Is Student Debt Going to Be the New Subprime Mortgage Crisis?
Student debt in the United States is $1 trillion and counting, but on a happier note, the president has a plan to alleviate the effects of this crisis: debt forgiveness. His proposed "Pay as You Earn" plan caps payment amounts at 10% of the borrower's discretionary income and grants forgiveness from the whole debt balance in 10 years. So college graduates are off the hook, but this plan brings another idea to mind: the debt doesn't just vanish. It's paid all right — with taxpayers' dollars.
The message that this system sends is not a very good one — don't worry about how much you owe because you only have to pay off what you can within 10 years. It's a system conducive to excessive borrowing and lack of accountability. But then again I am not blind to the conditions that dictate the ensuing debt crisis. Higher ed isn't very affordable, and the financing process in itself doesn't make things any easier. So whose fault is this? The reality is that there is no clear-cut answer to that question, as there are no "black and white" parties involved. Lenders may have not provided full disclosure of what the loans entail, and borrowers themselves may not have lived up to the responsibility they pledged to undertake. Maybe people need to learn to budget better, but alternatively, I could argue that that should be met with a change in loan terms to make them more affordable in the first place.
So is debt forgiveness just another bailout plan that doesn't encourage real institutional change? The relief plan that Obama has proposed is not a silver bullet. We need not forget taxes: Forgiven debt is subject to income tax, and if we're talking about six-figure debt obligations, the tax bill may still be too high to pay (and the catch is that the tax bill should be paid immediately — and in full — when it is issued). Senators Elizabeth Warren (D-Mass.) and Kirsten Gillibrand (D-N.Y.) have another approach, as their proposals target interest rates as a means of refinancing. House Republicans and Senate Democrats have already introduced bills to replace the current loans' fixed rates with variable rates based on the government's borrowing costs. In the end, as default rates continue to rise, one thing is for sure: Reform for higher-ed financing is necessary.
With the already sluggish economy, excessive student-loan debt is impeding economic growth in the United States. All the would-be entrepreneurs or homeowners are being drowned in debt to the point where they just don't carry enough money for consumption or investment or savings, all of which hurt the economy. The most straightforward way to think about it is that when people have more money, they spend more and stimulate aggregate demand and start a multiplier, or a ripple effect across the whole U.S. economy. But others simply look at is as a free ride to uninformed — or worse not conscientious — individuals.
On a final note, this issue brings about a more alarming question: Is higher ed worth the money in the first place? It's a legitimate question, because for many college graduates out there, the return on their investment is pretty low. Tuition costs continue to soar through the roof, but the growth in job opportunities is only inching forward if not completely stagnant. Essentially, a college degree has become more of a burden than a blessing, and that is not an abstract statement, as we see that the number of recent graduates in minimum-wage jobs has nearly doubled since 2007. I still think education is priceless, but it also seems to me that the optimism of better job opportunities with a degree is somewhat unfounded.