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Alleviating the Student Debt Crisis: Solutions in Brief

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Zane Heflin
Policy Analyst

Higher education has never been more important for Americans looking to get a good job. In 2018, college graduates earned weekly wages that were 80% higher than those of high school graduates. The U.S. is home to some of the best colleges and universities in the world, but the cost of attending them is burdening students and their families as never before. 

Increasingly, young people are pushing back many milestones of adulthoodlike starting a family or buying a homebecause they are buried under mountains of student debt.   

Today, the New Center released a paper — “The New American Dream: Alleviating the Student Debt Crisis” — outlining a plan to solve this problem.

Consider the following:

  • Tuition jumped 36% between 2008 and 2018, while real median income grew just over 2.1% in the same period.
  • There are $1.6 trillion in student loans, which is the second-largest consumer debt total after mortgages.
  • More than one million people default on their student loans every year. The average monthly payment is close to $400, or $4,800 per year. Some economists say nearly 40% of current borrowers could default on their loans by 2023.
  • Education costs have gone up 65% in the last decade. The average public four year college tuition in 2008 was $7,560 per year. Today the cost is $10,230 per year. The average private four year college tuition in 2008 was $28,400 per year. Today the cost is $35,830 per year.
  • Including the contributions of individual families and the government (in the form of student loans, grants, and other assistance), Americans spend about $30,000 per student a year—nearly twice as much as the average developed country.

A comprehensive solution to the college debt crisis requires immediate help for the millions of Americans being crushed by their college debts. But that’s only half the solution. Policymakers also need to deal with the forces that are making college so expensive in the first place so future payersbe it parents, students, or the federal governmentdon’t face the same debt burden as the current generation.

The New Center Paper proposes several ideas to deal with both the burdens of student debt and the excessive cost of higher education.

How Should We Deal with College Debt Now?

1. Income-Based Repayment Plans Need to be the National Standard

  • Today, some borrowers participate in the income-based Revised Pay as You Earn (REPAYE) plan, in which borrowers pay 10% of their discretionary income for 20 years. REPAYE should be the default repayment plan, and the Department of Education should immediately convert all borrowers to it. 

2. Targeted Loan Forgiveness

  • An alternative approach to providing universal student loan forgiveness — like the plan proposed by Senator Bernie Sanders —  is to target it to low-income students who are in most need of help. This program could forgive all student loans for individuals who qualify for and receive benefits from programs such as Supplemental Security Income (SSI), Supplemental Nutrition Assistance Program (SNAP), or Medicaid. 

3. Public Service Loan Forgiveness

  • The Public Service Loan Forgiveness Program (PSLF) permits direct loan borrowers to have the remainder of their loans forgiven if they work full-time for a qualifying public service job and have made 120 qualifying monthly payments (10 years worth of payments). However, only 1% of applicants have been approved for forgiveness by the loan servicers processing the applications. Rather than rewarding a narrow set of public service employees with loan forgiveness, a separate national service program could be authorized by Congress based on the Serve America Together Campaign. 

How Do We Make College More Affordable in the Future?

1. Keep Colleges Accountable for Raising Tuition

  • Washington can incentivize public universities to maintain lower tuition by using its influence over the federal student loan market. Colleges that increase their tuition faster than an index of inflation could lose access to federal student loans, or the colleges would have to pay for the overage in tuition prices themselves.

2. Expand (And Reform) College Promise Programs Nationwide

  • America needs better solutions for graduating high school students who don’t want to go to a four-year college. One is the College Promise Campaign, a national nonprofit initiative that aims to make community college education free and accessible. Making several changes to the design of these college promise programs, such as eliminating strict eligibility requirements, would make both access and affordability a reality for students who currently don’t have the same opportunity to pursue higher education. 

3. Personal Financial Education for Every High School Kid in America

  • Most high school students aren’t financially literate and do not understand what a loan will mean for their long-term economic security.  Given the general lack of knowledge about personal financeand the negative impact this will inevitably have upon student’s livesstates and localities should make it a priority to ensure that every high school student receives a course in personal financial education. 

4. Increase the Maximum Federal Pell Grant Award

  • Federal Pell Grants are subsidies provided to students based on financial need and make higher education possible for seven and a half million Americans each year. The maximum Federal Pell Grant Award needs to be roughly doubled to close income gaps in access and attainment of a college education.

5. Encourage Businesses to Provide Loan Repayment as an Employee Benefit

  • The Retirement Parity for Student Loans Act proposed by Senator Ron Wyden would permit retirement plans to make matching contributions to workers as if their student loan payments were salary reduction contributions. This proposal addresses the growing problem that many young people burdened by student loans aren’t able to invest in tax-protected savings vehicles like a 401(k), which are critical to achieving a secure retirement.

To download the full paper, click here.