To better understand the trillion-dollar student loan debt crisis in the United States which impacts nearly 45 million college attendees and graduates, taxpayers need to recognise the complexity of the problem and not simply blame student loan borrowers.

In the last 50 years policy-makers have created a federal funding scheme that has incentivised state governments to decrease funding efforts and to encourage tuition-fee-based funding reliance in higher education.

As higher education finance expert Arthur Hauptman pointed out in 2011: “Common sense suggests that growing availability of student loans at reasonable rates has made it easier for many institutions to raise their prices, just as the mortgage interest deduction contributes to higher housing prices.”

Expanding the complexity of this issue, the United States Supreme Court struck down President Joe Biden’s student loan forgiveness plan that would have erased student loan debts for nearly 23 million borrowers.

Scaled-down plans

Since the ruling, Biden has announced much more scaled-down plans – the latest coming earlier this month – that have only addressed a fraction of this national problem.

Critics of Biden’s loan forgiveness plan, which included conservative politicians, private student-loan servicers and major companies that manage commercially held federal financial aid loans, contended that since the student voluntarily acquired the loans, they alone are obliged to repay them.

A further claim by critics of the Biden federal loan forgiveness programme is that the cost of the US$430 billion programme will lead to much higher inflation due to increased deficit growth. A similar accusation was made that never came to fruition at the beginning of the Social Security Act in 1935 and the GI Bill in 1944.

This is a simplistic way to look at this complicated problem involving state government funding decisions and bountiful federal loan availability, which has incentivised many colleges and universities to adopt more tuition-fee-based revenue models.

The domino effect

At the nucleus of this issue are decades of state government disinvestment resulting in ongoing tuition and fee growth, with the federal government backstopping the system through its over US$100 billion in federal loan programmes.

As federal loans have expanded, state disinvestment went further as many public colleges and universities have shifted their financial reliance from state government to more tuition-fee-based revenue models.

The result is that current state government investment in public higher education is nearly 50% less in state ‘tax effort’ or ‘fiscal capacity’ than it was in 1980. Additionally, half of the states spend less in real dollars for public institutions than they did in 1991, while enrolments increased by nearly 20% during the same period.

Public colleges and universities were not the only institutions indirectly incentivised to become more tuition- and fee-reliant.

In reacting to the largesse of these available federal loan programmes, higher education institutions in the independent sector, including not-for-profit private colleges and universities and for-profit institutions, developed a fiscal addiction to the availability of federal loan programmes.

The disproportionate impact of these developments on under-represented and lower-income populations is only beginning to be understood.

Long-term economic consequences

The economic consequences of this complicated issue are already beginning to affect the country’s economy in the small business, housing, automobile and most other consumer markets. In 2019, the Federal Reserve Bank issued a report highlighting a national decline in home ownership rates and especially among young Americans in their 20s and 30s, who experienced nearly twice the decline in homeownership as the general population between 2005-14.

The Federal Reserve also reported that student debt accounted for nearly one quarter of the overall decline and precluded 400,000 young adults from buying homes during that period.

The report also noted that the rise in education debt increased borrowers’ odds of default, adversely impacting their credit scores and ability to apply for a mortgage.

In the last three years, the rate of millennial renters giving up on home-ownership has increased by 65.7%. The foreseen danger in the housing market is that we are creating a generation of renters and not buyers. Ultimately, consistent declines in home-ownership will cause a significant decrease in revenue for banks and investment firms that lobbied against the Biden administration’s student loan forgiveness programme.

Another long-lasting economic impact of massive student indebtedness is a reduction in consumer spending power of those with student loan debt. It is estimated that each time a graduate or non-graduate student’s debt-to-income increases by 1%, their consumer consumption declines by as much as 3.7%, according to the Education Data Initiative.

Also, in a 2018 LendingTree survey, one in 10 borrowers said they could not pay for a new car due to their student debt.

In addition to home-ownership and automobile consumer markets, areas such as clothing, home repairs, entertainment, travel and grocery goods are all beginning to understand what saddling the next generation of American consumers with substantial student loan debt will ultimately mean for their bottom-line profits.

Perhaps the most damaging economic consequence to the nation is in the small business markets. According to a 2015 Philadelphia Federal Reserve report, an increase in student loan debt of approximately 3.3% resulted in a 14.4% decrease in the formation of small firms and businesses in each Pennsylvania county.

Delayed retirement savings, deferred family formation

Moreover, rising student loan debt will prevent young people from saving for their retirement and weathering financial crises, making them increasingly reliant on social programmes and government agencies.

Demographically, the rise of student debt is already delaying marriage and family formation, which is increasingly becoming an issue of national concern. These economic and societal effects are not short term, and also disproportionately impact black, Hispanic and female student loan borrowers.

Finally, young people in the United States managing substantial student loan debt have very few options except to spend less, since student loan debt is the only debt where filing for bankruptcy is not an option by law. According to Robert Reich, former US secretary of labour: “Bankruptcy laws allow companies to smoothly reorganise, but not college graduates burdened with student loans.”

According to a warning from Federal Reserve Chairman Jerome Powell: “As it goes on and as student loans continue to grow and become larger and larger, then it absolutely could hold back the economy.” If important reforms and recalibrations are left unattended, the problem that college graduates are facing today will have economic consequences for every US business, government agency and citizen.

F King Alexander has been a professor and president of four large public universities in the United States for over two decades and currently serves as a professor of educational leadership at Florida Gulf Coast University, a senior faculty fellow at the Education Policy Center at the University of Alabama and a faculty affiliate at the Cornell University Higher Education Research Institute, United States. E-mail: falexander@fgcu.edu. This article is based on an international webinar at the Centre for Global Higher Education at the University of Oxford, 3 October 2023, and an opinion commentary in the Journal of Education Finance, Summer 2023. It is published in the current issue of International Higher Education.