The Student Debt Crisis

By: Taylor M. L. Rivich

Student debt relief is a major topic of conversation going into the 2020 election. Our collective student loan debt has surpassed $1.5 trillion, which is second only to mortgage debt. [1] The average debt burden of the graduating class of 2018 was nearly $30,000. [2] Furthermore, unlike outstanding debt on auto loans and credit cards, student loan debt is extremely difficult to discharge in bankruptcy. [3]

 

What Caused the Student Debt Crisis?

If not for a 1971 U.S. Supreme Court case called Griggs v. Duke Power Co., student debt might not be such a hot topic today. In Griggs, a group of African American employees of Duke Power Co. filed a class action lawsuit alleging that the company discriminated on the basis of race, in violation of the Civil Rights Act of 1964. [4] After the Civil Rights Act of 1964 was enacted, the company had instituted policies requiring a high school diploma and satisfactory performance on intelligence tests in order to qualify for a promotion. [5] The U.S. Supreme Court found the policies to be discriminatory, regardless of the company’s intent, because they had the effect of disqualifying a disproportionate number of African Americans. [6] The Court said that such a discriminatory impact might still be permissible if the requirements were directly related to one’s ability to be successful at the job, but those who did not meet the requirements could do the job just as well those who did. [7] In other words, the requirements were not found to have any discernible impact on job performance.

After Griggs, employers everywhere had to adjust to ensure that their hiring requirements were focused on the candidate’s ability to do the job. Employers found that requiring college degrees was justifiable, even for jobs which did not require college-level skills, because they served as good indicators that job candidates were reasonably intelligent and possessed important soft skills like dependability. [8] The result was a significant increase in demand for a college education.

Other contributing factors could include the prevalence of for-profit colleges, a lack of financial education in high schools, and nationwide wage stagnation for the middle and lower classes. However, the most common argument, anecdotally, is that, because the federal government is so willing to lend money to students despite the risk of default, colleges have been able to charge an exorbitant amount in tuition, so colleges, not students, are the real winners. [9] The counterargument to this is, if the industry is privatized, students from poorer families will be unable to borrow money for school at all, because “their future earnings and, therefore, their ability to pay are too speculative.” [10] Therefore, privatization could predictably create a caste system of sorts, in which only those from wealthier families, or those seeking jobs in high-paying fields, would be able to pursue a higher education.

 

A Brief History of Federal Student Loans

Six years before Griggs, in 1965, the federal government created the Federal Family Education Loan (FFEL) program, which guaranteed loans provided by banks and non-profit lenders. [11] In 1992, in response to a report from the first Bush administration finding that a direct loan program would be cheaper and easier to administer, Congress created the first direct lending pilot program, essentially cutting out the middle man and allowing the government to work directly with students. [12] Then, in 1993, President Clinton suggested making the pilot program official, because “[e]stimates from all of the government’s budgeting and auditing agencies showed that direct lending would deliver the same loans to students at significantly lower cost to taxpayers.” [13] Congress agreed and passed the Omnibus Reconciliation Act of 1993, which began phasing in direct lending. [14]

But the battle between guaranteed (third party) lending and direct lending was not finished. The Republican Party took control of Congress in 1994 and sought to eliminate the new direct lending program, despite its cost-effectiveness. [15] However, Republicans received a great deal of pushback from colleges which found the simplicity of the new program to be highly preferable to the “complicated, cumbersome process” of the old program. [16] Eventually, Congress settled for “prohibiting the Department of Education from encouraging or requiring colleges to switch to the direct loan program.” [17]

Later, the uncertainty caused by the Great Recession of 2008 persuaded many private lenders to withdraw from the guaranteed loan program. [18] As a result, students and colleges began relying heavily on direct lending once again. [19] In response, George W. Bush signed the Ensuring Continued Access to Student Loans Act (ECASLA), authorizing the government to buy the loans from the private lenders in an attempt to stabilize the student lending market. [20] Then, in 2010, Barack Obama succeeded in eliminating the guaranteed loan program entirely, effectively terminating “subsidies paid to private lenders.” [21] According to the Congressional Budget Office (CBO), this move would save “$68.7 billion . . . over the next ten years,” [22] and these savings have since been used to double the funding of the Pell Grant program. [23] Additionally, Obama created the American Opportunity Tax Credit, worth about $2,500 to students per year for four years. [24]

Despite this decades-long game of legislative cat and mouse, the student debt crisis is alive and more pressing than ever.

 

Proposed Solutions

During the last election cycle, Donald Trump, a New York businessman, proposed his plan to deal with student debt. A major component of his plan was privatizing the student lending industry. [25] The idea was that, by forcing students to look to private lenders rather than the federal government, colleges and universities could no longer expect students to be able to borrow whatever they needed, and they would be forced to lower their tuition prices to remain competitive. [26]

However, Trump has not followed through on his plan. The only significant changes under Trump’s administration have come through the Tax Cuts & Jobs Act of 2017, which allows the disabled to apply for tax-free discharge of their student debt. [27] The Act also extends eligibility for Obama’s American Opportunity Tax Credit to five years instead of four. [28]

Democrats have a plethora of presidential candidates going into 2020, but Elizabeth Warren, a Harvard law professor and bankruptcy scholar, proposed the most intriguing solution to the student debt crisis. Warren suggests a new tax on the wealthiest 175,000 families (top 0.1 percent) to fund the discharge of up to $50,000 in student debt tax-free for everyone who makes less than $100,000/year. [29] She contends that this plan would completely eliminate student loan debt for 75% of borrowers. [30] She would also eliminate tuition at every public college or university. [31]

Critics of Elizabeth Warren’s plan argue that it is a “fundamentally regressive policy,” because “more education is associated with higher incomes,” therefore, “[t]he largest handouts would go to those with lucrative graduate and professional degrees.” [32] They also argue that blanket debt cancellation would only incentivize students to take out more loans which they cannot afford. [33] Political considerations aside, Warren’s plan faces a legitimate constitutional hurdle as well: Article I, Section 9.

The relevant portion of Article I, Section 9 reads: “No capitation, or other direct, tax shall be laid, unless in proportion to the census or enumeration . . . .” [34] Interpreting this clause requires an understanding of the difference between direct and indirect taxation. Direct taxes are collected directly from the individual taxpayer (like an income tax), whereas indirect taxes are collected by third-parties and then paid to the government at a later date (like a sales tax). Unlike direct taxes, indirect taxes are not restricted by the U.S. Constitution. Direct taxes, however, must be apportioned among the states according to the most recent census. For example, if Arizona contains five percent of the U.S. population, then five percent of the revenue from the tax must come from Arizona.

Warren wants to levy a 2% tax on households whose total assets surpass $50 million and a 3% tax on billionaires. [35] This clearly operates as a direct tax, yet it is inconsistent with the apportionment requirement; each state’s ratio of billionaires to population is different. [36] The higher concentration of billionaires in one state, the lower each billionaire in that state would need to pay to satisfy a direct tax. [37] In states with a significantly lower concentration of billionaires, the burden on each billionaire would be that much higher. [38]

However, it is also entirely possible that her proposed wealth tax would be saved by the Sixteenth Amendment. That amendment reads: “The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several states, and without regard to any census or enumeration.” [39] This amendment disregards the apportionment requirement for income taxes and makes our current system of tax brackets and marginal rates constitutional. If Warren can convince the Courts that her wealth tax is merely an income tax in different clothing, then it will be upheld pursuant to the Sixteenth Amendment. But even if the wealth tax fails, there are other means capable of reaching the same end. The Taxing and Spending Clause explicitly gives the power to tax to the legislative branch, so Congress is always free to increase the marginal rates applicable to the highest earners without constitutional recourse. [40]

 

Conclusion

It seems to me that, regardless of how we go about addressing student debt, we must be willing to make bold policy changes. Student debt is one of the heaviest burdens on the national economy. Relieving this burden would empower younger generations to buy more homes, produce more wealth, and live more fulfilling lives.

 

References

[1] A Look at the Shocking Student Loan Debt Statistics for 2019, Student Loan Hero (Feb. 4, 2019), https://studentloanhero.com/student-loan-debt-statistics/.

[2] Id.

[3] Zack Friedman, Can Student Loans Now Be Discharged in Bankruptcy?, Forbes (Jun. 18, 2018), https://www.forbes.com/sites/zackfriedman/2018/06/18/bankruptcy-student-loans/#4da1cd0844f8.

[4] Griggs v. Duke Power Co., 401 U.S. 424, 426 (1971).

[5] Id. at 427–28

[6] Id. at 430–32

[7] Id. at 431

[8] Patrick W. Watson, The Real Reason Behind the Student Debt Problem, Forbes (Feb. 26, 2018), https://www.forbes.com/sites/patrickwwatson/2018/02/26/the-real-reason-behind-the-student-debt-problem/#62a709271f92.

[9] Republican Views on Education, Republican Views (Apr. 3, 2014), https://www.republicanviews.org/republican-views-on-education/.

[10] Jeffrey Dorfman, Government Should Get Out of Student Loan Business, Forbes (Apr. 19, 2014), https://www.forbes.com/sites/jeffreydorfman/2014/04/19/student-loan-profits-show-government-should-get-out-of-student-loan-business/#35e3665e3ae3.

[11] Student Loan History, New America, https://www.newamerica.org/education-policy/topics/higher-education-funding-and-financial-aid/federal-student-aid/federal-student-loans/federal-student-loan-history/ (last visited Oct. 3, 2019).

[12] Id.

[13] Id.

[14] Id.

[15] Id.

[16] Id.

[17] Student Loan History, supra note 11.

[18] Id.

[19] Id.

[20] Id.

[21] Id.

[22] Id.

[23] Democratic Views on College Tuition, Republican Views (Mar. 27, 2018), https://www.republicanviews.org/democratic-views-on-college-tuition/.

[24] Id.

[25] Justin Haskins, Trump’s Student Loan Plan Could Stop Student Debt Crisis, Townhall (Nov. 16, 2016), https://townhall.com/columnists/justinhaskins/2016/11/16/trumps-student-loan-plan-could-stop-student-debt-crisis-n2246699.

[26] Id.

[27] Sarah Kessler, Trump on Student Loan Forgiveness, Student Debt Relief (May 26, 2019), https://www.studentdebtrelief.us/student-loan-forgiveness/trump/.

[28] Id.

[29] Astead W. Herndon, Elizabeth Warren’s Higher Education Plan: Cancel Student Debt and Eliminate Tuition, New York Times (Apr. 22, 2019), https://www.nytimes.com/2019/04/22/us/politics/elizabeth-warren-student-debt.html.

[30] Id.

[31] Id.

[32] Preston Cooper, Elizabeth Warren’s Bad Student Debt Plan, Nat’l Rev. (Sep. 26, 2019), https://www.nationalreview.com/magazine/2019/10/14/elizabeth-warrens-bad-student-debt-plan/.

[33] Id.

[34] U.S. Const. art. I, § 9, cl. 4 (emphasis added).

[35] Katrina vanden Heuvel, Warren’s Push for a Wealth Tax Could Be a Game Changer, Wash. Post (Jan. 29, 2019), https://www.washingtonpost.com/opinions/warrens-push-for-a-wealth-tax-could-be-a-game-changer/2019/01/29/a6beced4-232a-11e9-90cd-dedb0c92dc17_story.html.

[36] Kyle Sammin, Here’s Why Elizabeth Warren’s Wealth Tax Is Completely Unconstitutional, Federalist (Aug. 8, 2019), https://thefederalist.com/2019/08/08/heres-elizabeth-warrens-wealth-tax-completely-unconstitutional/.

[37] Id.

[38] Id.

[39] U.S. Const. amend. XVI (emphasis added).

[40] U.S. Const. art. I, § 8, cl. 1.