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Debt Wrong: Dealing With College Costs and the College Debt Crisis

by Steven Pressman

Feb 12, 2020 | Economy


As the presidential race heats up, two contentious and related issues concerning higher education have begun to take center stage—whether to make tuition free and what to do about Americans drowning in college debt. The Democrats running for president have struggled mightily with these issues. Before we get to solutions, let’s review the problems.

The cost of higher education has gone up faster than any other spending category for decades. Tuition, fees, and room and board at four-year colleges and universities rose from $13,769 in the 1998–99 academic year to $27,357 in the 2017–18 academic year (both figures in 2017–18 dollars). In conjunction with the rising fraction of high school graduates going to college, we now have a massive college debt crisis. Between 2004 and 2019, student loan debt soared from $260 billion to $1.6 trillion. College debt exceeds credit card debt and motor vehicle debt; only mortgage debt is greater.

For those Americans with college debt, mean debt is more than $37,000. Average monthly payments run $400, or $5,000 a year—12.5 percent of the median personal income in the United States and nearly 10 percent of the median income for someone with a college degree. Relative to take-home pay, these percentages are greater. Such large debt repayments mean much lower living standards. Worse yet, those unable to repay their college loans during their working careers will have any remaining college debt deducted from their Social Security checks. And debt payments keep people from buying new goods and starting new businesses, thereby slowing U.S. economic growth.

It wasn’t always like this. Initially, a college education in the United States was only for children of the affluent, and universities were all private institutions. In the 1820s, some states provided free higher education to support democracy and open new opportunities for their residents. The 1862 Morrill Land Grant Act gave federal land to colleges teaching agricultural skills. These schools helped farmers and their children learn about crop rotation, pest control, and using manure. They became affordable state colleges in the 20th century.

After World War II, the GI Bill paid for college tuition, books, and fees for veterans at any institution of higher learning, as well as providing a small monthly stipend. This was seen as a reward for those who served their country in time of need. The Higher Education Act of 1965 provided grants, work-study money, and government loans to low-income students. The Pell Grant program, named after Rhode Island Senator Claiborne Pell, began in 1972. It provided need-based aid to all students attending college. Senator Pell saw this as a universal GI Bill, enabling Americans to attend college at relatively low cost.

Thanks to these many government programs, college remained affordable in the United States until the 1980s. Then a change in government philosophy prioritized large tax cuts for the wealthy at both the federal and state level. These tax cuts were partially paid for by sharply reducing government aid to institutions of higher education and to college students. Tuition and fees shot up to replace government support. Less financial aid to students left borrowing money as the main option for those seeking a college degree. Effectively, college costs shifted from taxpayers to students.

It should come as no surprise that college is cheaper outside the United States. What may be surprising is how much cheaper it is. Finland, Luxembourg, Norway, and Sweden all provide free college education. French universities don’t charge tuition; however, there is a small enrollment fee of a few hundred dollars a year. Germany charges up to 1,000 euros ($1,100) per year.

College is free or very cheap because European governments heavily subsidize tuition, as the United States used to do. They view higher education as an investment in the nation’s future. College-educated individuals earn more money; they are healthier, keeping down national health care costs; and they are less likely to engage in criminal acts. Last but not least, they make their co-workers more productive. This makes their company more competitive, increases national output and incomes, and so raises government tax revenues. All these benefits justify public expenditures.

Actually, college graduates in Europe do pay for their education. Payments come from taxes on their additional future earnings as a result of having a college degree. With average tax rates of 35 percent (counting income and value-added taxes), the entire cost of a college education is paid by graduates (as a whole) when they pay taxes. European governments receive a good return for their investment, and students graduate with little debt. The government only subsidizes those who attend college but don’t graduate and don’t earn more money because they lack a degree.

In contrast to Europe, college education in the United States is seen entirely as a personal responsibility. Students who don’t graduate from college and don’t earn any more money (on average) are still required to pay for their education. Students who do graduate pay for their degree both with loans and from the taxes imposed on their extra income as a result of having a college degree. And these gains are large. The average lifetime income gain to someone with a four-year college degree in the United States is $1 million.

Current controversies surrounding the financing of higher education should be viewed as a battle over this money. Will it go to wealthy Americans, whose large tax breaks led the government to reduce aid to education and required students to pay more and borrow more for their education? Will it go the students who work hard, obtain a degree, and make an extra $1 million and then some? Or will it go to the moneylenders who help students pay for college up front and attend college? Interest rates on student loans provided by the federal government are now 4.5 percent for undergraduate studies and 7.1 percent for graduate school. Yet the government is able to borrow money (the 10-year government bond) at less than 2 percent. Private rates generally exceed the federal rate and can reach double-digit levels. These high-interest rates divert the gains from a college education to the wealthy recipients of lower taxes and the wealthy owners of financial institutions lending money for college.

Contenders for the Democratic nomination for president want to make tuition at public colleges and universities free, or nearly free, to all Americans, by pushing tuition costs on to all taxpayers. Bernie Sanders and Elizabeth Warren see college as a right and want public colleges to be free for all. As in Europe, the cost of a college education would be paid in the form of higher taxes paid by graduates following their graduation. Others favor free community college and small costs, depending on income level, for those attending four-year public colleges and universities. For example, Pete Buttigieg wants to charge students from high-earning families, arguing that the children of millionaires should have to pay something for a public education.

Amy Klobuchar wants to expand Pell Grants and provide low-interest student loans. While providing less assistance to public college students, this approach would provide additional support to private college students. Cory Booker, who dropped out of the race in January, proposed giving every child born in the United States a $1,000 savings account at birth. Every year, at each birthday, another $1,000 would be added to the account until the child reached the age of 18. At this time, the money could be used to help finance a college education at either a public or a private university. Or the money could be used to start a business or as a down payment on a home.

Each of these proposals would be a huge improvement over our current situation, where a college education costs a great deal and is paid for up front, in large part through considerable borrowing. The result is that those who don’t make much additional income from their degree, as well as those who don’t graduate from college, struggle to repay their college loans.

On the other hand, each of these proposals misses the point that the cost of their education will be paid for by college graduates through their additional future taxes. Tax revenues from the additional $1 million in income made by college graduates can pay for the education, on average, of all those who graduate from college. The problem is that many people go to college but don’t graduate. These people don’t make extra income and won’t be paying higher future taxes; still, someone must pay for their years of attending college. At present, the burden falls on the students themselves who went to college to try to better themselves but did not graduate. However, there are other options. The money could come from general tax revenues that reduce the cost of college for everyone. As noted above, this goes against the American philosophy of individual responsibility. It also puts some of the expense of educating people who don’t graduate on the backs of low-income and middle-income households that pay taxes, and in which no adult went to college. Another alternative would be to make successful college graduates pay more—for example, by instituting a tax surtax on the incomes of college graduates that exceed some level.

This brings us to the issue of whether existing college loan debt should be canceled. Bernie Sanders strongly supports this. Elizabeth Warren wants to cancel debt only for those with household incomes less than $250,000. Cory Booker proposed canceling debt for those with low incomes and for those who go into public service jobs. Unlike plans to sharply reduce tuition, the differences here are not trivial.

Existing college loan debt is some combination of both tuition debt and living expenses; it is impossible to separate the two. Eliminating all college debt would have average citizens, many of whom never went to college, pay higher taxes to cover the past living expenses of well-off college graduates while they matriculated. Moreover, current and future college students would be forced to pay for their living expenses, and may have to borrow money to do so, since only college tuition will be free. Further compounding this problem, we should expect large increases in these costs if tuition costs go to zero at public colleges and universities.

There are options that fall between forgiving all existing college debt and forgiving no college debt. One simple solution would be to let college debt be discharged, or reduced, through personal bankruptcy. Bankruptcy is supposed to function as part of the social safety net. Businesses can discharge their debts through bankruptcy, and households can discharge all their other debts through bankruptcy. They could even discharge college debt until fairly recently. This option was eliminated in 1998 for government-provided college loans and, in 2005, for private college loans (except in cases of “undue hardship”).

There is no reason to treat college debt differently from other forms of debt, especially since college costs (on average) are being paid back by college graduates through higher tax payments on their additional income. And the benefits would only go to those with substantial debt and who earn more than the median income in their state or area (due to income limits for Chapter 7 bankruptcy protection). Another possibility, similar to Cory Booker’s plan, would follow the model of the GI Bill, whereby certain types of government service would eliminate existing college debt. This might help recreate what Tom Brokaw referred to as “the greatest generation ever,” a highly educated population, dedicated to the public good and unencumbered by debt, fueling a massive postwar U.S. economic expansion.

An entirely different approach would be a follow-up on the tax-surcharge idea mentioned earlier—require those attending college to repay the costs of their education not only through higher future income tax payments but also by paying something extra so the nation can continue to support public colleges and develop a highly educated population and workforce. The idea underlying this policy proposal is that those who gain the most should have to pay more to help fund state universities, and that these people also have the ability to do so. Even better would be a policy that exempts the first $25,000 or so of taxable income (a figure sufficiently above the poverty level for a single individual) from any surcharge. This is quite similar to what the U.K. currently does. (It imposes a 9 percent tax on earnings above $24,000, with all college debt forgiven after 30 years.) Rather than eliminating all existing debt, this principle allows existing college debt to be written down, as well as payments that have already been made to repay prior college loans.

These solutions have several advantages compared to the extreme alternatives of the status quo or wiping out all college debt. Unlike the status quo, they don’t lead to students avoiding college due to fear of having to repay enormous debt. Students won’t have to work so much while taking classes to pay for their education and can devote more time to their studies. They can choose majors based on their interests, rather than those that will earn them enough money to repay their college loans. During hard economic times, loan payments will fall with income, reducing individual hardship and leaving more money to spend and boost the overall economy. Finally, if students don’t complete their education or don’t make a lot of money after they graduate, their financial obligation will be small and manageable. And unlike the option of wiping out all existing debt, these solutions will not create inequities between graduates who owe a great deal of money and current (and future) students who may incur a great deal of debt.

The rest of the world manages to keep college costs down and college debt levels low. In the not-too-distant past, the United States was able to do this as well. Due to a changed philosophy, the United States has lost its place as the world leader in an educated citizenry. Once, we had the largest fraction of citizens with an elementary education in the world; then we were the world leader in citizens with a high school education and a college education. This made the U.S. workforce productive and the envy of the world. Today, the United States sits toward the middle of the pack in the developed world when it comes to 25–34-year-olds with a college degree, at 47.5 percent. We remain far below world leaders such as Canada (60.6 percent), Japan (60.1 percent), and South Korea (70 percent). In a global economy, we can’t afford to ignore this surging problem any longer.

Steven Pressman is professor of economics at Colorado State University, author of Fifty Major Economists, 3rd edition (Routledge, 2013) and Understanding Piketty’s Capital in the 21st Century (Routledge, 2015), and president of the Association for Social Economics.

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