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Headlines calling for the elimination of student debt have recently grabbed attention as U.S. policymakers seek solutions for a broken system of higher-education financing and ways to help overly burdened students.
While some form of relief may make sense during this time of economic uncertainty, such one-off proposals fail to get at the root of the current crisis and may cause new problems, including issues around fairness, effectiveness and moral hazard, if larger systemic issues aren’t solved in tandem with the forgiveness.
A more responsive and comprehensive approach would focus on enhancing systemic transparency with respect to education outcomes, costs, and opportunities, and also improving lenders’ underwriting practices for student borrowers. Outcomes should be presented in clear and standardized formats, and government and private lenders should be considering expected future incomes before offering a student various levels of debt.
Indeed, the core structural problem is that the federal government writes blank checks for education programs regardless of whether the field of study is demanded or will yield a future income capable of allowing the student to repay his or her debt. In effect, the government does not conduct an “ability to repay” test. Even without new debt relief efforts, a recent study determined that under current policy the U.S. government (and accordingly the American taxpayer) should already expect to lose more than $400 billion in unpaid existing student loans.
A former Treasury official from the Obama administration noted that “there’s no market discipline here . . . In 2007-2008, we saw a lot of lenders who were making risky bets going under. There’s no force like that in the student-loan market.”
The failure to consider real-world data and outcomes around higher education financing does a massive disservice to students and to the U.S. economy. Students, especially when pursuing graduate programs, may incur debt without receiving information needed to make informed decisions. Neither the student nor the government lender is assessing the borrower’s true ability to repay.
For example, the average amount of student debt incurred by 2019 law graduates from Golden Gate University who had borrowed was $142,667, yet only 22% of graduates from the 2016 class held long-term, full-time jobs where bar passage is required. 40% of that graduating class is unemployed.
Additionally, by failing to anchor decisions around higher education and financing to outcomes and job market data, current structures are further exacerbating the skills gap plaguing the U.S. economy. Specifically, labor shortages have become a chronic problem in key economic sectors, including transportation, skilled trades, cybersecurity/IT, education, and healthcare.
The solution to poor student- and labor-market outcomes is straightforward: Provide transparency around expected higher-education outcomes. Especially in the context of professional and skills-based programs, what might one expect in terms of increases in future income? What percentage of graduates attain employment? What are the necessary skills for both the current economy and economy of the future?
For their part, policymakers should facilitate the compilation and publication of this type of data through dedicated research efforts. By collaborating with private-sector stakeholders, including schools and lenders, governments at both the state and federal level can support the dissemination of information that allows for better decision making and resource allocation.
Schools must be accountable and honest in how they share information with prospective students. One approach would be to provide a disclosure form akin to a consumer loan disclosure.
Lenders must also be responsible in extending credit, including by considering a borrower’s ability to repay a loan through an analysis of debt-to-future-expected income. For graduate and professional education this ability to repay requirement should guide both private lenders and the federal government.
The country is at a critical juncture with respect to policy around higher education and its financing. One-time solutions such as loan forgiveness, while well-intentioned and desperately needed by many, do not alone solve underlying problems. We need to be honest and transparent with students, educators, and employers so that all can make informed decisions.
Angela Ceresnie is CEO of Climb Credit, a student lending and payments platform
Also read: Under President Biden, expect more aggressive oversight of the student-loan industry
