Looking Beyond Debt Forgiveness to Solve the Student Loan Problem
Over the last two decades, the prevailing narrative to “solve” the student loan debt crisis has focused on improving existing repayment programs and implementing wide-scale student loan forgiveness without a compelling argument of how to address the underlying issues.
For nearly two years, federal student loan payments have been paused thanks to actions by both the Trump and Biden administrations to respond to the pandemic. On a parallel track, pressure for aggressive loan forgiveness action from some progressives and a shifting public narrative has acclimated borrowers to the idea of sweeping loan forgiveness. This sets up an intriguing dynamic when, come May 2, 41 million borrowers will theoretically resume payments on their student loans, amid inflation at the highest level in 40 years.
Were the student loan pause extensions merely a clever way to enact wide-scale loan forgiveness on the backs of taxpayers? If so, it might be working. The White House hinted at another extension to the payment pause, allowing the president time to decide on using executive action to forgive student loans.
Rather than surrendering to loan forgiveness in hopes that it will be a panacea for the student debt crisis, policymakers should systemically alter how students finance their postsecondary education. They should start by embracing innovative financing approaches that address misaligned incentives where colleges receive billions in government subsidies each year with little motivation to control costs, exacerbating the student borrowing trend.
Otherwise, loan forgiveness unfairly burdens all Americans with the student debt of a fraction of the population who chose to borrow for their educations. Forgiving student debt is unfair to students who worked hard to fund their educations without loans or have paid off their loans. Worse than the expense to taxpayers, loan forgiveness is regressive and favors high-income, highly educated borrowers more than lower-income borrowers. Even current borrowers are divided on the issue.
President Biden, Congress, and state policymakers must use the current student loan crisis to build a more just, more equitable, and more stable student financing system.
Approaches such as matched education savings plans and income-share agreements (ISAs) can turn the tide on student borrowing, address misaligned incentives, and narrow opportunity gaps by enabling more choice and removing financial barriers to access post-secondary education.
These models move away from the indiscriminate subsidization of higher education and get the government out of the lending business. They empower students with financial resources and self-agency to pursue (and fund) individualized pathways in a postsecondary education marketplace where providers must compete for students (and their funds) based on students’ perceived value and relevance of offerings.
Offer matched education savings plans to students in every state. Several states have adopted some form of postsecondary education or lifelong learning or skills savings accounts to encourage individuals to save for future education costs. Earn to Learn, for example, is a matched savings program that incentivizes individual savings. Low-to moderate-income students in the Earn to Learn program who save $500 receive an 8:1 match using public-private funding. In Arizona, Earn to Learn garnered Governor Doug Ducey's support as a proven model to decrease and in some cases eliminate student loan debt. Last year, Congressional lawmakers introduced the Earn to Learn Act, a bipartisan and bicameral bill to pilot a federal matched savings program.
Matched savings accounts have the potential to transform education by incentivizing tax-free co-investment from multiple sources — individuals, employers, philanthropy, education providers, and government — to allow students to pursue education pathways best aligned with their preferences and goals.
Enable outcomes-based finance arrangements such as income share agreements. Income share agreements (ISAs) tie education-related expenses for a student to their earnings after program completion. An ISA aims to maximize the return on investment for students, ISA providers, and education partners by incentivizing programs with demonstrated value, relevance, and utility in the marketplace. This “skin-in-the-game” approach is unlike any other education financing tool. It holds promise for providers in all sectors, students who are reluctant to borrow in the federal (or private) programs, and policymakers looking to align cost and value in postsecondary education. For example, students who participate in the Workforce Income Share Agreement Fund through the San Diego Workforce Partnership have already realized positive outcomes without taking on federal student loan debt.
There are opportunities and risks associated with emergent models like ISAs. Several states and the federal Consumer Financial Protection Bureau are attempting to regulate ISAs as student loans, but overregulating ISAs could limit innovation and constrain students’ access to postsecondary education and new methods of financing. Jobs for the Future is working with proponents and critics of ISAs to identify best practices for outcomes-based underwriting, consumer protections, and alignment of incentives for funders, students, and education and training providers to inform sensible regulatory approaches.
It is time policymakers stop stoking the fiery arguments that divide people into two camps — “forgive all loans” or “do nothing” — and offer the new alternatives that call to question the current system and begin addressing the issues plaguing millions of students. We need a coalition of principled leaders who see the immediate challenge as an opportunity to transform the postsecondary education system by enacting new, sustainable funding solutions that empower all students.
