Student debt is a personal choice with predictable consequences

The claim

Students signed loan agreements knowingly. College is not mandatory. Those who chose expensive schools or non-remunerative majors bear responsibility for that choice. Loan forgiveness transfers money from non-college workers to college-educated ones — a regressive policy.

The mechanism

The individual-choice framing is legally accurate at the surface: students signed documents. The structural context in which those choices were made has three components that complicate the simple attribution of responsibility.

The credential inflation squeeze: Between 1979 and 2022, the median earnings premium for a bachelor’s degree over a high school diploma increased from approximately 38% to 84% (BLS Current Population Survey, published in College Board Trends reports). This credential inflation was not exogenous to the borrowing decision — it was the structural fact that made borrowing seem rational. Manufacturing jobs that paid middle-class wages without requiring a degree were largely eliminated through deindustrialization and the decisions of companies that moved production to lower-wage countries. The option to not borrow and still achieve economic security became genuinely unavailable for many occupations. The choice was not “borrow or don’t borrow” but “borrow or accept dramatically lower lifetime earnings.”

The public funding withdrawal: State governments have systematically reduced per-student funding for public universities, shifting costs to tuition. The State Higher Education Finance (SHEEF) annual report — produced by the State Higher Education Executive Officers Association using IPEDS data — documents this consistently. From 2008 to 2023 (inflation-adjusted): state and local appropriations per FTE student fell from $9,384 to $8,536 — a 9% real decline. This follows an earlier period of steeper cuts: from 1980 to 2008, real public university tuition increased 213% (College Board). Public universities did not cause this increase: they responded to state funding cuts by raising tuition. The decision to cut state higher education funding was made by state legislatures, not by students. Students faced higher prices as a result of choices made by others.

Information asymmetry and servicer misconduct: 18-year-olds were asked to make 30-year financial commitments based on labor market projections they had no means to verify. More concretely, the loan servicing system — administered by companies including Navient, PHEAA, Great Lakes, and Nelnet under federal contracts — was documented to have systematically failed borrowers in ways that increased their debt.

The Consumer Financial Protection Bureau’s 2017 lawsuit against Navient (settled in 2022 for $1.85 billion) documented that Navient:

• Steered borrowers into forbearance (which accumulates interest) rather than income-driven repayment (which caps monthly payments) in 1.5 million instances, generating more servicer fees while increasing borrower balances
• Processed partial payments in ways that maximized interest accumulation rather than principal reduction
• Failed to recertify income for income-driven repayment plans, causing borrowers to lose IDR eligibility and see balances spike

Pennsylvania’s investigation found PHEAA (the Pennsylvania Higher Education Assistance Agency) similarly failed to properly administer Public Service Loan Forgiveness — the program that promised debt cancellation after 10 years of public service employment. The Department of Education found that as of 2020, 99% of PSLF applications were being denied, primarily due to servicer processing errors and miscommunication about eligibility requirements.

The compound interest trap: Federal student loans in income-driven repayment (IDR) can accumulate unpaid interest faster than required monthly payments — a phenomenon called “negative amortization.” A borrower in SAVE (the current IDR plan) or PAYE with very low income may see their balance grow for years despite making every required payment. This is the opposite of how home mortgages function (where every payment reduces principal) and is a structural feature of the loan design, not a failure of the borrower.

Who benefits

Navient serviced $300 billion in federal and private student loans; its revenue model — fees on outstanding balances — was maximized by slowing repayment. Navient’s 2022 settlement with 39 state attorneys general included $95 million in restitution and $1.7 billion in private loan cancellation — an acknowledgment that specific borrowers were harmed by specific servicer actions, not by their own choices.

For-profit colleges — particularly Corinthian Colleges (shut down 2015) and ITT Tech (shut down 2016) — systematically extracted federal Title IV loan dollars for programs with poor employment outcomes. The Department of Education found Corinthian engaged in systematic misrepresentation of job placement rates. The students who borrowed to attend these schools were defrauded, not making informed free choices.

The data

The Federal Reserve Bank of New York’s Consumer Credit Panel and the Federal Reserve’s G.19 statistical release track total student loan balances quarterly. As of Q1 2024: $1.77 trillion outstanding, held by approximately 43.5 million borrowers. The median balance is approximately $20,000, but the distribution is heavily skewed — a small number of graduate and professional school borrowers hold large balances, while the borrowers most likely to default are those with small balances who attended and did not complete a 4-year degree.

Default rates: the 3-year cohort default rate for federal student loans was 2.3% for FY2018 (the most recent pre-pandemic figure, as CDRs were suspended during COVID forbearance). Among for-profit colleges, CDRs historically ran 2–3× higher than at public institutions.

The College Board Trends in College Pricing report (annual) tracks sticker price and net price (after grants and scholarships). Net price increases have been smaller than sticker price increases due to grant expansion — but lower-income students receive larger grants while upper-middle-income students above the grant threshold face close to sticker prices. The bifurcation matters: a student from a family earning $40,000 may pay little or nothing at a selective institution with generous aid; a student from a family earning $120,000 (above most grant thresholds) at a moderately selective school may pay $35,000–$50,000/year.

Comparators

Germany: German public universities charge no tuition (most charge administrative fees of €100–€300/semester). Funding comes from state (Länder) budgets. German students graduate with negligible loan debt for the credential itself; living expenses may require borrowing through the BaföG system (income-contingent grants and low-interest loans). The argument that free public higher education collapses innovation or quality is falsified by Germany’s manufacturing productivity and research output.

Australia: Australia’s Higher Education Contribution Scheme (HECS-HELP) is the international gold standard for income-contingent loans. Key features: repayment only begins when income exceeds the threshold (A$51,550 in 2024); repayment rates are a small percentage of income above the threshold (1–10%); no real interest (loans indexed to CPI, not above); balance written off at death. No Australian borrower faces the US situation of making IDR payments for 20 years and then receiving a tax bill on the cancelled balance (a provision of US IDR that the Biden administration partially addressed).

UK: Post-2012 UK loans are income-contingent, capped at 9% of income above £27,295/year, and written off after 40 years (post-2012 cohort). There is an implicit subsidy baked into the system — the UK government projects that approximately 25% of loan value will never be repaid, effectively functioning as a partial public subsidy. This is economically equivalent to the US loan forgiveness debate, but structured ex ante rather than ex post.

The counter

The fairness critique has substance: many people did not attend college — forgoing the credential premium — and paid for it in lower lifetime earnings. Asking them to fund forgiveness for those who chose a credential creates genuine distributive tensions, particularly when graduate and professional school borrowers (doctors, lawyers) hold large balances but also have the highest lifetime earnings. The better policy framing is structural reform rather than forgiveness: restore public higher education funding to 1980s real levels, implement income-contingent repayment without negative amortization or tax bombs on cancelled balances, regulate and close predatory for-profit institutions, and treat the accumulated stock of debt (particularly for borrowers defrauded by servicer misconduct or predatory institutions) as a public liability to be discharged. These address the structure rather than requiring case-by-case forgiveness.

References

Board of Governors of the Federal Reserve System. (2024). Consumer credit — G.19: Student loans outstanding [Statistical release]. https://www.federalreserve.gov/releases/g19/current/

College Board. (2023). Trends in college pricing and student aid 2023. https://research.collegeboard.org/trends/college-pricing

Consumer Financial Protection Bureau. (2022). CFPB takes action against Navient for years of student loan servicing failures [Press release]. https://www.consumerfinance.gov/about-us/newsroom/cfpb-takes-action-against-navient-for-years-of-student-loan-servicing-failures/

Goldrick-Rab, S. (2016). Paying the price: College costs, financial aid, and the betrayal of the American dream. University of Chicago Press.

Mitchell, M., Leachman, M., & Saenz, M. (2019). State higher education funding cuts have pushed costs to students, worsened inequality. Center on Budget and Policy Priorities. https://www.cbpp.org/research/state-budget-and-tax/state-higher-education-funding-cuts-have-pushed-costs-to-students

State Higher Education Executive Officers Association. (2023). State higher education finance: FY 2022. SHEEO. https://shef.sheeo.org/

U.S. Department of Education, National Center for Education Statistics. (2023). Digest of education statistics 2022 (Table 330.10). https://nces.ed.gov/programs/digest/d22/tables/dt22_330.10.asp