“Hence I have no mercy or compassion in me for a society that will crush people, and then penalize them for not being able to stand up under the weight.”
- Malcolm X
USA, where concrete jungles tower over the horizon, where dreams are just on the spur of life. The states used to be such a grand visage for opportunities, the exact place to be to change your life. But bit by bit, year by year, what was once hailed as the greatest, slowly becomes a shell of its past self. If anything however, American’s have only their education to be proud of as they house many of the world’s top universities. Harvard, Yale, Brown, they’re all household names in academia which stand on top. Yet even so, rising tuition costs coupled with the privatization of higher education has made loans the only way to afford it. A growing number of Americans are finding themselves working tirelessly, teetering between living costs and student loan debt as a bachelor’s becomes the bare minimum.
Who owes how much?
As of 2024, Australia’s GDP ranks 14th in the world with a cool $1.79 trillion according to data from the IMF. A bustling country with a growing young population, it’s a prime example of a developed country. Though it may seem out of place to talk about Australia here, it serves as a great point of reference. The amount of student debt owed in America nearly surpasses this number, sitting nicely at $1.75 trillion. The average American owes $28,950 of debt when divided equally, and in most cases it truly is the only way one can earn a higher education and a degree. 61% of college students graduate with debt according to the National Center for Education Statistics. Though these loans do provide a means for those with lower income, the act of burdening people when all they want is to just be able to get a job feels rather deliberate.
A key aspect of this student loan crisis is understanding how the payments themselves work. Generally, there are two methods granted by the US government; the first is a time based repayment plan that is similar to paying off installments on the loan. Borrowers pay a significantly higher amount than the interest every month, and as such it ensures that the loans will be fully paid off within the time frame provided. But for more than 40% of people, they can’t afford to pay this premium since their monthly wages can’t cover it (Wall Street Journal, 2023). They then resort to income based plans that can lower the monthly payments by over 80% at times. The problem with these reduced plans is that it rarely covers the cost of the interest, let alone bite into the principal loan itself. As time goes on, loans of low-income borrowers can start to balloon with interest, leaving approximately 39% of student loans higher than they were before (Pew Charitable Trusts, 2021). Imagine toiling away for 10, 15, maybe even 20 years, making sure to pay your loans every month without failure, and later finding out you owe thousands of dollars more.
The skyrocketing number of student loans is attributed to funding cuts done by the U.S government after the 2008 Global Financial Crisis as they try to recuperate their losses. Operating costs for public colleges provided by the State have fallen from 74% in 1986-1987 to just 46% in 2015, causing institutions to raise tuition in order to cover costs. Furthermore, after multiple reforms through the Reagan-Clinton era in the 80s and 90s, a majority of loans were no longer subsidized and were beginning to be borderline predatory (Carlson, 2020).
Defaults and Underlying Problems
Biden’s plans for reforming this student loan system became his leading campaign throughout his election and current time in office, vowing to once and for all clear people of debts they are unable to pay. After pausing payments during the pandemic to ease off burden, his Student Debt Relief plan that was recently reinstated vows to forgive up to $20,000 in debt. But the challenge still lies in its shortcomings. For non-public workers under an income driven plan, they are only eligible for forgiveness if they have been paying for over 20 years, and they have never missed a payment at all. One misinput of data, or forgetting to renew your annual income recertification can lead to the debt shackling you for the rest of your life.
It gets even worse when we take a look at the proportions of debt and the demography of the borrowers. More than a third of that $1.7 trillion is held by a measly 7% of borrowers who hold more than $100,000 (Council on Foreign Relations, 2024). Interestingly however, these people are a lot less likely to default on their payments as they are most likely to be doctors and lawyers who earn enough to pay off their loans. Those who borrow less actually tend to default on their payments. Figure 1 shows how students with less than $10,000 of debt are more likely to miss payments and fail to do so. Studies have also shown that these students tend to come from marginalized families who struggle to make ends meet in the first place (Bynoe et al, 2017). The final nail in the coffin falls to those who received no degree whatsoever. Student loan debt still shackles the 40% of students who took out loans, but dropped out halfway through due to financial strain. Stuck with no degree in exchange for their debt, these students struggle to pay off their debt, but are ineligible for relief plans.
A Prisoner to Principle
Left paying interest to no avail, borrowers are stuck with a payment that will continuously take up their expenditure for a long long time. Affecting over 43.2 million people, it significantly reduces the amount of spending that Americans can do, and reduces the aggregate demand the country has. As illustrated in Figure 2, the real GDP or output a nation experiences will drop accordingly to a leftward shift in the aggregate demand, labeled AD’. Student loan debt can be classified as an example of the income effect taking place, where the wealth of people determines just how much they will be willing to spend. Every 1% increase in debt-to-income ratio for borrowers causes their consumption to fall by 3.7% (Hanson, 2023)
On the other hand, the effects of mass debt forgiveness will most likely increase household net worth and disposable income, driving higher consumption and investment. A 10-year projection done by the Levy Economics Institute using risk models showed an average increase of $86 billion to $108 billion in real GDP annually over 10 years. Being unchained from debt will potentially shift the aggregate demand curve to the right, but inflationary pressure is expected to be low or have no impact (Fullwiler et al., 2018). Though the $305 billion lost in forgiveness may reduce cash flow to the government, the long term benefits from this stimulus has proven to be greater than the potential rise in interest rates or price levels. People’s lives are on the line here with education being the foundation.
Reflecting from the 2008 Global Financial Crisis, this student debt crisis may well be another bubble bound to burst. The price for opportunity in higher education steadily climbs year by year, mirroring the rising prices of housing back then. Bad credit and securitization of student loans into Student Loan Asset-Backed Securities (SLABS) also puts risk when mass defaulting occurs. Coupling the ease of lending money to students with the predatory lending experienced in many for-profit colleges potentially sets us up for another financial crisis (Ironfist, 2020). The only difference is that there are no longer houses to claim on default, just students begging for a clear shot at life. What was supposed to be a public good has now been transformed into a commodity only accessible through debt.
A Lesson to Learn
The hiking amounts of debt is already enough to warrant a crisis, but waving it as provided through Biden’s debt forgiveness plan will only solve it for the short-term. Even if all the loans were to be forgiven, future students who will eventually enroll themselves in college will face a higher and higher cost for tuition, causing them to rely even more on student loans. Dropouts who are left with no support and help due to defaulting on their payments have no chance of salvation either. Though debt relief will certainly aid people, without a structural reform to how tuition and higher education is funded by the government, the same crisis will happen again within the next 10 to 15 years. Subsidies and grants must be provided with less bureaucratic barriers in order to ensure that people don’t fall into the spiraling pit of student loans and tuition fees can finally drop.
Developing countries need to learn from these mistakes should they want to provide student loan programs to their citizens. Student loans do help and people will become inclined to finish higher education and in turn improve the nation’s economy and standing. But the fact is, resorting to loans because of rising fees, is only a band aid solution over the problem of affordability. Students in developing countries also face a different job market compared to the likes of America. It's not as diverse and may lead to them reaping less rewards than they are supposed to. These students are barely adults when they need to make this choice for burden, we don’t even have the capabilities to read the job market even after we graduate. It may get harder and harder to find jobs, whilst tuition gets worse still. Why does education, a human right and public good, need to be so expensive? Doctor Susan Carlson from the Western Michigan University put it best in her article on the debt crisis,“If the federal government had no problem coming up with US$700 billion to bail out the big banks that almost brought the U.S. economy to its knees in the Great Recession, why can’t it give students, their parents, and their grandparents real student loan debt relief?”
Kennedy Tangestu | Ilmu Ekonomi 2023 | Staff Divisi Kajian Kanopi FEB UI 2024/2025
Bynoe, A. J., PhD., & Fogarty, M. J., PhD. (2017). An Analysis of the Student Loan Debt Crisis in the United States: The Causes, the Current Status, and the Future of Indebted Students. Proceedings of the Northeast Business & Economics Association, , 57-62. https://www.proquest.com/scholarly-journals/analysis-student-loan-debt-crisis-united-states/docview/2842601010/se-2
Carlson, S. M. (2020). The U.S. Student Loan Debt Crisis: State Crime or State-Produced Harm? Journal of White Collar and Corporate Crime, 1(2), 140–152. https://doi.org/10.1177/2631309x20921567
Federal Student Aid. (2024). Studentaid.gov.
https://studentaid.gov/debt-relief-announcement
Fullwiler, S., Kelton, S., Ruetschlin, C., & Steinbaum, M. (2018). THE MACROECONOMIC EFFECTS OF STUDENT DEBT CANCELLATION. https://www.levyinstitute.org/pubs/rpr_2_6.pdf
Hahn, A. (2024, May 14). 2024 Student Loan Debt Statistics: Average Student Loan Debt. Forbes.
https://www.forbes.com/advisor/student-loans/average-student-loan-debt-statistics/
Hanson, Melanie. (2023) Economic Effects of Student Loan Debt. EducationData.org.
https://educationdata.org/student-loan-debt-economic-impact
Is Rising Student Debt Harming the U.S. Economy? (2023). Council on Foreign Relations. https://www.cfr.org/backgrounder/us-student-loan-debt-trends-economic-impact
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https://www.pewtrusts.org/-/media/assets/2021/07/pct-student-loans_topline-final-clean.pdf
Velez, E., Cominole, M., & Bentz, A. (2018). Debt burden after college: the effect of student loan debt on graduates’ employment, additional schooling, family formation, and home ownership. Education Economics, 27(2), 186–206.
https://doi.org/10.1080/09645292.2018.1541167
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