Putting Band-Aids on student debt problems

Olivia Cooper graduated from Union University in Tennessee in May 2020 with a biology degree and about $45,000 in student debt. As the first in her family to attend college, Cooper didn’t know about cost-saving options like starting at a community college. By graduation, her loans had already accrued about $3,000 in interest. “I don’t know that I had a great concept of money or felt like I had other options,” Cooper said. “I felt kind of stuck.”

In response to the COVID-19 pandemic and the resulting economic downturn, President Donald Trump on March 13 announced the government would freeze required payment and interest accumulation on federal student loans. President-elect Joe Biden has promised to extend that freeze. The pause gave Cooper and 42 million other borrowers a reprieve. But some Democrats are pushing for more drastic action that is unlikely to resolve student debt problems.

For some, the freeze has provided an opportunity to pay off loan capital, not just keep up with the interest. Cooper makes $38,000 a year teaching, and her husband makes $25,000 a year as a youth pastor. The couple ditched their second car, paid off their phones, and sold an Apple watch. They spend $60 a week on groceries and rarely eat at restaurants. Cooper hasn’t bought new clothes in almost a year. By January, they had paid off Cooper’s first loan of $15,000 and expect to pay the rest by December.

But the freeze didn’t provide long-term stability for all borrowers. An October Urban Institute analysis found that, while the freeze improved credit scores for those with student debt, they still carried about as much utility debt as they did before. Utility debt measures how far behind people are on paying for electricity and other essentials and is a good indicator of financial security. Student financial aid expert Mark Kantrowitz told CNBC that, based on government data, he estimated about 90 percent of borrowers paused payments on their student loans as of October.

Biden has promised to push Congress to forgive $10,000 of federal debt per student. Progressives like Sen. Elizabeth Warren, D-Mass., want to cancel federal student debt entirely. According to a 2020 Brookings Institution analysis, a quarter of graduates have under $20,000 in debt and another 30 percent have none. While only a quarter of graduate school attendees have student loans, they account for half of all student debt. Former Education Secretary Betsy DeVos noted in a farewell letter that forgiving loans wholesale would disproportionately benefit students who finished pricy degrees that boosted their earning potential, leaving other U.S. taxpayers to foot the bill.

“Across-the-board forgiveness of college debts is not only unfair to most Americans, it is also the most regressive of policy proposals—rewarding the wealthiest sector of our labor force at the expense of the poorest,” she wrote.

Near Lancaster, Penn., Dana Landis has also used the freeze to increase her loan payments. Despite being laid off from her job at a theater in March, she managed to spend less on gas and fast food so she could increase her loan payments from $215 to $250 a month. She has since landed another full-time job. Landis has about $11,000 in federal loans left, and she plans to pay it off in the next year. She doesn’t plan to stop paying despite Biden’s promises. While she wouldn’t resent debt cancellation, she pointed out that it wouldn’t prevent future students from graduating with new debt loads: “Cancellation of debt would be great, but it’s only a temporary fix.”

Preston Cooper and Jason Delisle of the American Enterprise Institute agree. Even with free community college tuition for low-income students, they predicted new federal loans would match today’s $1.5 trillion in just 14 years: “Advocates of debt forgiveness and free college need to admit that outstanding student debt will soon climb back to ‘crisis’ levels.”