Student loan debt is every American’s economic problem

The US Supreme Court’s recent rejection of President Biden’s $430 billion (£334.5 billion) student loan forgiveness plan threatens to impact not just borrowers but the entire US economy for decades. The plan would have erased the student loan debts of 20 million borrowers and lowered debt levels for another 23 million. By contrast, the vastly scaled-down plan with which Biden has responded to the ruling will provide only 804,000 borrowers with $39 billion in automatic loan forgiveness.

Critics, such as conservative politicians and private student loan companies, contend that since students voluntarily acquired the loans, they are obliged to repay them. But to effectively address the student debt crisis, we need to consider the complexity of the problem, not simply blame the victim.

At the core of the issue are decades of state government disinvestment in higher education. This has driven ongoing tuition and fee growth, with the federal government backstopping the system through more than $100 billion in federal loan programmes each year. Accordingly, many public colleges and universities switched to more tuition-based revenue models, while many not-for-profit private and a plethora of for-profit institutions saw the federal largesse as a gravy train to be ridden no matter the detriment to vulnerable student populations.

Meanwhile, ageing baby boomers, who were able to attend college when it was very low-cost, have been avoiding their intergenerational financial responsibility. Currently, state governments contribute nearly 50 per cent less in “tax effort” to public higher education than they did in 1980. Additionally, half of states spend less in real dollars on public institutions than they did in 1991.

Critics of Biden’s federal loan forgiveness programme claim that its vast cost will lead to higher inflation owing to increased government debt. Similar accusations were made ahead of the GI Bill and social security programmes but never came to fruition. A much bigger and longer-lasting economic problem for the nation resides in student indebtedness – which, 50 years after the inception of federal student loans, has reached $1.78 trillion, averaging about $40,000 for each of the 44 million borrowers.

Such indebtedness is affecting the economy in multiple markets. One is housing. In 2019, the Federal Reserve Bank issued a report showing that every $1,000 increase in student loan debt causes a 1-2 percentage point drop in the home ownership rate among borrowers. Also, student loan debt accounted for about a quarter of the decline in home ownership from 2005 to 2014 because it increased borrowers’ odds of default, adversely impacting their credit scores and mortgage eligibility.

In the past two years, the rate of millennial renters giving up on home ownership has increased by 66 per cent, according to the Education Data Initiative. Ultimately, such declines will significantly decrease revenue for the banks and investment firms that lobbied against Biden’s loan forgiveness programme on the grounds that it would substantially hurt their bottom lines as private student loan servicers and managers of federal financial aid loans.

Another long-lasting impact of mass student indebtedness is a reduction in consumer spending power. In a 2018 LendingTree survey, for instance, 1 in 10 borrowers said they could not pay for a new car because of their student debt. Also, according to the Education Data Initiative, each time someone’s debt-to-income ratio increases by 1 per cent, their consumer consumption declines by as much as 3.7 per cent. The initiative also found that, in 2023, student loan debt is correlated with a decrease in the creation of new businesses.

Moreover, rising student loan debt will prevent young people from saving for their retirement and for rainy days, making them increasingly reliant on social programmes. Indebted young people will also delay marriage and family formation, which is increasingly becoming a national concern. These effects are disproportionately challenging for Black, Hispanic and female borrowers.

In 2018, Federal Reserve chair Jerome Powell warned that “as student loans continue to grow…[student debt] absolutely could hold back the economy”. If important reforms and recalibrations are left unattended, this could be the first generation in American history to leave the next one with less economic and educational opportunity. Everyone has a stake in avoiding this outcome.

F. King Alexander is professor of educational leadership at Florida Gulf Coast University and a senior faculty fellow in the Education Policy Centre at the University of Alabama.