Analysis of Forgiving Student Loan Debt by Providing a One-time Bailout as a Solution

Students who cannot find a job in their chosen career should be able to obtain student loan forgiveness on a loan for that choice preparation. Student loan debt has surpassed $1.5 trillion in recent years, making it the largest type of consumer debt outstanding other than mortgages and credit card debt. The average student loan borrower graduates with nearly $37,000 in debt and increasing every year. Student debt has grown, and also the interests of private loans: the fixed interest rate is currently at 9.66%. The government and other loan holders recruit debt collectors to do most student loan collection work. These private collectors are doubtlessly to act very aggressively in trying to collect the payments from students. In many cases, they will not know about (or will claim not to know about) students’ right to cancel their loan or get an affordable repayment plan. Many of these problems stem from the government’s collector compensation system.

The federal government, states, organizations, centers, and foundations also need to make significant investments in college affordability to reduce the number of students who need a loan in the first place. Too many borrowers and defaulters are low-income students, the very people who would receive only grant aid under a rational system for college financing. Forcing students to borrow has turned one of America’s best investments in socioeconomic mobility (college) into a debt trap for far too many families. This paper focuses on student loan debt within the United States economy with student loan forgiveness.

Attending a college is a dream for many. It is a place where students, after graduating from high school, can learn valuable skills and knowledge to be useful within different job sectors of American society. High school students learn skills that enable them to work in entry- level positions within the ever-changing marketplace. However, high competition from those whom are already well established in many fields make it difficult to work in those positions that have higher salaries and wage levels. Students attend college and take full-time course loads that detract time from working. College students hope the opportunity cost of attending classes, doing homework and research worthwhile once their tassels are flipped at graduation. Since full-time students do not have the time to work at a living wage to meet necessary living expenses, such as food, housing, clothing, and transportation, students feel the need to take out student loans. Students are also attending college after starting a family in hopes that they can provide a stable future for their families.

Student loans cover costs of tuition and books, along with everyday living needs. Having enough income to live on and handing the energy to study is important. Students could opt out of full-time course loads, but that will delay graduation. Unless the students have family that can support them through college, it is often necessary to find other means of income. Pell Grants and scholarships are some ways that reduce the cost of college. Work-study programs are offered to assist students as well. Tuition is expensive, varying in cost from which college, university, or trade school is chosen.

Student Loan Hero is a service provider that provides information for consolidation options for student loans, financial analysis, repayment options, and student loan advice. It has an article titled A Look at the Shocking Student Loan Debt Statistics for 2016 on the Student Loan Hero website. It breaks down student loan debt portfolio, discusses Public Student Loan Forgiveness, and mentions other statistics.

Student Loan Hero mentions that the United States has currently 44 million student loan borrowers that total $1.5 trillion dollars. The delinquency rate is 11% for these borrowers. It is estimated that the average student loan payment for 20 to 30-year old’s is $351, and the median payment is $203 for the same group. Loan programs consist of Direct Loans (with $912 billion), FFEL Loans (with $343 billion), and Perkins Loans (with $8 billion). Stafford loans consist of Subsidized and Unsubsidized loans, totaling $690 billion dollars. Grad PLUS loans are at $50 billion and Parent PLUS loans are at $74 billion. The amount of loans that are consolidated are $439 billion. Within the Direct Loans program, $468 billion are currently being repaid, $101 billion are in deferment, $102 billion are in forbearance, $63 billion are in default, and $42 billion are loans that are within the grace period.

Student Loan Hero and Clive Belfield (2013) discuss about repayment options for the Direct Loan Program as well. Belfield states that $198 billion are being paid within 10 years, which is 11 million of the student loan borrowers, and $73 billion are being paid in greater than 10 years. The Graduated Repayment plan for less than 10 years is $69 billion, and greater than 10 years is 13 billion. Those whom are paying in the Income-Contingent plan have $23 billion, and Income-Based plan have $174 billion. The Pay as You Earn plan consist of $44 billion and the Revised Pay as You Earn plan has only $27 billion. Several servicers for student loans are AES-PHEAA, Great Lakes, Nelnet, Navient, and Not-for-Profit servicers.

Student Loan Hero mentions that over 400 thousand borrowers have been approved for Public Service Loan Forgiveness. However, in 2012, 71% of students that attended four-year colleges has student loan debt. 40% of the entire student loan debt was used for graduate and professional degrees, such as MBA, Master of Education, Master of Science, Master of Arts, Law, and Medicine and health sciences degrees. The article concludes with Student Loan Hero being available to help students to not be part of these statistics, which are growing burden for citizens in the United States.

Michael Wenisch (2012), whom received his Ph.D. in Philosophy from the Catholic University of America, wrote an article titled The Student Loan Crisis and the Future of Higher Education for The Catholic Social Science Review. At the time the article was written, in the past seven years prior to it, the debt had doubled. Since the economic downturn in 2008, students had an increasingly difficult time with employment, making it ever more difficult to pay off student loans. The article mentions that only 56% of the 2010 graduating class had at least one job within a year, compared with 90 percent for 2006.

The article discusses a brief history of the student loan system beginning with the Higher Education Act (HEA) of 1965, which extended federal loan guarantees to private lenders. In 1972, the Student Loan Marketing Association (Sallie Mae), which was a semi-private Government Sponsored Entity, was formed in order to provide a secondary for student loans. In 1996, Sallie Mae became privately held, publicly traded corporation. In 1998, the HEA was amended so that all federally guaranteed student loan debt be non-dischargeable in bankruptcy, and in 2005 it included private, non-federally-guaranteed educational loans.

Megan McArdle (2012) discusses “Peak Oil” and the inevitable decline in oil availability, specifically in how affects the student loan debt. In 2008, the price of oil reached $150 and in 2005, after a continuous increase in production, oil plateaued at 82 million barrels per day. Then in 2011, oil prices fell to $100 per barrel. This decrease in oil production rates, McArdle mentions, “renders any sustained economic growth, let alone the torrid rates necessary to service the European sovereign debt in any credible fashion, very unlikely.” The article declares that the collateral for guaranteeing current debts, specifically student loan debts, is resuming long-term future economic growth, and since oil production peaked, this would not happen.

Also, McArdle builds up a hypothesis that the student loan bubble will eventually burst, following a broader financial collapse due to loss of confidence in the economy as a whole. The European sovereign debt is viewed as a significant result of this loss of economic confidence. The article mentions that the confidence will be lost relatively sudden in higher education by prospective students and will result in the student loan bubble to burst, because college depends upon tuition that is mostly paid for by student loans, McArdle suggests that many of these colleges will go bankrupt before 2022. The article concludes with the importance of understanding the realities of the student loan crisis along with the ethical dilemma it creates, both for students, and for those employed in the institutions whom depend largely upon student loan money for their salary.

Robert Applebaum (2010), a J.D. in Law from Fordham University School of Law, wrote an essay for At Issue: Economy: Should the Federal Government Bail Out Private University? titled The Government Should Cancel Student Loan Debt. In the essay Applebaum relates forgiving student loans to the tax rebates from stimulus plans and bailouts that Wall Street financial institutions and auto manufacturers have received, and how they were not successful in stimulating the economy. Since the student loan debt is so high, Applebaum suggests that the government should cancel loan debt instead of focusing efforts on these other methods to improve the economy. The essay emphasizes how education should be the driving force in keeping the United States economy secure.

Applebaum (2010) states that in order to stimulate the economy immediately, the government ought to forgive student loan debt. One reason that is given is that responsible people went to great lengths to get an education and therefore ought to be helped just as much as financial and auto institutions. Another reason is that it will enable a multiplying effect because the money that would increase tax revenues, unfreeze credit markers, and thereby create jobs. In response to the banking system collapsing or student loans becoming unavailable, Applebaum responds that financial institutions will receive $700 billion TARP bailout along with additional extra bailout money anyway. Since these other institutions will receive trillions of dollars, they will not be in danger of not having available funds for student loan borrowers. The aggregate amount of student loan debt, according to this essay, was under $600 billion, So there should be funds available to relieve students of their debt.

Kayla Webley (2012), whom graduated from the University of Washington and the Medill Graduate School of Journalism at Northwestern University, wrote an article titled Is Forgiving Student Loan Debt a Good Idea? for TIME. The article responds to the notion of cancelling student loan debt. It mentions a petition that has had 670,000 signatures urging the United Stated government to forgive all the past student loan debt. Robert Applebaum apparently has had $88,000 in student loan debt and started the petition in 2009 for the U.S. government to provide a one-time $1 trillion bailout for student loans to stimulate the United States economy.

Webley (2012), responds to the student loan bailout proposal with the Freakonomics blog writer Justin Wolfer’s thought that it would be better to give 50 poor people $1,000 each because the money would probably be immediately spent rather than forgiving a person with $50,000 in student loan debt, which would take a much slower time to get back in to the economy. Webley further mentions that most student loan debt borrowers have the ability to make their payments but realizes that some desperately do need assistance. According to this article only 1% of student loan borrowers owe over $100,000. Since the government already has programs, such as the Income Based Repayment program, there is no need for the United States government to cancel all student loan debt in a one-time bailout.

Sandy Baum (2012) in the article called STUDENT DEBT: Good, Bad, and Misunderstood, questions why current debt holders should be forgiven, since the United States citizens have been paying their debts off of years, and why tax payers whom never attended college should have to pay for this debt relief. Future generations may also take on extra student loan debt and just hope for a bailout. The student bailout is viewed as a temporary solution. This article suggests that the current higher education finance model is broken because every student can take out unlimited student loan without considering the likelihood of repayment.

Abigail Blanco (2015) an Assistant Professor of Economics at University of Tampa, whom earned her Ph.D. in economics from George Mason University, wrote Don’t Forgive Us Our Debts: The Case Against Student Loan Forgiveness for Inside Sources. In the article Blanco states that “prime the pump economics is fallacious” since the government is unable to manipulate the economy because of it being a complex system of financial interactions. Savings and innovation are the driving force for the economy, so handing out money to student loan debt borrowers will not grow the economy. One main argument against forgiving student loan debt is that it will only help those that have gone to college, and not future students. This will be an unwise solution and there is no guarantee that all future student loan debt will be forgiven.

Block D. Gene (2012) states that college tuition will increase, similar to other educational subsidies, because demand for education will increase. College will have higher costs and students will choose to attend schools that are costlier, which taxpayers will have to foot the bill. Students are also well informed on how students loan process works, and therefore should be responsible for paying off their debt obligations. Investing in education requires time and money, and with limited resources, students are in need of student loans to cover the cost of this investment. Financial institutions would probably not be required by the United States government to hand out loans to students whom would not be required to pay them back. This will affect low-income students.

Bill Fay (2017) mentions that there are private companies that can offer loans or other forms of financial assistance to meet the costs of education. These companies usually promote their products through direct mail, telemarketing, television, radio or internet advertising. However, the payment of university studies is a serious and long-term financial obligation; Therefore, it is very important to compare the costs of the different means of financing available to pay for education. Private loans tend to apply higher fees and charges than federal government loans. In addition, Sandra Block (2014) in the article called The Right Way to Borrow, she mentions that private loans do not offer the same cancellation or loan forgiveness opportunities offered by several federal loan programs. Therefore, before considering loans offered by private companies, it is reasonable and convenient to exhaust federal loan options (as well as grants and scholarships). Block concludes by recommending that encouraging students should incur fewer expenses, working at a job, and attending community colleges will reduce the amount of debt.

While it seems like a magical idea to forgive all student loan borrowers of their debts, and there are positive points for doing so, there is enough evidence to realize that is not a one-time quick fix for the economy. The United States economy is complex and student loan debt is just one factor that needs to be considered in improving the economy. Instead of focusing on relieving the burden of all student loan borrowers at one time, efforts should be placed on ensuring institutions of higher learning are more efficient in training students to have useful skills for the workforce. Instead of wasteful spending on projects that do to enhance the main goal of these institutions, which is adequate and useful education, they should work on being efficient. Becoming efficient in all programs is an ever-learning venture, which takes time and effort, but as long as efficiency is a primary focus, costs of education for students will decrease, therefore reducing the amount of student loans that are often required. Another way to decrease student loans is creating a college culture and degree programs that make it feasible to have time set aside for work and encourages students to do so. This will enable expenses to be paid without detracting from work-related educational endeavors.

The $1.5 trillion student loan situation in the United States impacts the economy because it is a large part of how worker-developing institutions of higher learning are paid for, which are a large force of economic activity. It is complex since student loans have to be repaid, which detracts from money being spent on consumer goods. Student loans keep the much-needed educational institutions funded, and cycles back into the economy through repayment. Students pay more to study and then, when they graduate, salaries are proportionally lower than they used to be, so that more and more people drag this mortgage until middle age. So, in many cases, such as the 2.7 million Americans who owe more than $ 100,000 for going to college, it's about choosing: either to carry this mortgage on your back for decades, adding interest, or directly incur default This is the fate of 22% of the borrowers. A historical record that can be small. According to the forecasts of the Brookings Institution, in 2023 two out of five borrowers will not be able to pay their debts. The size of the debt not only affects the individual pockets; its size, 1.5 trillion dollars, could explode in the face of the national budget. The consequences of student debt ramify throughout the economy: the inability to save limits the sale of homes up to 35% among young people, according to a study by the Federal Reserve of New York, and cuts, in short, the financial freedom in the medium and long term of millions of citizens.

Although forgiving student loan debt by providing a one-time bailout is not the best solution, the debate brings up discussion that will hopefully ensure college education will be affordable, efficient, and apply to the workforce of this generation. An economy where students are able to attend college and not be burdened for their choice for their entire lives will enable American society to be less stressed. Attending college is a great dream to turn into reality but paying for it for the rest of life should not be a nightmare. Ensuring that students are not setting themselves up for having too much debt to pay for their education is a socially responsibly policy.