Introduction
In the recent decade, calls for student loan debt forgiveness have been rampant in the U.S. as citizens have accumulated over $1.6 trillion in student loan debt. Recently, the Biden Administration responded through executive action canceling $9.5 billion of select student loan debt, and the president is being encouraged to follow through on much more.
However, these actions won’t be able to solve the larger problem of inflated education costs and will, unfortunately, end up doing more harm than good. This policy note provides a set of arguments as to why student loan debt forgiveness is a regressive and misguided policy.
Background
Over the years, student loan debt has been increasing at an alarming rate. In just the last ten years alone, it has increased by more than 100%. In 2010, there was around $800 billion in student loan debt within the United States. In 2020, the total student loan debt surpassed $1.6 trillion and will likely continue to increase. Of the 43.2 million student borrowers in debt the average owes $39,351 each.
Tuition prices play a large role in the massive student loan debt within the U.S. The cost of tuition has been on the rise over the years, and even adjusting for inflation, the average tuition price for 4-year public colleges is up 361% since 1963. In 2020, the average tuition cost to attend an in-state 4-year public college was $9,580, but the average student attending that college would spend $26,615 per academic year when factoring in other expenses such as room and board, books and supplies, and other necessities. With the price to attend college being so high, it’s no surprise that 43.2 million students in the U.S. have taken out loans to help cover those costs.
Factors that Fuels the Crisis
Federally-backed student loans
A major factor fueling the increase in college prices is federally-backed student loans. According to research, for every dollar of tax-based (federal) aid, institutional grant aid is reduced by $0.83, meaning that the intended reduction of cost from the federal aid is significantly offset by reductions in institutional aid. As a result, students often increase their loan borrowing to make up the difference and therefore are not actually benefiting from more affordable tuition.
Increasingly administrative costs
Another important factor leading to tuition increases is the bloated administrative costs from colleges and universities. From 1993 to 2007, administrative costs increased by 61.2% while instructional costs only increased by 39.3%. These administrative costs have little impact on improving graduation rates, but are paying for more non-instructional staff, such as counselors, diversity coaches, and others who aren’t directly contributing to educating students within the classroom.
Bountiful Supply of Federal loans
It is not a stretch to imagine that the bountiful supply of federal loans has encouraged universities to commit to tuition hikes and higher administrative costs because they know that those the government will continue aiding and abetting borrowing for students, guaranteeing significant income for schools. The textbook case of a moral hazard.
