New York (CNN Business)Progressives and conservatives alike are sounding off about President Joe Biden’s plan to erase billions of dollars in student debt — that it’s either a half-a-loaf gesture to an overburdened middle class or a massive socialist handout to rich people, depending on your politics.
But whatever your opinion is on Biden’s motives, a couple of things seem clear. First: Relieving up to $20,000 in student debt per borrower is a financial tourniquet that will help 43 million people who’ve been swept into a complex and undeniably broken system. Second: It doesn’t even begin to solve the problem.
Once the debt is wiped away, what we’re left with is the gnarly reality that tuition costs are out of control, with no magic bullet to rein them in.
Paying for college
It’s not breaking news that college costs have skyrocketed. One year at a private college now costs $38,070 on average; a year at a public university costs $10,740 — or much more for out-of-state students.
The economics behind tuition costs are complicated and vary by institution. Some states, such as Louisiana and Arizona, have pulled money out of their own public higher education systems, forcing colleges to raise tuition and let federal loans make up the gap. But not all states, says Kevin Carey, vice president of education policy at the think tank New America. In some cases, tuition has risen in step with inflation and population growth.
What feeds tuition inflation has more to do with the scale of the higher education system. The United States has a massive decentralized system of hundreds of nonprofit colleges, where the national government does not control prices. The country also has a large upper middle class that’s willing to pay top dollar for their children’s education.
Every one of those institutions is competing for talent. And for funding.
Put simply: “There’s nothing about the system that pushes prices down,” Carey says. “Everything pushes them up.”
That’s why some critics of the Biden administration’s student debt relief worry about the precedent it sets. If the government creates an expectation that debts are likely to be forgiven, universities won’t hesitate to raise tuition. Students may take on more debt, expecting some of it will eventually be wiped clean.
Bottom line, canceling debt certainly doesn’t push tuition costs down.
Other ways to deal with debt
Some critics of the Biden plan have suggested a better solution would be to treat student loan debt like any other consumer debt: Let the bankruptcy courts handle it.
Right now, it’s not impossible to offload student loan debt via bankruptcy, but it’s much more difficult than, say, credit card debt.
“The typical American can go to court, declare himself insolvent, hand over some remaining assets, default on his remaining debts and return home to a house exempted from the proceedings,” wrote Oren Cass, executive director of the conservative think tank American Compass, in an opinion essay for Politico. “This is the option that should be available to all student-loan holders.”
While that’s not a simple or painless solution — bankruptcy carries very real financial consequences and social stigmas that make it a last resort — Cass argues the cost is low enough to “ensure someone who truly needs a fresh start can get one, but high enough that most who can avoid it will do what they can to steer clear.”
Good luck, class of 2028
For better or worse, the bachelor’s degree remains deeply embedded in the corporate hiring process. And in recent decades, many fields such as nursing have evolved to require a series of extra certifications requiring further education (and, of course, more student loans).
The bachelor’s degree has become the new standard, Carey says. “And then there are all these post-bachelor’s degrees, credentials and certifications — all that stuff is controlled by colleges… and paid for through loans.”
Another flaw in Biden’s plan that critics point to is the lack of clarity about future loan forgiveness. If you just graduated with debt and make under $125,000 a year, congratulations — now you’ve got 10 grand less of it. But younger generations whose student loans were taken out after the July 2022 cutoff could be out of luck.
“The class of ’27 is entering college literally as we speak,” Carey says. “They’re not getting any loan relief. I think people are going to start raising their hands and be like, ‘wait, what?'”
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