The Student-Debt Snake-Oil Scam: How America Uses Education To Expand Poverty & Hurt The Economy

-by Professor Liam O'Mara

There is a ticking time-bomb of debt waiting to explode in the American economy, and it will take us all with it if we can’t solve the problem. Cancelling student debt will help not only the 44.7 million Americans so burdened, but will provide a massive stimulus to the real economy and improve everyone’s lives.

The Problem

As of January 2021, those 44.7 million Americans together held a combined 1.71 trillion dollars in debt. That’s right-- trillion. This figure is almost double the consumer / credit card debt held in the country, which itself is at crisis levels seldom seen anywhere.

On average, each student carries $30,000 in debt from attending college, whether or not they graduated. Those from impoverish backgrounds, or who seek advanced degrees or attend private schools, often hold far more. The average MBA has $66,000. The average PhD has $110,000. The average lawyer has $145,000. The average physician has $246,000.

But even the lowest student debt figures hurt, given wages have been stagnant in the United States for forty years. Many jobs now require a college degree, but still pay a bare pittance. The largest share of the US workforce has at least some college or an Associates degree, and those with a Bachelors are about tied with high school graduates for the second largest. Together, much more than half of all workers have done at least some college.

Despite the prevalence of such debt, 60% of the workforce makes $15/hour or less, and adjusting for inflation many low-wage workers make less now than in the 1960s. Outside the top 10% of earners, wage growth has been flat since the late 1970s, while costs continue to rise-- in education, but also in housing and health care.

There are demographic issues here as well as classist ones. Black Americans have lower earning than white Americans, but take out loans at a higher rate. The reason for this is the systemic and generational poverty which has only deepened since the Civil Rights era. The black/white wealth gap has almost tripled since the 1960s, when it was already a massive problem. At about 12:1, that gap makes the dependence on debt more acute, and the burden far heavier.

In addition, poorer Americans-- who are disproportionately from minorities-- leave school without graduating at a higher rate. Almost twice as many Latino students do not complete their degrees as their white counterparts, often having to leave for financial reasons. But the student debt remains, whether or not the degree is earned, so this attempt to climb the socioeconomic ladder leads a third of Hispanic students to slide down a rung or two.

The Solution

We should never have adopted a debt-based model for attending universities, colleges, and trade schools-- they should be tuition-free for all, as they are in many places like Germany. By investing the money directly in education, rather than in providing loans, the whole economy gains from a better educated workforce, and the government isn’t skimming off the top through high interest.

Since student loans were a bad idea, let’s solve the problem by cancelling them outright. This is not only affordable, it helps the entire economy, and all Americans, whether or not they went to college.

Paying for it is easy, and has the added benefit of potentially discouraging some of Wall Street’s worse speculative habits. The plan put forward by Bernie Sanders applies a 0.5% tax on stock trades, a 0.1% tax on bond trades, and a 0.005% tax on derivatives trades. On current market traffic, this would raise about 2.5 trillion over the next decade-- a figure much greater than the student debt total.

In addition, these miniscule Wall Street taxes would be able partially, indeed almost fully, to replace the student loan system-- with the debt gone, the funds could be distributed in direct grants. The working and middle classes have repeatedly bailed out investors during financial crises, and it is about time the capitalist class returned the favour by bailing out the workers.

Education, whether college or trade school, used to be a path to a better standard of living-- into what Americans call the middle class. In the last couple decades, it has instead turned into a path to permanent debt penury and financial servitude. Those who graduate are often unable to buy cars or houses, and do not make enough money to save for retirement or invest after making massive monthly debt payments. With less cash on hand after all bills, college graduates spend less, and this slows growth.

Fully three-quarters of the benefits from cancelling student debt would go to the bottom 80% of the population. This includes those who held the debt as well as those who did not. The average borrower will save about $3,000 a year in payments, creating an effective wage rise. The benefit generally scales with the size of the debt, too, freeing up a lot of lost income. This will stimulate spending and boost the entire economy.

This is what we should be reminding everyone. Cancelling student debt isn’t a hand-out to the educated-- it is a stimulus package that would actually work, because its benefits go to ordinary people, not to corporations and the rich. A borrower no longer saddled with huge debts can qualify for home and car loans, helping the real estate and automobile industries. They can afford repairs to their homes, which helps countless trades jobs. They can also eat out more and purchase more consumer goods, which helps the service and retail sectors.

Everyone benefits, and ultimately no-one loses, because even Wall Street reaps massive benefits from making education more affordable. We could gain a workforce better prepared for a twenty-first century economy, and boost the profit margins of countless publically-traded companies.

There is no down side to cancelling student debt. It’s time to unshackle the middle and working classes from a vicious scam, and resuscitate the American Dream.