Cancelling Student Loans

Cancelling Student Loans

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Cancelling Student Loans

Estimations are around 45 million Americans possess student loans, which marks an increase of around ten million since the Great Depression. Outstanding debt alone in the country has exceeded $1.5 trillion, with estimations of delinquency expected to rise with the on-going coronavirus pandemic. The economic situation is disproportionally affecting minority families, which already face disparities in the student loan crisis. Numerous scientific researches highlight the adverse impacts of high student loans on the economy and the workforce. There is a storing negative correlation between high student loan debt and individual wealth. Given the magnitude of the problem, it is not uncommon for student leaders, politicians, and other public policymakers to advocate for complete student loan cancellation as a remedy for the looming financial crisis. The federal government should cancel all student loan debts, as the current loaning system underestimates the issue of non-repayment while impeding individual and national income growth.

The current student loan market raises concerns about the sustainability of federal funding. The rise in college expenses and increased student attendance led to a 16% growth in student loans between 2006 and 2016. The average college student spends an average of $26226 on college (Huffman, 2020). The underlying problem is the student loan market is expanding when the sources of funding are not. The majority of learners depend on income-based repayment programs. While the unemployment rate in the United States has been reducing in recent years, there is still a substantial number of graduates without jobs. The lack of employment implies delays in payment or total non-repayment. Students do not provide the government with collateral backing for the debt, which increases the federal strain in maintaining adequate funding.  Forgiveness is the sole solution as even if the graduate could secure a job, there is no guarantee of repayments.

Concerns about the sustainability of the loaning system also stem from the unique nature of student loans. Congress, through the Bankruptcy Reform Act of 1978 in section 523 (a) (8), classifies student debt as a form of non-dischargeable bankruptcy. The understanding is loan providers have little bargaining power to enforce payments when borrowers file for liquidity. The underlying fear is the federal government will have to reallocate funds to repay the loans of bankrupt senior generations. As a result, there will be little money left to cater to the younger generation’s needs. Alternatively, the government will have to source other funding sources, which implies an increasing national debt. Cancellation provides a solution for ascertaining the continuity of learning for the younger generation. The approach prevents the reallocation of learning resources, which helps maintain an acceptable level of quality in American campuses.

For individuals who hold a substantial amount of debt, there can be a wide range of adverse consequences. For instance, if the monthly loan repayment is not made in time, it affects the borrower’s debt-to-income ratio and credit score (Huffman, 2020). Low credit scores jeopardize an individual’s ability to acquire microloans, which in turn acts as a barrier to wealth accumulation. Homeownership is one of the most challenging and strategic ways for people to build wealth. The inaccessibility of mortgages due to low credit scores highlights the long-lasting implications of student loans. The assertion that student debt impedes wealth accumulation rests on the assumption the borrower can fulfil his or her payments. The loaning system is counterproductive to economic progression, which supports proposals for cancellation. The financial implications will be greater when the debtor pauses submitting payments, which is the emerging trend among the recently employed. There is a false assumption that employment enables borrowers to attain solvency.

Many learners are taking up federal college loans with little understanding of the inevitability of their cancellations. According to the Department of Education, the government lost $435 billion out of the $1.37 trillion student loan budget due to held payments (Mitchell, 2020). The same report highlights that the balance in loan repayments have been expanding over the last five years. The increase in learners’ pausing payments means the borrowers are facing increased interest on their debts. The Department of Education report informs that roughly 90% of all student loans are in bankruptcy or other status (Mitchell, 2020). It is not clear which federal policies can help the government get the recently employed back on track with their loan repayments. The employees are not facing income increments but are subject to higher interest rates in debts they are already unable to fulfil. The American government should anticipate more former learners filing for bankruptcy despite having jobs. If insolvency is the most likely outcome, then there is no reason why the government should not consider forgiving the loans to provide individual-level financial cushioning.

Income-based repayment plans are not the solution for the looming financial crisis. The underlying problem is not the unemployment rate but the increasing cost of higher education (Looney & Yannels, 2015). IBRs are inefficient because they do not consider the impact of income and family size on the consistency of payments. Graduates have to pay more while struggling with reduced disposable and household income. The American Community Survey shows the median graduate with an IBR plan had only paid 63% of their loan balance across ten years (Mitchell, 2020). The statistic implies that over 50% of borrowers who took loans in the last five years are not half-way through with their repayments. The findings equally suggest it will take more than a decade for the average debtor to complete paying back their student loan. The government should cancel old loans given the graduates are paying for the current learner’s increased fees. IBRs are a source of long-term individual and household strain and a contributor to the growing racial wealth disparity.

Cancelling student loans will help to reduce the growing racial disparity plaguing the United States. The loaning system is racialized and disproportionally affects graduates from minority communities, with research highlighting an increase in Black-White disparities (Houle & Addo, 2018). Minority neighbourhoods are the biggest consumers of student loans. However, a 2017 Heller School survey informed that while after 20 years, Whites had managed to pay off 94% of the debt while Blacks still owed 95% (Houle & Addo, 2018). The same report highlights that Blacks are the main users of IBR plans, while Whites use other payment plans. Therefore, minorities take longer to pay their student loans, meaning a long struggle with wealth accumulation constraints. Cancellation will have a direct positive impact on the rate of delinquency in minority neighbourhoods. The promise of higher education should reflect an act of racial justice by federal financial policymakers.

From a national perspective, failing to cancel all student loans puts the country at risk of reduced micro-economic performance. The SMEs market accounts for more than half of employed Americans but relies on personal and household income (Ulbrich & Kirk, 2017). The report already showed there is a negative correlation between high student loans and individual wealth. Therefore, increasing student debt constrains people’s ability to raise financial capital to establish and maintain small and medium businesses. In light of the on-going recession, lack of sufficient capital leads to job layoffs to reduce operational costs. At the national level, the occurrences translate into a higher unemployment rate. The events also result in reduced homeownership. Given the housing industry accounts for 12% of the GDP, any decline substantially impacts the economy. Therefore, cancellation is an act of insulating the economy from reduced performance and recession.

There are well-structured programs to cater to debt forgiveness across different socioeconomic classes. According to Huffman (2020), the government has the PSLF and Teacher Loan Forgiveness (TLF) program. The PSLF applies to all forms of student loans, including direct subsidized, direct unsubsidized, direct PLUS loans, and direct consolidation debts. For each plan, once the borrower succeeds in meeting several consecutive monthly payments, they become eligible for complete termination (Hegji & Smole, 2018). The approach allows the debtor to hold the responsibility for the loan for a certain period before shifting it to the government. The shared responsibility minimizes the financial strain exerted on both parties and the intensity of adverse implications. Debt forgiveness represents a feasible solution because there are proven processes and structures for its implementation. Moreover, the current plans meet the principles of justice and redistribution.

            A subtle argument revolves around the fact that the government risks the loss of certain professions due to the increasing student debt. High school students today are aware of the adverse implications of college loans. They are equally aware that certain campus courses are subject to higher tuition fees, meaning bigger student loans (Ulbrich & Kirk, 2017). Parents will discourage young learners from expensive courses due to the fear of an inability to complete the degree of the financial stress that follows graduation. In a world facing an unprecedented pandemic, this is not the time for government policies to be impeding entry to important professions, such as nurse and clinical practice. Cancellation will maintain the attractiveness of such courses to the younger generation, hence ascertaining long-term societal benefit.

            People that oppose student debt cancellation claim there is a moral hazard for learners and institutions. If a graduate cannot fulfill their loan repayments, and the debt is forgiven, there is a message sent to other debtors that they could repeat the same (Cain et al. 2014).  Forgiveness rewards student borrowers who have not met their obligations towards the government and the private financier. The moral hazard argument is incorrect because cancellation follows the principles of fairness and restitution. If one person receives relief under the law, it is unconstitutional to deny others the same services. On the other hand, relief only serves the interest of the borrower at the individual level. There are more far-reaching outcomes for the economy that the federal government must consider. Forgiveness facilitates the redistribution of capital while increasing household disposable income, which is critical to improved economic performance.

            Cancelling all college debt is the most feasible approach to addressing the student loan crisis. The underlying issue is the least privileged families are taking up bigger debts and employing disadvantageous payment plans. As a result, minorities face more difficulties in clearing their debts. In turn, the difficulties create adverse implications associated with racial wealth disparity and overall national economic performance. Debt forgiveness presents the opportunity to develop a fair system that does not place the burden of education on minority households. Policymakers should invest in financial explorations that discern the most suitable debt cancellation process per given socioeconomic class. Different debtors should be subject to different forms of relief to ensure fairness in the distribution of federal assistance. In the coming years, Congress should identify ways to terminate all tuition fees in American public colleges. Cancellation is a gateway for many Americans to have a livelihood not contingent on borrowing.

References

Cain, J., Campbell, T., Congdon, H. B., Hancock, K., Kaun, M., Lockman, P. R., & Evans, R. L. (2014). Complex issues affecting student pharmacist debt. American Journal of Pharmaceutical Education, 78(7), 131. https://doi.org/10.5688/ajpe787131

Hegji, A. & Smole, D. (2018). Federal student loan forgiveness and loan repayment programs. Congressional Research Service, no. 43571, 1-132.

Houle, J. N., & Addo, F. R. (2019). Racial disparities in student debt and the reproduction of the fragile Black middle class. Sociology of Race and Ethnicity, 5(4), 562–577. https://doi.org/10.1177/2332649218790989

Huffman, A. (2020). Forgive and forget? An analysis of student loan forgiveness plans. North Carolina Banking Institute, 24(1), 449-480.

Looney, A. & Yannels, C. (2018). A crisis in student loans” How changes in the characteristics of borrowers and in the institutions they attended contributed to rising loan deficits. Brookings Paper on Economic Activity, 1-68, https://www.jstor.org/stable/43752167

Mitchell, J. (2020, November 21). Student loan losses seen costing the U.S. more than $400 billion. The Wall Street Journal, https://www.wsj.com/articles/student-loan-losses-seen-costing-u-s-more-than-400-billion-11605963600

Ulbrich, T. R., & Kirk, L. M. (2017). It is time to broaden the conversation about the student debt crisis beyond rising tuition costs. American Journal of Pharmaceutical Education, 81(6), 101. https://doi.org/10.5688/ajpe816101