The student debt crisis is everyone's problem. Fortunately, there are solutions.
America's experiment with generational debt has turned into an ongoing catastrophe. At a time in their lives when young people should be experimenting with careers, starting companies and buying first houses, they are instead working off decades-long obligation to banks and the government.
This has an impact economy-wide. Construction companies have felt the pinch of reduced home buying, entrepreneurship has slowed down and even consumer products move more slowly off the shelves. As a result, economic growth remains sluggish.
While it would be inaccurate to lay all of this at the feet of student debt, that's an enormous amount of potential spending and growth simply gone. College graduates do earn higher salaries for their borrowing, but the U.S. economy simply isn't built to write off a generation of consumers at a time. The market counts on 20-somethings to act as both skilled professionals and active market participants at the same time.
Today, however, tuition rates ensure that the young people with the highest incomes also have the highest structural debts, and that's not good for anyone.
So what can be done about it? Here are four of the most common solutions, along with the reality that complicates matters.
Reduce tuition costs
One of the touchstones in the student loan debate is the need to reduce the tuition, and that's an issue on which most experts broadly agree.
"If you really want to address the issue of college affordability, the best solution is not to create it," says Michelle Cooper, president of the Institute for Higher Education Policy, an advocacy group that specializes in issues of college access.
"I am a really strong believer that if we don't fix affordability on the front end, we are going to create a mountain of a problems that we'll saddle more and more generations with," she said. "Let's figure out how to help those who are already in that situation, but let's figure out a way to help people so that they don't have to get into that situation in the first place."
As Cooper points out, any solution to student debt must include measures to keep from creating it in the first place. Tuition at four year schools has been climbing at a rate of 2.4% to 4.2% annually for decades, and wages have not kept pace. In fact, since 1978 tuition has climbed 1,120%, roughly four times faster than inflation.
This must be fixed, otherwise any solution to the student debt crisis will be little more than rough plaster that doesn't last very long.
It's also not enough. Fixing student debt requires a solution to the $1.4 trillion crisis that already exists. Helping future generations is certainly necessary, but focusing only on tuition writes off the borrowers who are already struggling.
Refinancing and interest reduction
One of the most common policy proposals is to help borrowers manage their interest rates. This comes in the form of both refinancing packages as well as direct reductions from the Department of Education.
The benefit of interest rate reduction is cost: trimming rates requires no up-front money and relatively little in long term expenses. Easy on the balance sheet, at least compared to other options, this approach also would make going to college noticeably cheaper.
With average rates ranging from 3.76% to 6.31%, interest adds up. For example, on an average $30,000 ten-year loan the borrower would end up paying an extra $6,448 over the lifetime of the note. That's a lot when you're 25 (or 50).
The trouble with this solution, however, is it's simply too little, too late.
While compound interest adds up, ultimately shaving off a point or two won't do enough to make onerous loan payments affordable. Any graduate for whom 1% is meaningful, they can already afford to make their payments. The real debt crisis comes from the $1.4 trillion that students owe and the grads whose incomes struggle to keep pace with it.
While interest rates do rub salt in the wound, ultimately focusing on issues like interest and refinancing elide the heart of the problem.
The popular approach of many on the left such as Sen. Bernie Sanders and Jill Stein, debt forgiveness would simply erase most or all of graduates' outstanding debt.
For borrowers and macroeconomists alike there's a lot to love here. Graduates would see the burden of debt disappear, receiving the equivalent of $4,000 raise overnight (more when accounting for taxes). The economy would get the boon of a stimulus package unprecedented in modern history as those former debtors turned around and started spending. It might even stave off an impending retirement crisis, as millennials who have put off retirement funds began investing.
So what's the problem?
Money, and a lot of it. Forgiving debts would cost that whole $1.4 trillion, more than a third of the entire federal budget, and that's just to start with.
This doesn't account for the fact that doing this would wipe out anticipated interest payments (already accounted for in federal budgeting), the dubious legality of forcing private lenders to sell their notes to the government and the fact that in fairness all college tuition would have to be made free from that moment on.
Higher education has spent decades digging this hole. The price tag to waving it away would be astronomical.
"Is it something we should be considering?" Cooper asked. "Yes. Is it a good policy solution? It's an O.K. policy solution. But if you really want to address the issue of college affordability, the best solution is not to create it."
It would also raise dicey questions of fairness, given that it would prejudice past borrowers. Anyone who behaved prudently and paid off their debts would have to stand by and watch while everyone else got to walk away from theirs… It's not necessarily the lesson we want to send while making a macroeconomic gesture.
Income Based Repayment (IBR)
Perhaps the best, or at least most flexible, idea is imposing a hard cap on student loan payments based on income. It is an idea which states like Oregon have been particularly experimenting with, to some success.
The benefit to IBR is that as a system it walks the line between the paper tiger of interest reduction and the fantastic expense of forgiveness. Instead it establishes a hardship point and says that graduates have to pay no more than that.
Perfect? Not by a long shot. High-earners still do noticeably better off of this system, especially those with only a bachelor's degree. But it's vastly preferable to forcing $1,200 a month in graduate loans on someone who makes $50,000 a year serving the community.
Any expansion of income-based repayment would also need to fix the private loan loophole. Although the federal government does offer a relatively weak form of IBR, it's an ineffective program which ultimately can cost borrowers more money in the long run. It also exempts private lending, which primarily services graduate students. These loans are typically high-value and high-interest, and represent a quickly growing section of the marketplace.
Income based repayment doesn't address our consumer slowdown issue. Even setting the rate low would still guarantee that much spending power absent from the marketplace.
That said, this is a system with wide support and for good reason. IBR walks the line between the crushing expense of forgiveness and the weak medicine of interest adjustment, and with proper accounting for poverty-level income it can be highly effective.
The student debt crisis is everybody's problem. Today's students pay exponentially more for their education than any previous generation, and the economy is not equipped for a generation of potential spenders sitting idly on the sidelines.
Fixing that will take creativity, but these ideas are a start.
Editors' pick: Originally published March 22.