The Sheer Stupidity of the Student Loan Program

The income tax and national service offer better ways for students to give back to society

The Treasury Department recently took over the management of the student loan program from the Department of Education. In continuing its dismantling of the Department of Education, the Trump Administration blamed the Biden Administration for its efforts at loan forgiveness. In reality, the program has faced problems that were easy to foresee from the very beginning and have persisted through every Administration, both Democratic and Republican. Its basic structure and design have contributed to widespread management glitches.

But that’s not even the main issue. Congress, in its wisdom, created a program that caused a significant decline in young people’s net worth. Additionally, the program contributes to delays in household formation, marriage, and childbearing.

A simple solution has long been available: let the progressive individual income tax perform its basic role of collecting revenue from those who are successful and who have benefited from past government investment. And use national service or work-service scholarships as an alternative way to repay some government loans.

The Management Problem

Many people, especially those who see little or no return on their investments, struggle to pay off their student debt. As one example, Black individuals—who are less likely to either attend or graduate from college—carry more debt than white households well into middle age. Even if they do graduate, Black students owe nearly three times as much debt as white students four years after graduation. Simply forgiving some students’ debts while maintaining the basic program structure isn’t a solution to the broader management problem. In many ways, it adds to the problem, as individuals realize that paying off their debt only penalizes them; better to wait for forgiveness.

Decline in the net worth of the young

While the question of how to manage student debt occasionally rises to national attention, few reports link the sharp increase in student debt with the slowdown in wealth accumulation among younger people. For example, although the net worth of those aged 20 to 47 roughly doubled between 1983 and 2022, the wealth of older individuals tended to multiply three, four, or five times.

Student debt is one factor behind this growing gap. Net worth equals assets minus liabilities. The much higher debt incurred by recent generations leaves them with a much lower net worth growth rate than that achieved by older generations.

Of course, if the extra student debt had contributed more to their human capital and knowledge, those hard-to-measure assets might have offset the increased debt costs. However, there is little evidence that this debt has significantly increased human capital among recent college students compared to those in the past. Essentially, turning a relatively affordable higher education system into one accessible through much higher student debt wasn’t really an education policy. It mainly served to shift costs onto young people.

Many analysts mistakenly focus only on whether a college education is worth the cost of a student loan. For many people, it certainly is. However, the question I am raising concerns the overall effect of replacing direct support from the state and federal governments with loans. Adding everything together, it seems this shift mainly led to a decline in net worth for young people, due to minimal gains in “human capital” (knowledge) and a significant increase in financial liabilities.

Behavioral responses to the student debt: less college, delayed household formation

The threat of a debt overhang likely has contributed to declines in college enrollment and in the associated effort to build knowledge and human capital. After peaking at around 70 percent in 2009, the proportion of recent high school graduates enrolled in college fell to 62 percent by 2022.

Student debt further delays household formation, marriage, and childbearing, which together postpone homeownership. Among 18–29-year-olds, about 40 percent lived with parents in 1900, 50 percent during the Great Depression, 30 percent near the end of the 20^th century, and now close to 50 percent again.

Mind you, I am not claiming that the increase in student debt solely causes the correlations examined here. I am simply expanding on one aspect of a broader argument I make elsewhere: that public policy over recent decades has largely abandoned the young, the working class, and the American dream.

Better ways forward

Much of the debate over student loans is misguided. When the government funds business research and investment, it anticipates earning a return from a growing asset base through taxes later on the profits of successful companies. Attempting to collect loan repayments, especially from those who didn’t finish college, moves in the opposite direction. It leaves the least successful with the largest debts.

Legislators have much simpler ways than acting as loan collectors to recover benefits from those who profit from government investments in education. The main method is the income tax, which, with some exceptions, progressively taxes most high earners. There is no need to create complicated recapture systems for every government program.

Also deserving of support are initiatives to provide national service and work options to help repay student debt. Of course, as Richard Reeves and Belle Sawhill point out, and as those involved in an experimental work-service scholarship program at Cornell University note, the benefits to broader society go far beyond simply making student debt less burdensome.

For whatever it’s worth, I don’t know a single college-educated person of my generation who doesn’t believe that recent generations of students have been shortchanged compared to us.