The combination of big debts and low-quality education has caused a lot of financial distress. People who earn degrees from well-respected institutions can usually handle the burden. But those who drop out or attend for-profit schools, or who were simply unlucky enough to graduate into a weak economy, often find themselves with obligations they can’t hope to pay — and can’t discharge in bankruptcy, thanks to the special legal status of student debt. At the end of 2018, the 90-day delinquency rate on federal student loans stood at 11.4 percent, up from 7.8 percent in 2008.
How, then, to improve a system that isn’t reaching everyone who could benefit from it, and isn’t doing enough to enhance the skills of those it does reach?
There’s no quick fix. Proposals to make higher education free for all or forgive student debt would primarily benefit the wealthy, who already account for the majority of college-goers and loans outstanding. Also, debt can be a legitimate way to finance an education that provides a high return. Its growth can even be seen as a positive sign, reflecting Americans’ desire to invest in themselves.
Removing public support and letting the market sort things out is not a great option, either. For one, it would cut off access to additional millions. Also, at its best, higher education creates broad social benefits — such as faster economic growth, lower crime rates, better health, greater civic involvement — that private actors lack the incentive to pay for. That’s why the government got involved in the first place.
That said, policy makers can take steps to improve the system. Consider three areas: access, cost control and quality.
Access
For too many Americans, money is the main obstacle to getting a college education. Yet the existing system of Pell Grants, federal loans and tax breaks spends a lot on people who don’t need it. About half of the American opportunity tax credit, for example, goes to households with more than $50,000 in annual income — with little or no effect on enrollment. Loan subsidies skew even more toward the wealthy: The top half of borrowers by income account for almost two-thirds of all student debt outstanding.
The government should replace this tangle of subsidies with a single grant program focused on poorer students — including those in the middle class for whom college has become increasingly out of reach. If properly targeted, even the current level of spending could go a long way toward covering the full cost of attendance for those who need it most.
The government’s approach to student lending, with no consideration of ability to pay, has left too many people with unbearable debt. That’s bad in its own right, but it also discourages the less well-off from embarking on college. Better-targeted federal grants would reduce the need for students to go into debt. Still, borrowers will continue to face risks beyond their control, such as falling ill or graduating into a bad job market.
To mitigate these, repayment of all new loans should be tied to income. Automatic deduction from paychecks would help avoid unnecessary defaults. Congress should give bankruptcy judges more leeway to write off loans, and the Education Department should revive its initiative to offer forgiveness in the most egregious instances of for-profit colleges conferring worthless degrees. Also, the government should simplify its dizzying array of prepayment plans and make them more accessible.