Student Debt and the Crushing of the American Dream
- Stella Wilson
- Jan 28, 2022
- 5 min read
Updated: Jan 29, 2022
Just like the housing crisis that preceded it, the student debt crisis is closely linked to soaring inequality in the American economy. Once again, we are starting to realise the devastating impact of allowing predatory lending, which crushes those who strive to improve their place in society.
Any semblance of the ‘American Dream’ has been destroyed, with the US no longer unique in freedom and social mobility, but in the huge burden it places on students. According to the Education Data Initiative, the average American borrower had $39,000 of debt, with the student debt totaling $1.8 trillion, almost one tenth of the US Gross Domestic Product (GDP). Many European countries, including Denmark, Finland, Germany, and Norway offer free tuition, and in some of these, grants are available for living costs. Even the UK and Australia, both of which charge thousands of dollars in tuition each year, do not charge interest on repayment, which only takes place once borrowers reach an income threshold. Higher education is a key way to better oneself and access opportunities, making these countries far better embodiments of the American Dream than America itself.
This high student debt has had a profound effect on the American economy, including reduced social mobility and economic growth, as well as worsening income inequality.
Student debt has been significant in restricting home ownership, which is key to building intergenerational wealth — 36 percent of college graduates delayed buying a house due to their student debt. The increase in this debt is a powerful force for the destruction of social mobility, which measures the link between a person’s occupation or income and their parents’ occupation or income, and making parents unable to improve the economic status of their children, as they are hampered by debt.
The Great Gatsby Curve, as shown below, shows the link between higher income inequality and lower social mobility. The US is one of the highest countries on this graph, which could be partly caused by the impact of student loans, representing the ultimate end to the ‘American Dream.’
Similarly, the high cost itself is a barrier to entry to higher education, making it harder for students from lower-income families to attain degrees. 82 percent of students from the highest income quartile graduate from college, compared to only eight percent from the lowest quartile. As college graduates earn 80 percent more than those without a degree, this creates a cycle of poverty, and reduces social mobility. According to the Social Security Administration, after controlling for key socio-demographic variables that influence earnings and the probability of college completion, the differences in lifetime earnings by educational attainment are still substantial.
Student debt further exacerbates racial inequality, as black borrowers pay back on average four percent a year, compared to ten percent for their white counterparts, largely due to the racial pay gap. Similarly, women, who are 56 percent of students, hold two-thirds of all student debt, as a result of the gender pay gap. With the interest on some loans doubling the money owed over eight years, these slower rates of repayment can severely reduce the wealth of marginalised groups, solidifying racial and gender income inequality.
From a macroeconomic perspective, higher education is central to economic growth. The tertiary, or service sector has been the driving force of the US economy. It is now the world’s premier services exporter, with the service sector comprising 78 percent of the workforce and 80 percent of GDP. However, this was not possible without a well-educated workforce, as strong education is a requirement for many of these more skilled jobs, such as those in finance and medicine.
Access to higher education and therefore tertiary jobs, which are less threatened by current economic trends such as globalisation, are central to improving incomes and equality. This is because especially in a time where globalisation and liberalisation of trade are decreasing wages in the US towards that of China and India, inequality for low-skilled workers has been exacerbated. Similarly, automation is rapidly eliminating jobs for those without further education.
Laura Marquez-Ramos’ paper Education and economic growth: an empirical analysis of nonlinearities, argues that improving education increases economic growth. It also states that increasing college enrolment greatly improves economic activity, particularly in countries where higher education enrolment is already fairly high such as the US — 88 percent compared to an average of 77 percent for OECD countries, according to the World Bank.
It is clear that human capital is central to the US economy. Human capital is the economic value of a worker’s experience and skills, such as education, intelligence, and skills such as resilience and punctuality. It is perceived to increase productivity. Human capital has become even more important since COVID-19, as the balance of power has shifted from capital to labour, seen from examples such as labour shortages and higher wage bargaining power. A better-educated workforce is needed for economic growth, which can only be achieved by removing these barriers to higher education.
Prior to COVID-19, 50.4 percent of American borrowers were not making payments on their student loans, which is estimated to be almost 90 percent when payments resume on February 1 2022, after a break of almost two years due to the pandemic. Even though 70 percent of borrowers work full-time, they are simply not financially secure enough to resume payments, and student debt will prevent them from affording rent, car payments, or even medicine. It seems cruel and futile to demand payments from those who simply cannot afford it, especially for those who could not even complete their degrees.
Student-loan systems are often badly designed for an extended period of high unemployment, as they are based on the idea that a graduate’s future earnings will cover the cost of their degree. This has been highlighted during the COVID-19 pandemic, in which unemployment reached 14.8 percent — the highest rate since data collection began in 1948.
62 percent of Americans support student debt forgiveness, which would be an effective way to counteract income inequality, and promote economic recovery after COVID-19 by increasing consumption. Furthermore, a proposal to cancel $50,000 of student debt per borrower would immediately increase the wealth of average Black Americans by 40 percent, highlighting the importance of student debt in exacerbating racial inequality. Although this plan was rejected by President Biden, he has supported cancelling $10,000 in debt for each borrower. This is an important step towards reducing such a significant cause of income inequality, including between races and genders.
References
- The Real College Debt Crisis: How Student Borrowing Threatens Financial Well-Being and Erodes the American Dream – William Elliot III with Miranda K. Lewis
- The Great Divide – Joseph Stiglitz
- https://www.su.dk/english/state-educational-grant-and-loan-scheme-su/
- https://www.statista.com/statistics/270072/distribution-of-the-workforce-across-economic-sectors-in-the-united-states/#:~:text=In%202019%2C%201.36%20percent%20of,and%2078.74%20percent%20in%20services.
- https://www.gov.uk/government/organisations/social-mobility-commission/about
- https://sgp.fas.org/crs/misc/R46554.pdf
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