The price of knowledge

The price of knowledge

What's happening to education loans in the USA?

Author: Yan Veselov
Editor: Zhenya Ofitserova
Illustrator: Ira Grebenshchikova
Infographics: Vitya Ershov

During almost a year of Joe Biden's tenure as US President, the country's government has written off about $11.5 billion in student loan debt for certain categories of citizens. However, this is only 1% of student debt, the amount of which has been growing steadily and has already reached 1.7 trillion, second only to mortgage debt. The situation with student loans has revealed a number of problems in the US economy and educational system, and has also become a topic of scientific and political debate. DOXA figured out how the educational loan system works in the United States and why the movement to write off debt is gaining momentum.

Anatomy of debt

The United States first began issuing loans for higher education in 1958 - both then and now, money from the federal budget is used for this. Seven years later, the government switched to a loan guarantee system for student loans from banks, but in 2010 the government again began issuing loans itself, launching a direct loan program from the Ministry of Education.

Nowadays, most student loans are issued by the federal government. Debts are collected by government-hired private companies that, according to government reports, do a poor job of misleading debtors about their credit plan and how much they need to pay. Some loans are issued by private banks, but they account for only about 8% of the total debt.

Most often, undergraduate students have access to government loans in the amount of 5.5 to 12 thousand dollars per year of study. For master's and other programs, the loan amount can reach 20 thousand. Payments begin on average six months after the end of study, and their term is designed for 10-25 years. The interest on these loans is 3.73% for bachelor's degrees and 5.28% for master's degrees.

Over the years, the size of loans has grown significantly, outpacing inflation. If in 1996 the average amount of debt among bachelor's degree graduates was around 12.7 thousand dollars, then in 2016 it was already 29.6 thousand (together with master's students - 37 thousand).

Among all undergraduate students, more than 70% are forced to take out a loan . The greatest burden falls on students at private for-profit colleges, where 83% of undergraduates study on loans, averaging $40,000 in student borrowing (across all years). In private non-profit universities, the share of bachelors studying on credit is 68%. The average amount of their debt is 31.5 thousand. Students at public universities have the least debt (66%) and owe less ($27,000).

Looking at the racial makeup of debtors, Asians (45%) and Hispanics (66%) had the lowest share of bachelor's students with loans in 2016, with an average debt amount of $24,500 for both groups. Among white students - 69%, they take out an average of 30 thousand in debt. The largest share of students with debt is among African Americans (85%), they also owe more than others (an average of $34,000). Other data shows that among undergraduate graduates, 66% of whites, 72% of Hispanics and 90% of blacks have debt.

Bachelors make up 75% of all student loan debtors, but they owe only half of the total amount of student debt. The other half are students of master's and other programs, whose studies are more expensive.

The total amount of student debt is rising for a number of reasons. Firstly, more and more people want to get a higher education, and for people from low- and middle-income families, a loan is the only way to pay for their studies. Secondly, the government, in turn, makes educational loans more accessible, which also stimulates demand. In addition, higher education is becoming more expensive.

How does student debt affect American life?

Carrying large amounts of student debt becomes a significant burden. The Federal Reserve estimates that the decline in homeownership is partly due to student loans, as it makes it harder for debtors to save up for a large down payment on a home with a mortgage.

Research shows that student loan relief improves people's well-being. So, after several borrowers received debt forgiveness due to the loss of documents on their loans, it turned out that the average debt of each of them (excluding student debt) decreased by about four thousand dollars, as did the need for other loans.

In addition, people became more mobile - they moved and changed jobs more often. Within three years of debt relief, their income increased by an average of $3,000. This is due to the fact that debt “locks” people into secure, but not always highly paid, jobs, preventing them from starting a business and starting a family - and married people, especially men, tend to earn more.

In addition, in the case of an educational loan, it is difficult to declare oneself bankrupt - this is intended to prevent people from avoiding payments by writing off the debt after graduation. Even if a bankruptcy is filed in court, the consequences can be negative: Because the federal government is the creditor, it withholds money from paychecks, benefits, and pensions to pay off the debt.

However, from 2003 to 2011, student loan bankruptcies doubled . About a third of them were students at private commercial universities. Graduates of state universities were the least likely to go bankrupt

Among black debtors, the bankruptcy rate is five times higher than among whites (21% and 4%, respectively) - because African Americans are more likely to enroll in private institutions and, due to lower incomes, are forced to borrow more money.

It's no surprise that when the Biden administration announced a one-year suspension of student loan payments in January 2021, only 1% of debtors continued to pay . According to a survey , 75% of debtors surveyed consider such a pause to be critical for their financial situation.

The situation is especially difficult for people who took out a loan, but for various reasons were unable to complete their studies , because without higher education it is more difficult for them to get a well-paid job and therefore pay off their debts. Between 2014 and 2016 alone, 3.9 million debtors were forced to deduct.

Debt write-off: pros and cons

During the campaign, Biden promised to forgive $10,000 for every student loan debtor—an estimated 43 million people. And although activists and, for example, another presidential candidate, Bernie Sanders, have made proposals for complete cancellation of student debt, most often politicians call for writing off 10 thousand or 50 thousand (as Democrats in Congress propose ) debts from each borrower.

The project of “universal” debt write-off is criticized for the following reasons:

1. Writing off shares is unfair to those who have already paid off and to those who abandoned education due to their inability to repay the loan;
   
2. Debt forgiveness is regressive , since most of the total debt falls on those graduates who will earn more in the future (for example, doctors and lawyers), that is, rich people will forgive the most debts. about who will benefit more from debt forgiveness - the rich, the poor or the middle class There is an active debate ;
3. This is an expensive program, which, for example, if 50 thousand debts are written off, will cost the budget about a trillion dollars;
4. People are not forced to take out loans. Plus, education is a good investment: people with a bachelor's degree earn , on average , 30,000 more per year than people without one. Over a lifetime, the difference in total income between these groups of people ranges from $500,000 to a million. If you compare a bachelor's education with stock exchanges, then in the first case the annual benefit is 15%, and in the second - only 6%;
5. Debt forgiveness will not solve the structural problems associated with rising private college costs and declining subsidies for public university tuition. Thus, in 1963, the total cost of obtaining a bachelor's education at a state university was almost seven thousand dollars a year in terms of current exchange rates. By 2013, prices rose to 17.5 thousand. In turn, the cost of studying at private universities increased from 13.5 to 35 thousand. Therefore, according to critics, debt forgiveness will not only lead to a new inflation of the debt bubble, but will also serve as an incentive to make tuition even more expensive.

Nevertheless , numerous opinion polls show that more than half of Americans support debt cancellation - both in the amount of 10 and 50 thousand .

Supporters of “universal” write-offs respond to opponents’ arguments as follows:

1. The effect of write-offs can spread to people without debt if they live with debtors. Moreover, there is nothing wrong with targeted assistance;
2. much more than for the rich; Such debt forgiveness would be progressive because it would reduce the debt burden of the poorest borrowers relative to their average income
3. Quite a large portion of existing debts will still not be paid in full due to write-offs under IDR (income-driven repayments) programs, which allow the loan to be repaid as a share of income instead of a fixed interest rate, and the growing number of bankruptcies. Therefore, there is no point in prolonging the suffering of debtors, thereby continuing to have a negative impact on the economy as a whole;
4. Society should not punish the pursuit of education, which is becoming increasingly in demand;
5. Debt forgiveness and student loan reform (especially in the area of ​​private for-profit universities) are not contradictory.

Are other reforms possible?

Opponents of “universal” debt write-off offer alternative options that could improve the lives of borrowers. One of them is a debt forgiveness program with restrictions that allow it not to write off the debts of graduates who can easily pay them off anyway. Such restrictions may include the debtors' income, their total assets, and the targeting of certain professions or training programs whose graduates typically earn more.

Other proposals include the continuation of existing debt forgiveness programs, such as the Public Service Loan Forgiveness program, which allows debt forgiveness for graduates who have worked in public and municipal service for more than ten years (and which has been criticized for unfair denials of debt forgiveness and lack of transparency). The above-mentioned IDR programs can also reduce the debt burden, which write off the remaining debt after 20 years of payments and allow you not to pay off the debt at a low level of earnings.

What's stopping you from writing off debts?

The easiest way to write off debts is through a decision by Congress, which is traditionally responsible for financial spending in the country. However, congressmen cannot pass it due to lack of votes.

Forgiveness supporters believe that the Higher Education Act of 1965 allows the government and the President of the United States to cancel student debt for everyone, bypassing federal debt collection standards and possible litigation.

Others interpret the law differently and believe that the government does not have such powers. Thus, at the beginning of 2021, at the request of the Trump administration, lawyers from the Department of Education prepared a corresponding report. In April, they compiled a similar report - this time for the Biden administration (its text has not been published).

Now the US President is faced with a dilemma: either follow the lead of activists and the left wing of the Democratic Party, agreeing to significant debt write-offs, spending his political capital on this, or continue the policy of write-offs for certain categories of borrowers, hiding behind a convenient interpretation of laws.