As the last reverberations of the U.S. mortgage crisis wind down and start being forgotten, another, less obvious, crisis sits on the horizon waiting to explode. The federal student loan market is a catastrophe waiting to happen, and it is only getting closer to the brink. Today, the federal student loan market exceeds $1 trillion, nearly double the number in 2009, with the average college graduate owing back $30,000 in debt. Many borrowers will not be done paying back these loans until their retirement years, if they do not default on them first. Worryingly, today that default and delinquency rate has climbed to 11% of all student loan debt, an amount close to $100 billion. Leaving aside the very real and potent issue of yet another taxpayer bailout once this bubble finally pops, the federal system of student debt takes the responsibility of paying for an activity out of the hands of the very people benefitting from said activity and tosses it onto a third party that had absolutely nothing to do with it in the first place. This system must come to an end.
Student loans are not discharged in bankruptcy, and credit scores are affected if students choose to not pay them back. Yet student debt forgiveness programs championed by politicians like Obama, and even more radically, by Senators Elizabeth Warren and Bernie Sanders, only make the problem more pervasive. In the first place, there is no collateral the government can seize if a loan is not paid off – education cannot be rescinded, and therefore students can choose to not pay back the loan knowing that the one real consequence is a credit score hit. Under loan forgiveness programs, students don’t even have to make that tradeoff. The people ultimately paying for this ill-conceived scheme are the taxpayers, who never signed up to weather such a crisis in the first place.
One solution to this misallocation of responsibility is two-fold: “Pay It Forward, Pay It Back” programs such as those enacted in Oregon state, coupled with the size of loans being tied to the expected income upon graduation for each major. Under the Pay It Forward, Pay It Back plan that Oregon legalized in 2013, the state pays for students to attend colleges and universities. Students pay the state back the amount of tuition from their incomes, the annual percentage tied to each student’s income level. Crucially, this program makes student debt manageable and easy to be paid back as it only takes a small percentage of earnings and does not collect any interest. Students have little incentive or opportunity to default on the loan. The state uses these funds to ultimately pay back the taxpayers through returning that money to the very people who paid it, either directly or indirectly through projects benefitting the state. The taxpayers paying for the scheme see this money returned, and the students benefitting from it are forced to take responsibility for the payments. Individual responsibility falls on individuals.
Critical to the survival of such Pay It Forward, Pay It Back programs are loans tied to potential future earnings.
The loan size should not exceed a defined percentage of the future earnings that students in each major can expect to earn in their lifetimes. If you want to be a gender studies major, that’s your choice. But the taxpayer will no longer be going bankrupt paying for that unprofitable adventure. Tying loan size to the choice of major ensures that students can handle paying back the amount of the loan without the incentive arising to default on it, and that taxpayers are ultimately paying for something that will make their lives better. A state’s economy is better off with a large number of highly skilled professionals in business, the sciences, and the law than it is with an outsized number of comparative literature and fine arts graduates. Taxpayers should be able to reap the rewards of a highly educated workforce if they’re going to pay good money for it. Crucially, the responsibility of choosing what to do with their lives goes back to resting on the shoulders of students themselves, where it belongs. The current system of federal student loans encourages no such responsibility. If students choose the wrong majors, it will ultimately not be their loss but the taxpayers’. Under this plan, students have the option to be in-demand professionals or not, and they will pay for this choice.
The fundamental problem of the current federal student loan program is that it hinders the very foundation of individual choice and responsibility. Students may choose whatever path of study they want, and the federal government will pay for it. But all majors are not created the same, and some will entail more rewards and skilled workers than others. To treat all majors alike, and to force taxpayers to pay once loans are in default, is the very antithesis of individual responsibility. States should look to Oregon to authorize Pay It Forward, Pay It Back programs, as Pennsylvania is trying to do now, and give loans to those degree-recipients who will do the most good with them. Students who choose to follow careers not demanded by society will no longer be allowed to saddle taxpayers with their choices. Returning responsibility to the people needing it most while unburdening innocent third parties is the only way to solve the looming student loan crisis in this country. Individuals need to take back responsibility.
* Jenny Grimberg is a graduate student in applied economics at Georgetown University.
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