5,141 to $16,647 (adjusted for inflation). During this time, shifts in state policy resulted in decreased funding for public higher education, causing a greater share of the cost burden to be passed along to students and their families. In 1990, tuition paid by students made up about a quarter of college and university revenue, with the remaining seventy-five percent coming from state and local government. By 2015, students were covering about half the revenue.

In addition, the federal minimum wage has declined from $9.87 per hour in 1970 (in 2020 dollars) to $7.25 in 2020. This means that a student working a minimum wage job in 2020 would not only be expected to pay three times as much in tuition and fees—but be expected to do so with less buying power. Whereas a student in the 1970s may have been able to afford college while working, that notion is far from reality in the 2020s.

The value of the Pell Grant, a federal grant available to low- and moderate-income students, has also not kept pace with rising college costs. Today, it only covers about 30 percent of the average cost of tuition, fees, and room and board at public four-year colleges, the lowest level in more than 40 years.

Unsurprisingly, students have become much more likely to graduate with debt. In 2019–20, the average college graduate owed about $30,000, compared to only $1,070 in 1970 (or $7,107 in 2020 dollars). Hindered by such large loan burdens, students have become much more likely to default or fall behind on their payments. In 2020, 18 percent of borrowers with outstanding debt were behind on their payments. For the nearly four out of 10 borrowers who do not complete a degree, repayment can be particularly challenging because they owe debt but lack a college degree to help pay for it.

There are also important issues of equity for who is most likely to carry debt. Black borrowers have the highest monthly student loan payments by race. Black and Latino borrowers are most likely to report that they have delayed buying a house or marrying, respectively, due to their loan debt.

Addressing college affordability requires new choices

A one-time push for student loan forgiveness can help address the immediate problem, but it won’t establish a sustainable pathway to affordable and accessible higher education for all students. It is time to revisit the root causes of ballooning student debt to create a more enduring solution.

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