Student Loans: The Ultimate Stealth Tax
The American higher education system is a mess. What is supposed to be a gateway to prosperity has instead become a wicked vampiric debt trap sucking wealth from generations of Americans.
In a functioning country, education is basically free for a reason so simple only politicians and pundits are dumb enough not to notice:
More education leads to higher income which governments will find a way to tax, boosting public revenues.
Simple, right? The average (male) college graduate makes close to a million dollars more than the average worker without a degree across their lifetime. In a progressive tax system, where higher-income people are taxed at a higher rate than those who are poorer, the more educated people are the more revenues the government gets.
That, and not any kind of moral commitment, is why K-12 education was made free — mandated, in fact —years ago. Everyone benefits from living in a place with a lot of educated people, even people who don’t go to college.
Which is why it is so disturbing to see a supposedly left politician like Nancy Pelosi make the craven argument that forgiving student loans would harm people who didn’t go to college.
And used-car-salesman-in-chief Joe Biden insists we can’t forgive student loans for rich kids who go to pricey schools, despite those kids typically having the kind of parents who don’t need loans to fund their child’s college education.
It is a simple fact that letting people get as educated as they want to be benefits everyone. Few go to school for ten years and come away without some useful skills they’ll eventually put to use in the labor market or their community.
The real reason the student loan system works the way it does is because it is intended to trap as many people as possible in a special tax category.
Most student loans these days go through the federal government. That’s why the President may be able to simply cancel them — the Department of Education owns the loan, so it can decide to burn it up.
Virtually all borrowers are eligible for income-sensitive repayment and total forgiveness after making payments for 20 years — 10 if you work in public service (and the Department of Education doesn’t screw up).
It is called the dirty secret of the student loan world that everyone knows the vast majority of federal student loans will never be repaid.
That isn’t the point of them.
Under income based repayment plans as they’re currently structured, the federal government takes about 10% of all a borrower’s income beyond 150% of the poverty line, somewhere in the $20,000 range for a married couple with no kids.
And after 20 years — poof, gone, the balance owed wiped out, though possibly with tax consequences (but possibly not).
All federal student loans will eventually be forgiven, the question is only when. The system is structured to extract income from borrowers for up to twenty years, basically the majority of their working lives.
Unlike most taxes, the politicians don’t have to call it a tax. That’s the dirty trick they’re pulling on those of us who have education debt.
A new fad is gripping parts of the federal government, part of the great wave or neoliberal ideology that pretends private companies don’t often wind up as bureaucratic and unmovable as governments. And one of the new innocent-sounding but ultimately massively destructive ideas neoliberals are pushing is the idea of user fees.
Basically, people pay taxes for the services they use.
This never applies to the single biggest discretionary budget item — the Pentagon — for some reason, but for things like roads and schools this is the new trend Republicans and Centrist Democrats love.
It doesn’t work in the long run because it creates space for a classic collective action problem and under-funding of public infrastructure, for the same basic reason when six people try to split a check everyone manages to contribute about 20% too little to make the bill.
But that’s how the higher education system is set up in America. Which is why it has become so incredibly expensive to get a college degree, a fact that is keeping millions of Americans down.
Because like it or not, a college degree is a requirement for any job that pays better than minimum wage — in effect, any job you can work and still afford to live.
Americans are asked to trust that they can go into debt without any guarantee they’ll even get their degree or find a job. Those with rich parents are fine — so they have a built-in advantage. Anybody with poor or even lower middle class parents like I had takes out loans and has to accept the tax burden.
That leaves us with less disposable income to spend on things like houses, cars, electronics, and kids — y’know, all the stuff that keeps the economy growing which provides the jobs indebted grads work to pay off their life-debt.
Naturally, having to live that life creates another point of separation between the college-educated and those who aren’t, which is why that is becoming the single most dangerous fault line in American society, followed closely by the rural-urban divide.
Which is, by the way, strongly correlated. Rural folks like me grew up thinking debt was to be avoided at all costs. Had the state of California not made higher education free to lower-income students back in my day, I might never have gone to or graduated from UC Berkeley — something that has dramatically shaped my professional opportunities.
Many lower-income people see a lifetime of indebtedness as culturally abhorrent. And so they’re effectively locked out of the single greatest engine of social mobility left in the United States.
A fault line that has erupted in anti-science attitudes in the middle of a brutal pandemic and is corroding the country’s governing institutions.
The student loan system is quite literally America shooting itself in the groin.
Because sooner or later, middle-class students are going to start realizing that it’s cheaper — and probably more fun — to get a degree in Europe or even Canada.
Europeans love skilled immigration. Especially when the immigrants are descended from Europeans. For students who don’t need to be close to their families, an international education can be far cheaper than one in the United States.
And based from my experiences as a student, teaching assistant, and instructor, a better one too.
Because thanks to the structure of the student loan system colleges have precisely zero incentive to rein in costs. In fact most have adopted the opposite strategy: turning education into an experience for students who know the real point is to leave college with a degree and connections because those are what’s required to pay back the loans they took on.
Across America there are hundreds of four-year state colleges like Oregon State University who hype their football teams, party scene, connections to big companies, and alumni network. Most teaching is done by adjunct instructors and grad students with no real job security. Out of state and international students are recruited because they can be charged even higher tuition than residents.
Their graduation rates? Poor. Students transfer out like crazy after one or two years, the institution churning through new bodies— and often leaving them with debt.
There are simply no true quality controls at most universities. Too many tenured professors checked out intellectually years ago, leaving the real work to adjuncts who are seen as disposable and grad students whose work they often steal and pass off as their own.
Obviously, there are exceptions — but in reality college is a trap for far too many students. They go, get a questionable education over four or five years, but ultimately learn how to be an effective worker, employee, or manager wherever they find a job and get real training.
Like so much of America these days, the system is fundamentally predatory. The rich don’t rely on it, the poor can’t trust it, and the middle class are sucked dry, some getting rich, many doing alright, most remaining almost poor.
The student loan system has to be reformed. Simple forgiveness, whether a paltry $10,000 or even a more substantial $50,000 is not a solution.
New debt will simply begin to accrue, and every few years Democratic Presidents (if those ever even happen again) will make a big show of forgiving another chunk to secure the vote of the young and indebted.
To fix the broken student loan system requires several key steps:
- The Department of Education must buy all outstanding education debt held by private lenders. Private education loans must be banned.
- All federal student loans must be immediately refinanced at the same rate the Department of the Treasury uses to set market interest rates plus half a percent to cover administration costs. This would take the average loan fixed interest rate from around 6%-8% to under 1%.
- Repayment must be set at about 5% of a borrower’s adjusted gross income. Every year a borrower works full-time 10% of their remaining loan balance is forgiven tax-free. This is pro-rated for part-time workers. Public service workers get 20% forgiven annually.
- Establish a hard cap on the annual amount a student can borrow set at the average cost of four years of tuition and fees across the country for undergrads, ten years for graduate and professional students. This will make cheaper schools more attractive and push expensive ones to rein in costs, especially if a national cost and student outcomes database is established.
- Borrowers who have paid off their loans in the last 10 years will be allowed to claim a non-refundable tax credit, spread over a maximum of five years, to compensate for their past losses being trapped in the system.
Getting rid of student loans entirely and actively funding higher education ought to be a national priority.
But this will take time — if it can even happen at all. In the meantime, a hard reform of the system that makes it fair and penalizes cost inflation at universities is vital to giving America any chance of surviving.
The country is ultimately fragmenting because social mobility is dying. There are many reasons for this —the broken higher education system is one.
This plan covers most of the major objections opponents of student loan relief bring up.
- Borrowers who paid off their loans already can zero out their federal income taxes for a few years
- Debt-averse potential students will see a clear path to escaping their debt, particularly if they do public service work like the military, firefighting, police, or teaching
- You can eliminate other redundant education programs or tie good ones like Pell Grants in to pursue cost savings
- Students who choose high-cost institutions will pay much more over time than those who head to cheaper ones that offer the same quality of education
Everyone gets something from this plan. Conservatives get to put some hard limits on the cost of education, Liberals get to claim credit for offering all Americans a path to prosperity, Progressives get sustainable debt forgiveness.
Unfortunately, if my diagnosis of the federal government is correct, this is precisely why nothing like this will be adopted.
The politicians want the fight — actually doing anything is too risky. Negative partisanship wins the day, not effective policy. The only bipartisan thing that moves forward is a halfassed infrastructure bill that is barely scratching at the surface of 30 years of infrastructure decay across America.
So millions of Americans remain trapped, given a reprieve until January 31, 2022.
But after that — the pain begins anew.