Student education by Mikael Kristenson is licensed under Unsplash

Last week, President Biden visited Madison, Wisconsin where he announced new details for his student debt cancellation plan. While this initiative promises immediate short-term financial relief, it avoids addressing the deeper systemic issues plaguing American higher education.

“Starting this fall we plan to deliver up to $20,000 in interest relief to over 20 million borrowers and full forgiveness for millions more,” Biden remarked in a new approach aimed at primarily attacking student loan interest payments. In addition, income-driven repayment (IDR) plans will now automatically cancel debt for borrowers and debt with at least 20 years of repayment will also be canceled.

This initiative comes as the Biden-Harris administration recently announced an extra $1.2 billion in spending for income-driven repayment (IDR) student debt forgiveness initiatives. In addition to President Biden’s other efforts reforming higher education financing, this plan demonstrates the most consequential shift in U.S. government loan forgiveness policy in history. This program would mean nearly 153,000 more borrowers will be eligible for shortened forgiveness time under the Saving on a Valuable Education (SAVE) plan.

The SAVE plan is designed to offer forgiveness to those who have been consistently making payments. This plan emerges against the backdrop of growing enrollment numbers, with 7.5 million borrowers now part of SAVE, including 4.3 million who benefit from a $0 monthly payment due to their income levels.

To be eligible for loan forgiveness under the SAVE Plan, borrowers must meet specific criteria, including enrollment in the SAVE Plan, a history of at least 10 years of payments, and an initial borrowing of $12,000 or less for college education.

The Biden Administration’s focus on student loan cancellation has led to nearly 3.9 million borrowers seeing almost $138 billion in loan forgiveness. Beyond the SAVE Plan, this includes the Public Service Loan Forgiveness (PSLF) program, relief for borrowers with total and permanent disabilities, and other IDR plan changes.

Despite the Supreme Court striking down an earlier student debt relief plan, the Administration continues to seek alternative paths to student debt cancellation, underscored by increases in Federal Pell Grants and the drafting of regulations to expand loan forgiveness eligibility.

The message to Americans is clear: the current $1.6 trillion still outstanding federal loan balance will not be paid by borrowers. U.S. Secretary of Education Miguel Cardona said, “With today’s announcement, we are once again sending a clear message to borrowers who had low balances: if you’ve been paying for a decade, you’ve done your part, and you deserve relief.” What the Biden Administration fails to address is how companies, academic institutions, current, and prospective students will react to this changing incentive structure. 

There is no such thing as a free lunch. When a central government enacts top-down policy to shift who is paying the bill for a given system, those benefiting from said system are guaranteed to have their behavior altered in ways that lead to negative outcomes. This consequence is known as moral hazard. When the financial risk of a service shifts away from individuals responsible for incurring that risk, it means no one has an appropriate incentive to minimize spending.

Nowhere is such a situation so clearly displayed than with student debt forgiveness in higher education.  Today, Americans are broadly losing faith in the value of four-year college degrees. As of 2023, only 36 percent of Americans have “a great deal” of confidence in the U.S. higher education system. Since 2010, total undergraduate enrollment has declined 9.8 percent.

This drop in perceived value is likely correlated with a decline in the marginal benefit of undergraduate degrees. The reason students decide to defer four years of work experience for education is usually justified with the increase in earning potential post college. While this is still true when compared with high-school graduates, the advantage a class of 2024 college graduate receives is less than their parents.

From 1984 to 2023, graduates’ average adjusted annual salary right after college fell more than 10 percent. When this fact is placed in the context that college, nowadays, is viewed as a social requirement by more Americans than ever, means a student graduating today is competing in a significantly larger pool than before.

The decline in value of four-year college degrees has not, however, translated to a drop in tuition payments. Part of the reason that U.S. total student debt balance is the largest in history is because academic institutions have consistently been raising prices over the last few decades. Since 1963, the cost of tuition for public undergraduate degrees increased by 747.8% adjusted for inflation. Tuition inflation averages around 12% each year just in the last 14 years.

With the Biden-Harris administrations new IDR plans soon to come into effect, Americans should ask themselves where their money is really going. If students can be assured that they won’t have to pay the full amount of vastly inflated tuition prices they agreed to when accepting admission into a college, they are more likely to be ambivalent about these high costs. Even with slightly declining admissions in this recent decade, academic institutions make up the difference with these higher costs. Therefore, tax dollars collected are being directly redistributed from individuals who did not decide to incur hundreds of thousands in debt for an education to students who are taking a dubious risk to attend college today. Last, all that money gets funneled back into higher education institutions as they continue to baselessly raise their prices year to year.

The federal government has long had a corrosive effect on higher education. In 1944, the “G.I. Bill” provided subsidies for returning veterans to attend college paid for by taxpayers. The argument at the time was that more Americans in higher education would boost the nation’s economy. AIER states that the U.S. never had a lack of professionals before the war. Most learning used to happen on the job instead of a college classroom.

Once the government got its foot in the door with federal involvement in higher education they continued to expand. The cold war saw new programs to support education such as the National Defense Educational Loans in response to the space race agaisnt the Soviets. Lyndon Johnson’s “great society” came with the Higher Education Act of 1965 which further opened the door for easy loans and grants to any high school graduate seeking to attend college. This led to an explosion in enrollment as most barriers for taking on such loans were lifted regardless of the borrower’s ability to pay back their tuition.

This led to an explosion in enrollment as most barriers for taking on such loans were lifted regardless of the borrower’s ability to pay back their tuition. The increase in federal subsidies and loans has been a significant contributor to rising tuition costs. Essentially, when more money is available for students to borrow, colleges are incentivized to increase tuition because they know students can access these funds. This abundance of federal financial aid creates a market where educational institutions can steadily raise prices, knowing that the government will provide students with the means to pay, perpetuating a cycle of higher debt and tuition.

Students with below average level of academic ability were now enrolling into four-year institutions. For an 18-year-old, payments that are years in the future seem inconsequential when making this decision. Regardless of the irresponsible nature of this decision, it is equally as irresponsible for the executive branch to create this incentive structure and not expend the numerous negative consequences created by this moral hazard.

Higher education is broken in America. This is not to say that education is worthless, and no one should attend college anymore as the evidence still points to a significant pay bonuses for 4 year degree holders long term. The federal government needs to however attack the problem from the root instead of aiming for the low hanging fruit of student debt.

The debt crisis is a problem. However, it is a symptom – not the cause – of this failing system.