Moneybox

A Sweeping Plan to Fix Everything Still Wrong With Student Debt

President Joe Biden’s loan forgiveness doesn’t reform a cruel and senseless system. This will.

A pile of money falls away, revealing a college campus.
Animation by Slate. Photos by Getty Images Plus.

On Aug. 24, President Joe Biden announced an enormous student loan forgiveness plan. Progressives hailed the action, which is expected to erase more than $500 billion in outstanding debts, as a victory for economic justice. Conservatives denounced it as a costly giveaway and an insult to the working class. But there was one thing everyone agreed on: The plan does nothing to prevent the future generation of new student loans.

While the COVID moratorium on student loan payments is now scheduled to be lifted in January 2023, nearly three years after it began, the federal government’s student loan–granting engine ran at full throttle throughout the pandemic, generating hundreds of billions of dollars in new debt. Mass debt cancellation will erase a big chunk of the government’s ledger, but the Committee for a Responsible Federal Budget estimates that it will take less than six years for the Department of Education’s loan portfolio to grow back to its current, pre-forgiveness level of $1.6 trillion.

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Can anything be done to stop it? High-profile loan forgiveness advocates like Sens. Elizabeth Warren and Bernie Sanders have proposed free college programs that would eliminate tuition for undergraduates attending public colleges and universities, therefore reducing undergraduate borrowing. Biden included a since-scuttled free community college proposal in his original Build Back Better agenda. But none of these plans would prevent the student loan crisis from remetastasizing, because most student loan dollars are not borrowed by undergraduates to attend public colleges and universities. The majority of debt is generated by private colleges, for-profit colleges, law schools, medical schools, and master’s degree and Ph.D. programs.

The Biden loan forgiveness plan created a ticking time bomb for fundamental reform. If Congress doesn’t enact wholesale changes to the way colleges are subsidized and college tuition is set, the winner of the 2024 presidential election will be faced with exactly the same mountain of student loan debt, with the added complications of millions of new debtors asking why their loans haven’t been forgiven too, and potential rulings from conservative federal judges that could outlaw future debt jubilees.

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Overhauling America’s sprawling, decentralized higher education system won’t be easy—not least because the biggest adversary of reform is likely to be the powerful higher education industry itself. But there is a solution, one that starts with a clear-eyed appraisal of what got us into this mess and some realism about where the limitations of reform ultimately lie. This Congress may not be ready to confront the gnarly political battles and tough policy choices of fundamental reform. But it has to come sometime, somehow. Here’s a viable path.

How We Got Here

The explosion of outstanding student loan debt (including private loans) from under $500 billion in 2006 to over $1.7 trillion today was caused by several key factors.

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Historically, state governments have been responsible for keeping undergraduate education affordable. Many states have reneged on that obligation, driving up public university tuition and creating an affordability gap filled by federal loans. In other areas of public service, like transportation and health care, states are obligated to match federal funding with state resources. Only in higher education can states disinvest with impunity.

There are also no price controls attached to federal financial aid. This, too, is unusual—if hospitals want to serve Medicaid patients, they agree to be paid Medicaid rates. While the Department of Education limits undergraduate borrowing to about $31,000 over four years for students of traditional university ages, many colleges circumvent those limits by offering additional federal loans to students’ parents. The graduate and professional school market, meanwhile, is a loan-subsidized Wild West of aggressive marketing and sky-high tuition. Students can take out federal loans for whatever universities decide to charge for graduate school, plus living expenses, few questions asked.

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This single, permissive system of federal loans and grants is used to finance nearly every kind of post–high school education imaginable. A local cosmetology school offering nine-month certificates in hair styling, an SEC football powerhouse, a for-profit online college serving 100,000 students, an overseas medical school, an Ivy League redoubt, the community college up the street—they’re all financed by the same few federal programs, and all held accountable for the quality of education they provide in the same way, which is to say hardly at all.

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College-loan horror stories often focus on the amounts students borrowed. But the quality of the degree for which they borrowed matters just as much. You don’t hear a lot of tragic narratives about anesthesiologists with six-figure loans, because anesthesiologists usually make enough to pay their debts. There are few if any effective federal regulations of college quality, which is why the predatory for-profit sector was allowed to run rampant for years, resulting in hundreds of thousands of defrauded students and billions of dollars in bad loans.

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Yet students continue borrowing to attend bad programs anyway. They trust that if an accredited university admits them to a program, and the Department of Education approves them for a loan, they must be making a good financial decision. Often, they are wrong.

How to Fix the Debt Problem

To start, the federal government should ditch its one-size-fits-all grant and loan system, and split the program in three: one for short-term, job-focused credentials; one for traditional undergraduate degrees; and one for graduate and professional school.

For two- and four-year undergraduate degrees, there’s no need to reinvent the wheel. For more than a century, states have been providing public colleges and universities with a certain amount of money per student, in exchange for the schools agreeing to charge affordable tuition. Some are still doing this today. We should adopt the same approach at the federal level, by building off the Biden free community college plan.

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Students walk down a sidewalk on a campus.
College students walk to classes at the University of Texas–Brownsville. Photo illustration by Slate. Photos by Anna Moneymaker/Getty Images and Getty Images Plus.

That law would have provided roughly $5,000 per student to states in exchange for them agreeing to charge $0 tuition at two-year colleges. The subsidy should be increased to $10,000 per student and expanded to include four-year universities. In exchange, institutions would agree to a standard affordable tuition schedule. Families earning less than the median household income—currently about $70,000—would be charged $0 tuition. Those earning more would pay modest tuition, on a sliding scale, up to a maximum of $5,000 per year for the wealthiest households. Colleges would be free to charge less.

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That might not sound like enough money to provide a great education. But many institutions discount their prices, and community colleges in particular remain relatively cheap. In fact, two-thirds of all undergraduates attend a college or university that currently receives less than $10,000 per full-time-equivalent student in tuition revenue. These include more than 900 community colleges, 460 public universities, and 320 private nonprofit colleges, which would also be eligible to participate. (For-profit schools would not be included.) The new federal subsidy plus tuition paid by wealthier students would leave most colleges in a better financial position than they’re in today.

The federal Pell Grant for lower-income students would be maintained to help pay for students’ living expenses. States would be required to maintain existing funding levels for each college that participates in the program. Because every institution would get the same subsidy and charge the same prices, states that have disinvested in their public universities would have to put more money back in the system in order to keep their institutions whole.

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Participation would be voluntary, and not all colleges would join. A relatively small number of selective public universities make a lot of money charging market rates to out-of-state students and won’t want to give that up. Which is OK—the goal isn’t to make every single college free. It’s to make sure that every single student has the option of attending an affordable college. And the new federal money would go a long way toward narrowing the large state funding disparities that currently separate flagship universities from other public institutions serving more middle- and lower-income students.

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This approach would also help clear the fog of confusion around college pricing. Every year, millions of high school seniors and their parents try to navigate a bewildering system of price discounting and deliberately obscure financial aid offer letters. Standardizing prices among hundreds of colleges would relieve much of that stress.

Job Training Is Really Important

The federal government should make this new investment in undergraduate education because society has a strong interest in helping people learn. The United States was ahead of almost all other countries in promoting universal high school and providing broad access to college, an incredibly wise decision that needs to be strengthened and reaffirmed.

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But the best path from high school into the workforce doesn’t always go through a leafy quad and college dorm. Millions of students enroll in job-focused programs that take less than the two years needed for an associate’s degree. Many of these jobs are in the building trades as well as the health care, child care, transportation, and technology fields. A shorter, focused training program can be a great option—with one enormous caveat. It has to be a good program, affordably priced, that leads to a good job. Many programs do not.

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It is an iron law of public policy that if the federal government makes a lot of money available for job-training programs and doesn’t closely regulate their quality, students and taxpayers will be exploited. The GI Bill is fondly remembered for sending returning soldiers onto campus to learn philosophy and Shakespeare after World War II. In fact, most participants signed up for short-term job-training programs, often created by fly-by-night companies offering shoddy correspondence courses in fields like bartending and dance. It was an enormous scandal at the time, one that has been repeated in every generation since, right up to the present day. Just last month, the Washington Post reported that “Millions in COVID aid went to retrain veterans. Only 397 landed jobs.”

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Students walking and riding bikes on footpaths surrounded by trees and fallen leaves
Students walking on footpaths on the University of Michigan’s Ann Arbor Campus. Getty Images Plus
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A big part of the problem is that the U.S. Department of Education uses the same system to provide financial aid to the University of Michigan’s Ann Arbor flagship (student body 48,000) as to the Great Lakes Boat Building School (student body 25). Many victims of the student loan crisis borrowed relatively small amounts of money, often less than $20,000, for short-term programs offered by for-profit colleges that promised the moon and didn’t deliver. Some students dropped out, while others finished only to learn their credentials were all but worthless.

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One important step will be to reinstate and strengthen the “gainful employment” regulations for for-profit and job-training programs that were created by the Obama administration and gutted by the Trump administration. Those rules disqualify programs that leave students with too much debt, and not enough income to repay their loans, from receiving federal aid

But the grant and loan system itself also needs to change. We should connect Department of Education grants currently being spent on short-term job training programs with similar U.S. Department of Labor programs and expand the use of apprenticeships, on-the-job training, and other types of partnerships that ensure students are trained not just for a job but a good job. The overall budget should be doubled from current levels. But aid should only be available to attend programs that meet rigorous standards of quality and have a demonstrated track record of producing graduates who land well-paying jobs with good wages and benefits in their field.

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Many of the people who opt for job training instead of the traditional undergraduate degrees don’t have a lot of money or social capital. They are particularly vulnerable to high-pressure marketing tactics, and student loans can be a huge risk. For most of them, we should reduce or eliminate the need for debt altogether. Loans should be a last resort, in limited amounts, and only for the best programs.

Too Much Trust in Graduate School

The student loan system also supports students who attend graduate and professional school—master’s and Ph.D. programs, law and medical school, and the like. Only 14 percent of American adults aged 25 and older have a graduate or professional degree, and they are collectively among the nation’s highest earners. For that reason, there are fewer programs for, or traditions of, publicly subsidizing graduate school. Most universities, public or private, set graduation school tuition at or near market rates. The University of California–Berkeley, for example, charges more for a one-year online master’s degree in data science (nearly $80,000) than for four years of in-state undergraduate tuition ($60,000).

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But not all graduate degrees are lucrative. Fields like education, social work, and health care increasingly require graduate degrees for hiring and promotion. (Not coincidentally, most of the workers in these fields are women.) Plenty of universities offer expensive graduate degrees in journalism and the arts, despite the long odds of finding well-paying jobs in those fields. Faced with fewer students after the peak of the millennial enrollment wave and a looming demographic cliff, many universities are spinning up new master’s and postgraduate certificate programs designed to turn a healthy profit, often in secretive partnerships with for-profit companies that take a majority of the tuition for themselves.

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All of this is fueled by federal Grad PLUS loans, which, unlike undergraduate loans, are not capped for how much students can borrow. Grad PLUS has become a crucial source of access to graduate school for students who need an advanced degree to move ahead professionally, particularly Black students who were denied intergenerational wealth by systemic racism and continue to face discrimination in the job market. But Grad PLUS has become a double-edged sword—Black students leave college with the highest levels of debt, are less likely to successfully pay down principal, and are more likely to default.

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Many of these problems cannot be solved with higher education policy alone. Graduate students often borrow to pay for rapidly rising housing and food costs. Workers in the caring professions are mostly women, are often people of color, and are chronically undercompensated. They should be paid enough to afford the credentials we require them to obtain. Now that federal policymakers have developed a taste for industrial policies like the recent massive green energy investment in the Inflation Reduction Act, they could apply similar principles to the labor market by subsidizing the cost of graduate degrees in key public service professions, either by giving students grants or directly supporting graduate schools that offer socially critical programs and credentials.

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But it would be politically unfeasible and practically impossible to implement the same kind of broad subsidy-for-price-control scheme for graduate education that has traditionally been used for undergraduates. The market is too disparate in student costs and benefits to manage that way. To solve the graduate school debt problem, we need to lean more heavily on changing incentives, regulations, and consumer behavior.

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Every graduate program, including those at public and nonprofit universities, should be subject to the “gainful employment test,” a comparison of how much students borrow to how much they earn. Applying the test to for-profit colleges led many low-quality programs to preemptively shut down before penalties were even applied. Public and nonprofit graduate programs should have to meet the same standard.

Institutions should also share in the risk they create for students and taxpayers when they load people up with unaffordable loans. Universities should be liable for 50 percent of the cost to the taxpayer of any graduate school loan that goes into default or is erased by a federal debt relief program other than Public Service Loan Forgiveness (or the kind of mass write-off implemented by the Biden administration, if that ever happens again).

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Finally, students are going to have to change the way they think about the graduate school market. They have been taught by society and culture to trust the good intentions of colleges and universities. That must change.

Many heartbreaking student loan stories begin with a naïve student enrolling in graduate school and signing a sheaf of loan papers in the understandable but incorrect belief that the financial side of things will surely work out in the end. Often, they blame “the system.” But they weren’t victimized by a system. They were victimized by the lack of one, a lawless environment in which individual universities, some among the most prestigious in the world, deliberately choose to rip them off.

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It sucks to cross another entry off the dwindling list of institutions that deserve our trust. But it will be necessary to prevent the future exploitation of graduate student loans.

The Path to Reform

All of this will cost a lot of money—tens of billions of dollars per year, or more. But the body politic has just described a concrete limit on how much outstanding student debt it is willing to tolerate. In addition to forgiving half a trillion dollars in loans, the Biden administration is also implementing what will likely be the most generous system of income-based loan repayments and future loan forgiveness in the world. If nothing else changes, that system alone will likely cost another $200 billion over the next 10 years.

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So the choice is not whether we spend a great deal of money to solve the student loan problem. It’s whether we do so by blindly writing off debts on the back end of the higher education system without doing anything to change how much colleges charge, how much students borrow, and whether their degrees are any good, all subject to the whims of executive fiat and the federal courts.

Policymakers and advocates should understand that while some politicians on the right will likely object to spending more taxpayer money on a system they find ideologically alienating, the higher education industry itself will oppose many needed reforms, just as the American Medical Association has shamefully fought efforts to expand public access to health care over the past 100 years. Many colleges don’t want to be free, or even affordable. They’d rather keep selling expensive services to rich people, with the lucre and status that brings.

Comprehensive debt reform will also require borrower advocates to acknowledge that not all student debt is bad debt, and borrowers bear some responsibility for their choices. The ultimate goals should be fewer, smaller loans to attend better college programs. The Biden loan jubilee showed that the higher education system is badly out of balance. This plan would right the scales.

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