President Joe Biden’s administration has yet to decide whether to write off student loan debt. Despite Biden’s campaign promises, the report exclusion Debt cancellation in the next White House budget proposal means the proposal is unlikely to happen anytime soon. Biden himself seems reluctant widely cancel student loans, breaking away from progressives like Senator Elizabeth Warren (D-Mass.) who are ardent advocates for large scale loan forgiveness. Meanwhile, conservative politicians have produced several alternatives invoices focused on the efficiency and transparency of the federal student aid system.
But no simple debt cancellation policy will prevent the same problems from happening again. This will only encourage more students to make bad debt decisions. Even improvements in the efficiency and transparency of the federal student loan system will not solve all or even most of the problems it has caused for U.S. higher education, U.S. taxpayers, and students themselves.
Policymakers face the harsh reality that the federal student loan system is hopelessly broken. American students would be better off without it.
The federal student loan system has failed financially. A report a JP Morgan consultant found that taxpayers are already likely to be at the mercy of about a third of the federal student loan portfolio, or about $ 500 billion. According to the report, the federal government expects to receive 96 cents for every dollar outstanding on a student loan and therefore claims the system is cost effective. He justifies this ridiculous assumption by making new loans to defaulting borrowers, allowing the program to say that the previous loans have been repaid.
These shady accounting practices could benefit federal bureaucrats who get salary pushing loans. But American taxpayers must foot the bill. The JP Morgan executive report estimates that the government can reasonably expect to recover only 51 to 63 percent of delinquent student loans. The rest will go to the already colossal federal debt.
While it is bad enough that the government is falsely promoting its costly student loan system as profitable for taxpayers, the system is not even profitable for many students. Forty percent of students drop out before graduation. Majority of college dropouts have student debt, and 84% of dropout loan balance is left unpaid after 12 years. The dire financial consequences of the student loan system, combined with the incentive to send every student to college, can be life changing for these people.
One of the worst effects of the federal student loan system has been an artificial increase in the demand for higher education, which has resulted in exorbitant increases in tuition fees. Since 1980, tuition fees at American universities have more than doubled, affecting both those who borrow and those who don’t. Much of this increase in tuition fees can be attributed to the massive growth in enrollment resulting from the federal student aid system. In the name of accessibility, student loan promoters have made the university financially inaccessible to almost everyone outside of the upper class.
This academic rent-seeking not only places massive financial pressure on the economy, but also drives colleges to spend lavishly on administrative bureaucracies and luxurious student services. In my recently published report High price: what college costs in the United States, I have documented the growth in the number of well-paid directors who focus on educationally peripheral activities such as global outreach, “diversity and inclusion” strategies and “wellness”. Firms that need to make a profit have a certain natural constraint on bureaucratic growth; non-profit colleges don’t. University administrations are becoming more and more bloated and the academic part of the American university is more and more sidelined. All of these tuition fees pay for lower quality education.
Meanwhile, the return on investment of a college education is dismal. At least 40 percent of recent U.S. college graduates are underemployed; in other words, they have jobs that a high school graduate could do. The college income premium has stagnated over the past decade, and the college wealth premium – perhaps a better measure of college efficiency – has declined sharply.
Yet some still argue that a more federal government ready and more college enrollments will solve these problems. They call for greater accessibility to “the promise of higher education“for low-income students and minorities, even as these students disproportionately drop out of college and struggle for years with student debt. And for those who don’t go to college, the increase in Credentials caused by our economy saturated with diplomas has reduced employment opportunities.
We need to focus on access to employment opportunities rather than access to higher education. Today, guidance counselors and parents encourage young students to attend university. But college is not for everyone. Students should be encouraged to pursue other post-secondary pathways, such as trade schools or apprenticeship. This way, they can save time, money and energy that would otherwise have been spent on higher education that they did not need.
If we do away with the federal student loan system, we can start to reimagine the future of higher education. The next generation of high school graduates could take multiple paths to financial and social prosperity, instead of being stuck in the one-way street of graduation. Deprived of its rent-seeking opportunities through student loans, higher education would be forced to revert to its primary focus of providing excellent education to young study-inclined Americans. And taxpayers would no longer have to worry that more of their income would be used to pay for bad government financial decisions. This brighter future for higher education could be ours if only we had the courage to end the federal student loan system.
Neetu Arnold is Senior Associate Researcher at the National Association of Scholars and author of High price: what college costs in the United States. Follow her on Twitter @neetu_arnold.
The opinions expressed in this article are those of the author.