3 Ways Life Will Be Radically Different in a World Without Student Debt

A student debt jubilee would benefit the economy whether your loans are nuked or not. 

by James Dennin
Unsplash / Wyron A

Particularly in the last year, student debt forgiveness has continued to be taken more and more seriously.

Most recently, the presidential candidate Massachusetts Senator Elizabeth Warren announced a radical new higher education platform that calls for cancelling nearly all of the federal student loans on the books. About 75 percent of people with student loans would have their loans forgiven entirely, and even households making up to $250,000 per year would get at least some loan relief.

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It is easy to see why people find the policy attractive. It’s also easy to see why politicians, particularly Democrats, are incorporating it into their platform: Student loan borrowers who skew young and are more likely to be people of color are a particularly savvy demographic for Democratic politicians to court.

It seems important, then, to take a step back and think about whether student debt cancellation is the way to go. To get to the bottom of it — and try to counteract the roughly $10,000 in personal bias I have on the matter — I reached out to economists and scholars across the political spectrum to help me envision life in a student debt-free world.

A Warren campaign ad puts it out there: "Cancel student loan debt."

Warren for President

Life in a Student Debt Free World

The federal student loan program has some defenders. Most of the time, point out that the earnings premium for a college graduate is about $1.4 million over the course of a lifetime, according to the Chronicle of Higher Education and it’s growing all the time. As with any public policy, there may be an opportunity cost: Is student debt cancellation, which would necessarily benefit many college educated adults, really the best way to help the most people with the resources we have?

“On average it’s a generally more well-off constituency,” Beth Akers, an economist focused on higher education who has done stints at the right-leaning Manhattan Institute, the left-leaning Brookings Institute, and also the White House Council of Economic Advisers, tells Inverse. “Education is really risky … [But] we can still have a marketplace and benefit from things like innovation and quality that come from having competition in a marketplace. And we can effectively mitigate the risk without a fully socialized program.”

Akers notes that there are cheaper ways to solve a lot problems we’re seeing in the student loan system. We could focus on making the safety net we already have better, for example, by automatically enrolling people in income-driven repayment plans.

Other parts of the borrower safety net aren’t so much frayed as they are nonexistent. The Public Service Loan Forgiveness program is supposed to forgive the remaining balance for borrowers who work in certain fields like non-profits or education, and who make 120 qualifying payments. Since the program launched in 2007, it has paid out a paltry $21 million in loan forgiveness. Of the nearly 54,000 people who had applied as of the end of last year, according to Department of Education statistics, only 338 people qualified, a fraction of a percent.

On the other hand, a growing chorus of left-leaning economists argue that this is like putting a Band-Aid on a bullet wound. Marshall Steinbaum, an economist and fellow with the Roosevelt Institute, points to a famous 2016 paper from economists at Stanford and Harvard which found that income mobility essentially collapsed between 1940 and 1980.

Education is increasingly essential to middle class life. But the debt you need to finance it is also making achieving this life increasingly difficult. 

Unsplash / Vasily Koloda

The generation now entering middle age, Steinbaum notes, will very likely be the first American generation to grow up poorer than their parents were. This obviously isn’t solely the result of student debt accumulation, but the evidence that student loans play a role in advancing a mounting retirement readiness crisis is considerable. Roughly half of households are at risk of not being able to maintain their standard of living, according to National Retirement Risk Index. For households with any student debt at all, that figure jumps to 60 percent.

Despite the widespread perception that student debt is a “millennial” problem, student debt accumulation among seniors has been rapid and alarming. The amount of debt held by borrowers over the age of 60 grew 161 percent between 2010 and 2017, according to an analysis conducted by TransUnion and the Wall Street Journal. Their average tab is nearly $34,000, and nearly 40 percent of these borrowers are already in default, according to estimates by the Consumer Financial Protection Bureau. In 2015, 114,000 people receiving Social Security or disability payments received offsets to help cover outstanding student loan repayments, according to the Government Accountability Office.

Until recently, estimates about the number of struggling borrowers were likely low due to the limited time-horizons of the borrowers being studied. Many of the reforms that kicked off the rise in student loan borrowing took place throughout the mid-1990s, so when scholars first began studying the effects of this new debt, the borrowers in question were still pretty young.

Look at a batch of 28 year olds, and of course their repayment picture looks pretty rosy. They’ve got a lifetime to earn money, get raises; they don’t have expensive kids, and their parents are less likely to need expensive healthcare. But as cohorts age, more people get into trouble. When Judith Scott-Clayton, a researcher at Teachers College at Columbia University, looked some of the first data on twenty year repayment windows, she found more people get into repayment trouble as the years go on than we thought. She estimates that by 2023, as many as nearly 40 percent of all borrowers could be in default.

Judith Scott-Clayton/Brookings

Even if student loan forgiveness does wind up benefitting some non-impoverished people, economists also argue that it will still be worth it.

“Economic historians have shown that, along with more federal policies enacted by the New Deal, the universalization of access to higher education was the foundation for the post-war American middle class,” Steinbaum tells me. “Each part of that foundation has been systematically removed, and the result is the privatization and de-universalization of the higher education system, even as more and more people go into it.”

Eliminating this debt-financed system, several scholars argue, could benefit the economy in some pretty transformative ways.

"“The information economy we have now would not be possible without the Apples and Googles and all these other high value entrepreneurship companies … If these guys had had tons of loans, that would have actively discouraged them and slowed down completely the growth of the economy. It’s just a fact."

1. Job-Seekers Would Get a Lot More Leverage

For people on the left, the biggest argument for cancelling student loan debt is that it would be a big boon to workers. Recent graduates in particular wouldn’t feel like they have to take the first job they get, and would be more likely to hold out for better offers.

“[Student debt] is key to the economy itself, it’s the mode of capital production that’s essential, and it’s grown more and more important to the production of prosperity,” Malcolm Harris, author of Kids These Days: Human Capital and the Making of Millennials, tells me. “Speculation isn’t my gig, but we can imagine that without it, [people would] be less anxious and less insecure … debt severely incapacitates the working class’s ability to organize and negotiate.”

The data bears this out: For every extra $2,500 in student debt, a recent graduate’s odds of working in a field aligned with their major drops 5 percent, according to a working paper from researchers at Auburn and the University of Georgia. A student debt-jubilee, then, could potentially kick off a wave of healthy rage-quitting.

2. People Would Start Families Sooner

One of the strongest arguments for forgiving student loans is that it would make it much easier for people to get their lives started and build prosperity.

“Student debt impacts the life cycle, it prevents people from buying houses, starting families, until later and later in their life,” Steinbaum says.

Again, some of the data bears this out. Several papers have found evidence that women with student loan debt are less likely to get married. One 2014 paper estimated that for every $1,000 of extra student loan debt, a woman’s odds of getting married fall by 2 percent each month.

“If you ask people why they don’t’ have children, it’s ‘well I couldn’t possibly afford to I have all this debt!’” Steinbaum explains.

I’m not saying that everyone needs to get married! But there are other ways that student debt impacts the life cycle, too. Homeownership amongst households headed by people aged 24 to 32 fell from 45 percent in 2005 to 36 percent in 2014, according to the Federal Reserve. About a fifth of this decline alone was due to the corresponding rise in student loan debt.

Student debt is also putting pressure on the housing market by making young people delay homeownership longer, according to data from the Fed. 

Unsplash / Evan Dvorkin

3. More People Would Break Out On Their Own

There’s also solid evidence that student debt suppresses entrepreneurship, which has ramifications both in terms of employment, but also innovation. Though they only account for 2 percent of employers, startups accounted for the vast majority of net jobs created between 2011 and 2014, according to data from the St. Louis Fed.

“The information economy we have now would not be possible without the Apples and Googles and all these other high value entrepreneurship companies,” Karthik Krishnan, a finance professor at Northeastern University who is currently on leave to launch a loan alternative startup, says. “If these guys had had tons of loans, that would have actively discouraged them and slowed down completely the growth of the economy. It’s just a fact.”

In a paper written with co-author Pinshuo Wang, Krishnan found evidence that student loans substantially reduce someone’s odds of not only launching a company, but launching a good company.

“A $40,000 debt increase from zero is correlated to a 100 percent reduction in the likelihood of starting a business,” Krishnan says. “Typically when you think about starting a company, you have limited liability. You can only lose what you put in. But when you have student loans, that changes completely. Not only you can lose the money you put in, you can lose more if you start to miss payments.”

There are other likely benefits, too. Steinbaum thinks that a debt jubilee would also potentially help keep healthcare costs down, pointing out that it’s hard to blame doctors for charging as much as they can for their services if they’re hundreds of thousands of dollars in debt. Despite making more than $200,000 a year, loan payments still make it hard for lots of doctors to get by.

A student debt jubilee would also probably help bring down wage gaps. Women who graduate with bachelor’s degrees have about $2,700 more debt on average than men, according to the American Association of University Women. Finally, student debt forgiveness would also avert a mounting crisis among black college graduates, who default at five times the rate of their white counterparts, according to Brookings.

I still think it’s important not to completely put aside the point about opportunity costs. We could do a lot to solve many of these problems without running the risk of spending money forgiving debt for some people who might not need it. But the evidence is also clear that student debt’s impact on the economy is far-reaching and profound. To characterize Warren’s proposal as a handout for a relatively privileged demographic simply isn’t true.

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