US higher education needs reform despite relief from student loans: Experts

According to Laurence Vance, a columnist and policy adviser for the Future of Freedom Foundation, "the government should not be in the student loan business in the first place."

Kirill Krasilnikov-US President Joe Biden's initiative to forgive at least USD 10,000 in student debt for each eligible borrower will not be enough to improve the situation with higher education in the United States, experts and citizens surveyed by Sputnik believe.

Earlier in the week, Biden announced that the US government will forgive up to USD 20,000 for individuals who took out Federal Pell Grants, while individuals who took out regular federal loans could get up to USD 10,000 in debt cancelled.

According to the Department of Education, the Biden administration's student debt relief plan will require borrowers to pay no more than 5 per cent of their discretionary income each month for undergraduate loans, down from the previous 10 per cent . The plan will also cover the borrower's unpaid monthly interest as long as they make their monthly payments.

 

The student loan forgiveness program will only apply to individuals who earn an income of less than USD 125,000 a year and will guarantee that no borrower making the annual salary based on USD 15 minimum wage will have to make a monthly repayment.

In addition, the plan will forgive loan balances of USD 12,000 or less for each borrower after ten years of payments.

EXPENSIVE LESSONS

The federal government's involvement in student loans goes back to the late 1950s when the launch of the Soviet artificial satellite Sputnik 1 prompted the US to step up its science and technical education through low-cost loans to students in mathematics, science and foreign languages under the National Defense Education Act of 1958.

This was later expanded in the 1960s as part of Lyndon Johnson's Great Society initiatives, resulting in the arrangement where the government serves as a guarantor of loans made by banks and other private lenders to students, covering losses if a borrower defaults.

Since then, the price of college tuition skyrocketed due to rising demand for higher education and also, as many people claim, due to government-subsidized student loans, which allegedly caused universities to start raising tuition prices and fight to enrol as many students as possible. Now, the overall federal student loan debt has reached $1.6 trillion, with many US citizens being saddled with an exorbitant amount of debt and degrees that do not translate to incomes that would allow them to repay it.

As a result, there have been calls to change the current arrangement, with some insisting on universal forgiveness of student debt and others objecting, saying it would be unfair to those who had already repaid their debts.

"We will be having the same discussions in ten or twenty years. Forgiving ten or twenty thousand dollars in student loan debt does nothing to solve the structural incentive problems in US higher education," Constantine Yannelis, an associate professor of finance at the University of Chicago Booth School of Business, said, describing Biden's announcement as "more of a band-aid than permanently healing a wound."

According to Laurence Vance, a columnist and policy adviser for the Future of Freedom Foundation and an associated scholar of the Ludwig von Mises Institute, "the government should not be in the student loan business in the first place."

"Yes, it [Biden's initiative] will have the desired effect of alleviating the debt burden of many college graduates, except for those who owe large amounts, like over USD 100,000. But it is no more the job of government to alleviate someone's student loan debt than it is for government to alleviate someone's credit card debt," Vance stated, adding that "a massive structural reform of US higher education is still needed."

The feeling that the change is overdue is shared by many across the nation, such as Fairooz Adams from Texas, who noted that "not everyone needs to go to college and not every single job requires college."

"We have to better evaluate how exactly college provides value and who exactly should go. Until we dispel the myth everyone must go to college we will waste people's time and drive up college costs through demand," Adams said.

An anonymous math PhD student from New Jersey also told Sputnik that fewer people should be going to college, citing the low level of ability displayed by some students. They also suggested that "universities should slash administration and remove bureaucracies, including DEI [Diversity, Equity and Inclusion initiatives]."

Meanwhile, John from Virginia proposed that students should be allowed access to the bankruptcy mechanism as a way to deal with debt.

INFLATION DRIVER OR WEALTH TRANSFER?

One of the concerns regarding Biden's debt relief plan is that it could exacerbate the country's inflation, which has been on the rise and could potentially get even worse.

"Although the money has already been spent -- in some cases 20 years ago -- this measure will create an additional burden on taxpayers because of the hundreds of billions of dollars that will not flow into the federal treasury via loan payments. In the end, it will boost inflation because the federal government in conjunction with the FED will end up printing more money," columnist Laurence Vance explained.

Yannelis, for his part, said that while there will be some effect of inflation, it will be quite small as "most people are not paying their student loans today, so the forgiven payments would have occurred quite far in the future."

"The impact of a payment resumption might be higher, but this will be deflationary and still likely quite small. I think we should be focusing on the distributional consequences of student loans, not inflation," he added.

The matter of distributional effects is another salient point when it comes to student debt forgiveness as a disproportionate share of the debt is held by people from upper-income households, per Federal Reserve data, meaning that various debt relief policies would generally benefit the affluent groups at the expense of taxpayers, many of whom come from a lower socioeconomic background.

"It is a regressive measure that uses the broad tax base of workers without college degrees to further subsidize the education of people with degrees who have an average unemployment rate of less than 3 per cent," Vance said.

"I don't have any student debt myself thankfully but I am concerned about it functioning as a wealth transfer. I'm also concerned about subsidizing degree programs that I don't think are a benefit to our society," John said.

Associate Professor Yannelis agreed that the forgiveness policy will mostly benefit those from the upper middle class to upper class as the income cap of USD 125,000 is more than three times the median income and married couples are eligible even if they earn USD 250,000.

"On the other hand, the new and more generous income-driven repayment policy will mainly benefit the middle to lower-middle class. So the full distributional effects of the announcement are mixed, but the loan forgiveness portion of it will definitely benefit relatively high earners," he said.

In the end, the issue of student debt will continue to haunt the public until a more comprehensive reform of US higher education is introduced that would serve both individual and national needs.

"I don't really blame the people with debt, but I hesitate to support this [move by Biden] because we haven't made changes necessary to relieve the demand for colleges to reduce it to something more in line with what jobs genuinely need and what talents are distributed amongst our people," Texan Fairooz Adams concluded.