Student Loan Forgiveness Is A Bad Idea. Here Are Some Alternatives.

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Photo Credit: The College Investor

A few months ago, I wrote about Democratic presidential candidate Andrew Yang’s proposal to implement a form of universal basic income, known as the Freedom Dividend. Today, we’ll address another important topic of interest: student loan forgiveness.

Bernie Sanders has proposed wiping out all currently outstanding student loan debt, regardless of income. Elizabeth Warren wants to forgive student loan debt based on income, by reducing the amount of debt cancelled as income increases. Individuals with incomes above $250,000 would not enjoy any student loan forgiveness. Warren’s plan would also end tax penalties for forgiven student loan debt. Other candidates have also proposed forgiving student loans.

Let’s set aside the chances of these proposals actually becoming law. Is student loan forgiveness a good idea? And if not, what would make more sense?

Student Loan Forgiveness Eases Pressure On Colleges To Reduce Educational Costs

Federal student loan programs allow students to borrow money, which is used to pay for tuition, housing and so on. If these loans are partially or entirely forgiven, then students benefit financially.

However, educational institutions stand to gain as well. If students know that part or all of their debt will be forgiven, they’ll behave in a less cost-conscious manner. Financial considerations will play a smaller role in college choices. This gives colleges a freer hand, to charge as they please. In effect, student loan forgiveness will act as another subsidy for universities.

Why is this a bad idea? From 1989 to 2016, after accounting for inflation, the average cost of a 4 year college education nearly doubled. The cost of college grew by more than 8 times the growth in average wages, over the same time period. Aggregate student loan debt in the United States increased by 119% from 2009 to 2019 . Even after adjusting for inflation, that is an 82% increase in just 10 years. Higher education costs have spiraled out of control.

There are a variety of reasons for these trends. Increased demand for higher education, reduced state funding for public universities, and a rise in the amount of student services provided have all led to this sharp spike in tuition. In her book Weapons of Math Destruction, mathematician Cathy O’Neil argues that the prominence of US News & World Report college ranking system, has led to colleges trying to game their numbers, in part by building expensive facilities. Clearly, we’re dealing with a very complex problem.

If we subsidize universities (by forgiving student loans), then we’re eliminating incentives to reduce educational costs. Fewer students will seriously look at alternatives to college, which essentially guarantees a captive audience for universities.

Business will continue as usual. More innovative models of delivering education will be rendered unnecessary. After all, if it ain’t broke, why fix it?

Student Loan Forgiveness Means More Underprepared Students Will Attend College

Student loan forgiveness doesn’t just create negative incentives for colleges. It does the same with students.

I believe that the vast majority of people attend college for positive reasons. They want to build a better future for themselves, grow as individuals, and (hopefully) learn something along the way.

Yet, when a product or service is offered for free, or at a greatly reduced cost, we often tend to value it less. This is simply human nature. Loan forgiveness would lead to a drastic reduction in the cost of education (for students).

This makes education easier to purchase, and inherently less valuable. Some high school graduates, who are less academically inclined, and might normally forego college, could view reduced (or zero) costs as a reason for attending. Seeing college attendance rates increase, can also create a feeling of peer pressure, where a college education is seen as the only often.

Attending college might also become even more of a necessity. If a larger and larger fraction of the workforce is college educated, then a degree (or at least some college education), will become the expected standard, even for jobs where the value of a degree is questionable.

We’re already seeing this “degree inflation” in action. It is harming the middle class, and making labor markets more inefficient. Otherwise qualified individuals who lack a college degree are excluded — or forced to obtain necessary higher education, simply to demonstrate that they would be capable contributors to the workplace.

Many students who lack preparation will drop out. For each of them, this is a personal tragedy. Their time has been wasted, and opportunities have been lost.

Other students might require extensive remedial attention. Faculty and staff will have to spend more time on such efforts.This takes away from those who were ready for college in the first place, and did not require additional help.

Neither of these concerns are merely hypothetical. In 2016, over 48% of first time, full-time college students who had begun college 6 years earlier had still not completed their degree. Just 28% of students complete their degree within four years.

While students of four-year colleges graduate at a much higher rate than community college students, the fact remains that far too many students, at all levels, are dropping out. Students from low income and minority backgrounds are especially vulnerable.

Many students are also quite poorly prepared for college — in fact, this is probably a major cause of subpar graduation rates. A 2017 study from the Hechinger Report found that of 911 two and four year institutions examined, for the 2014–15 school year, 96% of schools enrolled students who later needed remedial courses.

209 of these schools placed more than half of their students in at least one remedial course. In states like Tennessee and Nevada, the majority of recent high school graduates who attended college (within community college or state university systems), were placed in remedial education.

To be clear, remedial education isn’t always a bad thing. Not all high schools are created equal. Many bright students, particularly from underprivileged backgrounds, don’t recieve a college-preparatory education during their earlier years.

People deserve an opportunity to bring their skills up to par, and build a better future. The doors of opportunity should not be permanently closed on those from challenging circumstances. There is some role for remedial education, particularly in community colleges.

Yet, this is a far cry from reducing the costs of college so drastically that virtually everyone, even those with little desire or need for college, has an incentive (or is pressured) to attend, and quite possibly fail. Student loan forgiveness will ultimately harm both students and universities.

Student Loan Forgiveness Encourages Attending College Over Other Potential Options

Government incentives are incredibly powerful tools. The federal tax code has been used to encourage home ownership, reward having children, and promote medium to long-term investment.

By the same token, partial or complete forgiveness of student loans encourages students to attend college. This policy makes it clear that attending college is a valued goal, which the government should promote, by forgiving loans.

However, perhaps we should reconsider that stance? What if college is not the best option for some students? Given what we’ve discussed already, there are clearly plenty of individuals who might be better off attending vocational school, or completing an apprenticeship.

Yet, if loan forgiveness and similar incentives are only offered for attending college (rather than other paths), then more students have a reason to choose college. As Charlie Munger once noted: “Show me the incentive, and I will show you the outcome.”

This means, once again, that prospective students for whom college is not a great fit, will be steered towards it anyways. Mismatching talent benefits no one.

Some Alternatives To Student Loan Forgiveness

Forgiving student loans clearly isn’t a smart policy. However, it’s just as important to think about what solutions might actually help today’s high school graduates build a secure future, at a lower cost. Below are some ideas.

Increase Online/Distance Education Programs Offered By Universities

When we break down the costs of college, we see that the costs of student living (i.e. housing and food), have increased dramatically. Adjusted for inflation, room and board costs have doubled since 1980, and living in the dorms costs almost as much as off-campus housing. Meanwhile, off-campus housing has grown even more expensive. As we’ve already established, tuition costs have risen exponentially.

If bringing students together at a university costs too much, why not facilitate more remote education? Undergraduate students could be admitted to schools in two tracks: In-person attendance, and remote.

Those who attend remotely would take classes online, with professors answering questions via webinar software, and hosting office hours through videoconferencing tools like Skype and Zoom. Exams could be taken at local test centers, with periodic on-campus events to bring together those attending live and remotely.

Career planning and other services could also be arranged online. Of course, remote students would pay less in tuition, and make their own arrangements for room and board.

These students could live in the region where they grew up, or, for that matter, anywhere in the country. To be sure, much of the value of college comes from in-person experiences, connections and learning. Remote students miss out on this.

However, there is a partial substitute. Distance learners from various universities, who live in the same area, might attend courses and study together at a local coworking space, and perhaps live in the same neighborhood or apartment complex. If a sizable number of remote students of a college live in a particular part of the country, they might all live together, or close by.

Through these unique models, students can replicate aspects of the traditional college experience. More importantly, they’ll earn a college degree, at a fraction of the cost. This helps ensure a more financially secure future.

Expand Vocational & Apprenticeship Programs

We need to think beyond college. Right now, the United States is facing a serious shortage of professionals for skilled trades in building and construction, including ironworkers, welders, electricians, plumbers, heating and air conditioning technicians, and more.

Around 70% of construction companies face challenges in finding people to fill these positions. The US Department of Education predicts that in the next 4 years, there will be 68% more job openings in fields involving infrastructure development (i.e. construction of some sort), than there are qualified workers. The US is dealing with aging housing stock, and inadequate infrastructure, which has fallen behind much of the developed world.

Clearly, we need to solve these problems — and that will only happen with a sufficiently skilled workforce. Those who choose to join these professions have the chance to earn a livable wage, and build a meaningful career.

Vocational schools are an excellent place to acquire the skills required. Students who attend these institutions are eligible for federal student loans (though typically on a more limited basis, since some of these institutions are not accredited). Expanding Pell Grant availability for these programs, as recently proposed in Congress, would be a welcome step.

For those who are ready to start earning and learning on the job, an apprenticeship offers the opportunity to learn quickly and effectively, without getting stuck in the cycle of student loan debt. Since some of the largest employers in fields like plumbing offer apprenticeships, suggesting that there is a lot of potential for continued job growth here.

High schools should also offer more exposure to vocational and apprenticeship programs, so that interested students can take advantage of these opportunities. The one size fits all, college-focus model is outdated for the demands of today.

Require Universities & Graduate Programs To Cover Part Of The Cost Of Defaulted Student Loans

Senator Josh Hawley of Missouri recently introduced a proposal to hold colleges accountable for defaulted student loans, by forcing them to cover 50% of the cost of any loan which end up in default. Universities would be forbidden from increasing tuition costs, to cover payment of these defaulted loans.

Hawley’s proposal achieves a worthy objective: Universities will have more skin in the game. As it stands now, the student who defaults, and the American taxpayer, are the only two parties who bear any consequences when a federal student loan goes unpaid.

Forcing universities to think carefully about whether students will graduate and obtain meaningful employment, might lead to more thoughtful admissions decisions. It will also (hopefully) ensure greater support for those who are at risk of dropping out, or ending up underemployed.

This also isn’t to say that we should pass Hawley’s proposal, as currently written. We need to further explore what might be a reasonable percentage of a defaulted loan for a university to repay, in order to ensure accountability. That could be 50%, or it might be less. However, the basic approach makes sense.

Create Greater Transparency Around The Costs of Education, & Outcomes Of College Students & Graduates

When you apply for a mortgage, each lender is required to provide you with certain disclosures. This information is designed to better inform you of the actual costs of a loan over time, and to enable you to better compare offers from different lenders. This brings greater transparency to the entire home purchase process.

Colleges and universities should function no differently. They should be required to disclose, in detail, both the costs and benefits of an education from their university. Federal student loans already offer detailed information around loan repayment schedules, borrower rights, and more.

Before a student enrolls, a university should offer a detailed breakdown of the total (and yearly) expenses incurred by a typical student. Obviously, this is an imprecise number, since expenses often change (mostly upwards). Also, some costs (like off-campus housing), are not entirely within the control of universities. However, providing such information offers a general picture of what students can expect to spend.

Universities should also share a comprehensive picture of where exactly their graduates ended up. How many are employed? What are their typical occupations and incomes? This information can be gleaned from alumni surveys, LinkedIn profiles, and other data sources.

Ideally, this audit of graduate success will be conducted by an independent, third-party research agency, in order to avoid manipulation & conflicts of interests (as happened with law school employment statistics). In short, prospective students and their families should be educated about what they’re likely to pay for an education, and how graduating from a particular college helps them build a stronger future.

Some Final Thoughts

Senator Sanders and Senator Warren’s proposals appear well-intentioned. With 44 million Americans facing $1.5 trillion in student debt, this is amongst the biggest economic and social issues of our time. Student loan debt is impacting family formation, and the housing market.

However, forgiving student loan debt simply isn’t the answer. There are clearly much better alternatives out there — approaches that will be beneficial to students and taxpayers. Let’s think about education differently, beyond the traditional paradigm of college. The current model isn’t working. It’s time for a change.

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