The problem of student loans accumulates and is difficult to solve: the "debt trap" of American higher education loans | students | the United States
Global View
On July 14th local time, the Biden administration announced in a high-profile manner that it will cancel a loan debt of $39 billion for a total of 804000 students in the coming weeks. The US Department of Education claims that this action addresses the system's "historic failure" and administrative errors in miscalculating borrower eligibility for exemptions.
Since the US Supreme Court overturned Biden's $400 billion massive student loan debt relief plan at the end of last month, the Biden administration has first stated that it will not give up and will attempt to release the debt again through another law. Subsequently, it has introduced the "most favorable student loan repayment plan ever" and a 12 month repayment "buffer period". Now Biden has once again announced a new action - a series of actions to push the topic of student loans to the forefront. This is mainly because the repayment of federal student loans, which has been suspended for three years due to the COVID-19 epidemic, will resume this fall. Starting from September, the accumulated interest on loans will begin to recover, and starting from October, repayment will resume, which has caught many borrowers off guard. At this critical moment, the Biden administration reiterated its commitment to reducing student loans in an attempt to solidify the support of relevant voters.
1. "never-ending debt"
Student loans have a long history in the United States, but in the past few decades, the original intention of "student loans" to help students receive higher education has become a lifelong economic "shackle" for many Americans.
The large-scale promotion of student loans in the United States began after World War II. In order to help a large number of veterans solve their employment problems, the US government introduced the Veterans Rights Act in 1944, which funded the education of veterans in universities and initiated the transition from elite higher education to mass education. In 1965, the United States Congress passed the Higher Education Act, which provided student loans to eligible college students. This was also the first law in American history to determine the funding method and amount based on the degree of financial difficulties faced by students.
For decades, student loans have become the fastest-growing debt among American households, with $1.6 trillion in outstanding student debt and approximately one-fifth of Americans holding student loans. This is because the cost of higher education in the United States is not only high, but also constantly rising. According to the Education Data Initiative in the United States, excluding inflation, college tuition fees have increased by 747.8% since 1963, far exceeding the 19% wage increase for workers aged 22 to 27 during the same period. The annual undergraduate tuition and living expenses at Harvard University are approximately $95438. Based on last year's average savings of $5011 per person in the United States, it takes an American 75 years to save enough money for a child to complete a degree at a top university. According to a report by CNN, the reasons for the increase in tuition fees include the widening wealth gap in the United States, and top ranked universities continuously increasing additional expenses to provide luxury services to affluent students in order to attract affluent families. In addition, state legislatures are continuously reducing subsidies for public education, which means universities must rely on tuition fees paid by students to cover school expenses. And many students are actually borrowing money to pay tuition fees through student loans, which leads to a vicious cycle of student loans spiraling up with college tuition fees.
In addition to the increase in tuition fees, the combined effects of high loan interest rates, tight repayment terms, and increased demand for education in the labor market have resulted in a large number of Americans with student loans not even earning enough money to pay the accumulated interest, let alone repay the principal. In the United States, there are also many middle-aged and elderly student loan borrowers. The most famous example is former US President Obama. Although Obama's student loan amount was only about $40000 and he had a high paying job, he did not repay his student loan until 21 years after graduation, when he was already 44 years old.
According to data from the Jahn Family Research Institute in the United States, student loan repayments continued to decline during the decade before the pandemic. In 2020, 60.7% of outstanding student loan balances were higher than the principal. Due to the suspension of payments during the pandemic, some borrowers were able to take the opportunity to repay their principal, resulting in a decrease of 53.7% in 2022. During the three years of suspension of payments, the social credit score of the United States has risen, and the default and default situations of other debts such as healthcare and housing have also decreased... Borrowers of student loans are generally unable to repay their loans under normal circumstances, and only have the opportunity to repay under special circumstances of suspension, indicating that student loans have caused great economic pressure on the American people.
The New York Times recently published an article titled "American student loans can never be repaid", pointing out that in reality, college degrees are not always "rewarding", and the promise that "higher education can directly bring high income" is actually hollow. Many people with high education but low income also bear a large amount of student loan debt. Taking teachers as an example, their expensive master's degree did not bring much salary increase. At the same time, structural inequality in American society, especially in the labor market, can also have an impact on the repayment situation of borrowers. Research has shown that borrowers from vulnerable groups such as women, African Americans, and Latinx have to try to overcome labor market inequality by increasing their education levels, thereby spending more tuition fees and making it more difficult to make progress in debt repayment.
2. Recovery of repayment exacerbates the borrower's economic difficulties
In order to gain the support of young voters in the midterm elections of that year, Biden announced a plan in August 2022 to exempt eligible citizens from up to $20000 in student loans. Soon, 26 million people applied for the project. But the plan was opposed by Republicans, and a series of lawsuits raised questions about its legitimacy, causing the plan to be put on hold. On June 30th this year, the US Supreme Court ruled that Biden's student loan reduction program was unconstitutional, and the President had no authority to reduce student loans on such a large scale.
The overturning of the debt relief plan by the court caught many borrowers off guard. Many people had previously believed Biden's promise and used their savings to make additional investments such as renting a house, buying a car, and repaying other debts during the three years of debt suspension. According to a survey released on July 10th by The Capitol Hill, 50% of surveyed student borrowers stated that their income will not be sufficient to repay student loans when student loan repayments resume in October. Only 22% of people have planned to make payments. Another public opinion survey showed that more than one-third of the surveyed borrowers stated that they had made additional consumer spending before the court ruling, as they had originally believed that the Biden administration could at least waive some of the debt.
After repayment is restored, many borrowers will need to pay hundreds of dollars in loans every month, which not only disrupts their original life plans, but may even cause some people to fall into economic difficulties. In recent years, due to the impact of the pandemic and inflation, rent in the United States has risen significantly, and many low-income people are already facing the risk of being evicted and homeless due to rent issues. Debt recovery will undoubtedly further affect the quality of life of these people. In addition, elderly borrowers who rely solely on social security for their livelihoods and borrowers who have not successfully obtained a degree due to unforeseen circumstances will face unbearable repayment pressure.
In addition, economists are concerned that the recovery of loan repayments may bring more uncertainty to the already uncertain US economy. Goldman Sachs predicts that the Supreme Court's ruling will lead to a 20% decrease in the personal consumption expenditure index. In other words, consumers will be forced to reduce their daily expenses due to debt repayment, and the cash flow that stimulates the economy will also decrease accordingly. E-commerce companies, bars, and restaurants will be the first to be affected. Josh Bevens, Chief Economist of the Institute for Economic Policy in the United States, predicts that restoring loan repayments could hit the US economy by approximately $85 billion to $90 billion annually.
3. Voter Struggle Behind Loans
The topic of student loans has also become a focal point of debate between the Democratic and Republican parties in the United States. The Republican Party criticized the Biden administration's debt relief plan as "bribing" voters and a blatant violation of the Constitution and Supreme Court rulings. The large-scale debt relief may further exacerbate the problem of rising higher education tuition fees and exacerbate inflation. Furthermore, for those who have already repaid their student loans and taxpayers who have not chosen to attend university, this plan is unfair. The Democratic Party, on the other hand, criticized Republicans for not being able to "tolerate" the idea of providing relief for the working and middle classes in the United States, and for using the Supreme Court to intervene in government decisions. US Secretary of Education Miguel Cardona has publicly stated that while Republicans are obstructing student loan relief programs, they are also reducing taxes for large corporations and billionaires, using the "salary protection program" to protect small and medium-sized enterprises during the pandemic to reduce huge loans.
Observers here believe that for Republicans, the Supreme Court's ruling is a significant victory. During his presidency, Trump appointed three justices and established a conservative majority, which was also the reason why the Supreme Court rejected Biden's debt relief plan with a 6-3 vote. As a result, the Supreme Court has been increasingly seen as politicized by American liberals. The Washington Post reported that the Supreme Court's ruling this time, as well as the overturning of the Roe v. Wade case last year, has made many liberal young people realize that the Supreme Court is not the institution they imagined to protect the rights of vulnerable groups. Observers predict that this may encourage more young people to participate in next year's presidential and congressional elections in the hope of changing the status quo.
However, the Supreme Court's ruling is not good news for Biden either. During the re-election campaign, the ruling increased the political pressure Biden faced. Therefore, the Biden administration urgently convened a meeting to discuss countermeasures after the debt relief plan was overturned, and announced multiple new measures in a short period of time, attempting to alleviate the public opinion pressure on young voters and minority voters. Biden's student loan relief plan was one of his promises during his 2020 presidential campaign, and now the plan has failed, making even Democratic supporters feel disappointed. As Massachusetts Democratic Representative Ayana Presley said, "President Biden must find a way to waive student loan debt, otherwise he will bear the political consequences of the Democratic Alliance's pressure on the White House on this issue."
The President of the National Association for the Advancement of Colored (NAACP), Derek Johnson, had previously reminded Biden that without further swift action after a court ruling, black voters would be incredibly disappointed with the government as it failed to fulfill key campaign promises, widened the racial wealth gap, and pushed their family and friends into economic uncertainty.
According to media reports, the Biden administration is not entirely certain that its debt relief plan is legal and can ultimately pass court review. But in order to attract voters, the Biden administration did not remind supporters of the possibility of his plan failing. When asked if he had given borrowers a false hope of loan relief, Biden pointed the finger at Republicans. Biden said, "I didn't give borrowers false hope, but the Republicans took away hope.".
The latest poll released by Gallup Consulting in July shows that American confidence in higher education has dropped to a historic low. However, neither the Republican proposal to restrict federal loans nor the Biden administration's large-scale loan relief program can fundamentally solve the problem of American student loans. The New York Times article bluntly stated that the $1.6 trillion debt tower is a symbol of the failure of US education policy. To change the current situation, it is necessary to fundamentally redesign the relationship between the US government and the higher education system, reform the higher education financing system, adjust the structure of student loans, and reduce higher education tuition fees. Unfortunately, politicians from both parties seem unable to break free from the box of party struggles.
When the two parties blame each other and the government and courts argue endlessly about the government's ability to exempt student debt under current laws, student loan borrowers worry about having to reduce expenses, change their life plans, delay or give up marriage, buy a house, retire, or invest in their children's education, and the US economy faces potential risks as a result. The judicial system's disregard for public opinion and the growing disappointment of the public towards the system highlight the deep-seated problems in American politics and society.
