Hi Friendos,
I hope you had a wonderful Labor Day weekend! After my August break, we have a back-to-school theme this week: student loans. Of course there is a lot of media coverage on this topic, including of the recent Supreme Court decision to keep the SAVE plan on ice, impacting ~8 million Americans currently enrolled in SAVE, others who would like to enroll in it, and perhaps also the ~2.6 million Americans currently enrolled in other income-based repayment plans (PAYE, ICR).
Some data to keep in mind in thinking about loans for higher education. Per 2022 U.S. Census Bureau data, of the U.S. population age 25 and older:
- 37% had not attended any college,
- 15% had attended some college but had not received a college degree (37% + 15% = 52%),
- 10% had received an Associate’s degree, and
- 38% had received a 4-year college degree/masters/professional/doctoral degree.
Over the last few years, I’ve read a lot about student loan forgiveness. I see statements like this (emphasis added):
- “One question is whether debt forgiveness is the right thing to do. It asks whether forgiving student loans is the best way to spend an estimated $500 billion, given that some, though not all, of those who benefit have college degrees and relatively high household incomes.” (Vox.com)
- “You are essentially transferring this debt from individuals and families to the federal government and ultimately to taxpayers.” (NPR.org)
- “Prior to the Affordable Care Act, a majority of student loans originated with a private lender but were guaranteed by the government, meaning taxpayers would foot the bill if student borrowers defaulted.” (Investopedia.com)
My spouse often says I am too Spock-like. Leonard Nimoy seems pretty cool, so I will go ahead and point out that it is not analytically correct to describe debt forgiveness as “transferring” an obligation from former student-borrowers to taxpayers at large because the taxpayer money has already been spent.
When a student takes out a federal student loan, there is a cash disbursement from the federal government to the student’s school. The college or university gets the money right away and spends it on faculty, staff, facilities, etc. The student has a (digital) piece of paper saying they owe this loan. The taxpayer money has been spent at this time, going from the federal government to the school. Put differently: if the federal government just sent the cash to the schools, and skipped the part where it created the piece of paper saying the student now owes a loan, the amount of federal money flowing to colleges and universities would be the same.
Later on, after the student graduates or drops out, they start making loan payments to the federal government. They directly make loan payments to a student loan servicer, but ultimately it flows back to the federal government.
It’s as if the federal government says: ok, we’ll let you to go to college now, but later on, we’ll impose a higher tax rate on you for a while. The imposed additional tax rate may be based on your income for a set number of years (10 or 20 or 25 years depending on the income-driven repayment plan – SAVE/IBR/ICR/PAYE/REPAYE). If you get married (or divorced), your spouse’s income can change the “additional tax rate” applied to you. If you take a certain kind of job, your “personal tax rate” will be higher for only 10 years (Public Service Loan Forgiveness). Also, your additional tax rate will vary with the prevailing interest rate environment at the time you took out the loan (Congress adjusts the interest rates on student loans every year based on 10-year Treasury bond rates), and that rate may change from the time you start school until the time you finish. Certainly this is something any 17 or 18 year old can easily understand???
Former students who default on their debt (most of whom do not receive a degree) do not escape these additional “taxes” but simply experience them in different forms, like wage garnishment, having tax refunds withheld, tarnished credit, and having Social Security benefits withheld.
When someone takes out student loans, I think it is more accurate to say: Taxpayers collectively are paying for that person’s higher education, and then, over a multi-year period, will recoup money from that former student. Taxpayers might get back the full cost of that student’s education, or just a portion of it, or maybe even more than the full cost. It is complicated to analyze exactly what proportion of a specific student’s higher education is ultimately taxpayer-financed because the former student will pay back their loans over a multi-year period and it’s tricky to accurately compare cash flows happening at different points in time along with other factors that impact repayments like deferrals, interest capitalization, forbearance, and loan consolidations.
I think the current U.S. system for financing higher education is pretty jacked. I hope that we can, collectively, find a better way. Â
-Stephanie
p.s. thanks to economist Nathan Tarkus for his excellent August 2022 article on this topic.
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Frequently Taxed Questions 