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  • Scoop Market Mysteries 9-11-22 (Student Loans)

Scoop Market Mysteries 9-11-22 (Student Loans)

🔎 Market Mysteries: Why did President Biden forgive student loan debt?

 Market Mysteries of the week

   Why did President Biden forgive student loan debt? 

Answer:

Relieving millions of Americans from financial hardship can't be too bad for the polls. Beyond that, it’s a band-aid solution that recognizes the deeper issue of exorbitant college costs and ballooning student loan debt perpetuating wealth inequality in America.

How bad is the student loan crisis?

Student loan debt has become a massive problem in America within just two decades.

Nearly

in federal student loan debt, which accounts for

 education debt. 

Most of that debt has been amassed in the last generation. 

students are taking out loans to finance their degrees. The

since 1990. Student loans as a

in the past 15 years.

Student debt has grown as a function of soaring education costs.

Over the last 40 years, the price of college tuition has

than all other consumer costs, now nearly 15x higher. Wages haven’t kept up with the cost of tuition either. In 1970, you could work part-time during the year and full-time over the summer to cover the cost of tuition. Today,

on minimum wage.

It’s nearly impossible to avoid using financial aid

to pay for a college degree yourself.

Who has student loans?

While most of the country has attended some form of higher education, only recently have student loans become a necessity

. Over

. Those rates increased significantly for the millennial generation. 

As millennial college attendance soared, so did the financial burden.

 In the past decade, 

of first-time, first-year undergraduate students have received some form of financial aid - loans, grants, or scholarships. The degrees with the most student loan debt are

, followed by liberal arts. 

It wasn’t just bachelor’s degrees driving the burden.

of outstanding borrowers have an associate’s degree or less. 

There are also

millions of Americans with student debt who don’t have a college degree.

of student loan borrowers failed to graduate.

is the most cited reason for not finishing. The

indirect costs of college, such as books or food, can make up more than half of the total expense

, creating an unexpected burden for students.

of Americans with only a high school degree carry student loans averaging $24,000.

While a college degree can offer more significant career income opportunities,

most student loan borrowers are not high-net-worth individuals.

More than

, those recognized to have the most severe financial need, mostly earning less than $30,000 annual household income. Borrowers are also not necessarily the beneficiaries.

Many families take on student loans

for their children or grandchildren.

of federal student loan holders are 50 years or older. 

Why are the loans so difficult to pay off? Aren’t they earning a higher income?

Higher education is proven to be a platform for

Recently

it has become a burden

that a generation of graduates into multiple economic crises with low wage growth can’t shake. Roughly

student loan borrowers have defaulted.

The system still works for many.

The highest share (

) of student debt is held by those with post-bachelor's degrees, those with the highest income opportunities. Doctors and lawyers take out big loans to pay for several school years and then earn high incomes with the best chance of paying down those loans. 

A college degree does not translate into comparable income for many others.

The volume of debt is weighted toward the highest earners, but the

skews more towards the lower-middle income bracket.

will take at least 20 years to earn an income premium that compensates them for the cost of college, while 16% will never make it back.

of Americans living below the poverty line went to college.

For borrowers able to complete their degree and earn the income premium of higher education, the

ballooning loan amounts relative to income have made the repayment process more difficult.

 outstanding student loan balances exceed the original amount. 

for the college-educated hasn’t kept up with student loan interest rates for the past decade. Even for above-average earners, making $80,000 to $90,000 per year, their student debt, on average,

That additional debt can reduce borrowers’ creditworthiness

, increasing their borrowing costs on other loans and mortgages. It also reduces income allocated to investments and retirement assets,

perpetuating intergenerational wealth inequality.

The average 35-year-old is

than the average 35-year-old 30 years ago.

Why does education cost so much?

That’s the most crucial question.

Much of the price appreciation can be attributed to higher demand

. As a culture, Americans have institutionalized the bachelor's degree as a mandatory requirement for jobs that wouldn't require four years of training. Between 2007 and 2016, nearly

required a bachelor’s degree or higher. Seen as necessary for a career,

between 1970 and 2010 to 21 million. Registration per school, however, has not advanced to the degree that could warrant the annual price inflation. 

While the costs of operating college, as with any business, have increased in the last fifty years,

universities avoid one considerable cost: taxes.

Most public and private universities and colleges are exempt from federal and state income tax and property tax. While they pay payroll taxes for their employees, they are often exempt from sales tax on any items they buy or sell. The

imposed a 1.4% tax on the investment income of school endowments, but it only affected the biggest endowments. Over the past thirty years, the total value of the twenty

Many of the country’s wealthiest universities hold multi-billion dollar investment and real estate portfolios. 

Does forgiveness solve the problem?

President Biden’s action toward student loans was a valuable treatment, but it was far from a solution.

The executive order forgives $10,000-20,000 in federal student loan debt to individual borrowers earning less than $125,000. It extended the pause on interest payments for active loans through the end of the year. It also reduced the existing cap on monthly loan payments tied to income from 10% to 5% of the borrower’s discretionary income. 

The executive action recognizes the problem the government created without stopping the perpetuation of the problem or helping those already affected

. The one-time payment does p

While much of the broader conversation discusses how a relatively small number of borrowers (post-grads) carry a large portion of the total debt burden, it’s essential to understand that

half of all student loan borrowers hold less than $20,000 of debt.

Relieving $10,000-$20,000 of that debt is life-changing. Reducing the income cap addresses some longer-term problems for borrowers but shifts the burden of rising education costs to the government. 

The decision to shift the burden of exorbitant education costs from the early workforce to the government has created plenty of debate.

If the government doesn’t raise taxes to pay for it, the additional costs will be paid for with debt, kicking the proverbial can down the road. As with all government deficit spending, it’s an evaluation of whether this is a good investment that can stimulate growth and prosperity for the country without creating so much inflation that it impedes the intended growth. So far, estimates from

and

on inflation risks for this particular spending decision have been low-to-negligible. Evaluating the concentrated immediate benefit versus the distributed long-term cost is difficult. Perhaps with the government more on the hook for higher education costs, they might have a better reason to limit their rise, but it's anyone's guess. If you’re familiar with climate change, you know those in power tend to prefer short-term gratification over long-term practical risk management any day. 

đź’™ The Share Scoops Team

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