Originally written on 8/30/2022

With much fanfare, President Biden announced a debt relief program for those holding student loans. The debt relief program will cost more than $500 billion, effectively wiping out all the deficit reductions from the Inflation Reduction Act. The $500 billion in foregone revenue must lead to other spending reduction, increases in other taxes or an expansion of future public borrowing. In a very real sense this not debt relief as much as it is a debt transfer from former college matriculates to federal taxpayers. 

The non-partisan Committee for a Responsible Federal Budget projects that within five years, outstanding student debt will return to where it was before the recently enacted debt relief. If outstanding student debt is a systemic problem, the recent action does not remedy the problem. Instead, it is a textbook example of politicians kicking the can down the road.  

Why has student debt increased? Traditionally state appropriations to state colleges and universities kept out-of-pocket tuition rates low for both rich and poor households. Over the last 30 years, states have decreased their spending on higher education and increased spending on Medicaid and other priorities. At the same time, the Federal government has increased needs-based scholarships, and state colleges and universities have increased tuition rates. Students are taking out loans to pay for the increased tuition and other expenses.  

However, most college graduates’ lifetime earnings are more than those of high school graduates. The Social Security Administration estimates that men with bachelor’s degrees earn $655,000 more in median lifetime earnings than high school graduates, and women with bachelor’s degrees earn about $450,000 more in median lifetime earnings than high school graduates. College graduates’ higher incomes should provide the means to repay those loans. 

However, these loans are a significant reason that tuition is increasing. Loans help students afford higher tuition, and schools can charge more. Higher education costs have also increased. Three reasons are campus buildings, amenities and more administration. Campus buildings and amenities have improved to compete with other schools to attract the best and brightest students. If schools don’t compete on price, they compete on non-price margins, such as better buildings, dorms, and food. The number of administrators has increased to comply with increasing government regulations and provide more services to students, such as counselors, student success specialists, and bureaucracy.  

The recently enacted policy is, at best, a Band-Aid for the complex underlying problems of financing higher education.