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Forgiving the student debt trap

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Student loans often equate to more than the student is capable of repaying, but policy-makers around the world are beginning to act (Image via Pixabay)

Many tertiary students struggle under the weight of student debts, so maybe it's time for policy-makers to change things, writes Dr Kim Sawyer.

IN EVERY ELECTION there is a generational divide, but no more so than in this election. Economic policy has wedged the young. They have constraints imposed on them that were not imposed on previous generations. More than ever before, the younger generation is dependent on transfers of wealth from their parents, yet politicians are not talking about it. They should be. Inequality matters not just because of unfairness but because of the effect on productivity. The widening inequality between the young and the old should be addressed.

More books and articles have been written about income and wealth inequality in the last 20 years than in the previous century. The stylised facts are well-known. We know that inequality has been increasing, that wealth is more concentrated than income and that the inequality is higher than at any time since before the Great Depression. The wealth distribution in Australia is now so concentrated that the top 20% have nearly 70% of the wealth and the bottom 50% less than 18%.

Policy-makers justify their lack of response to inequality by pointing to other countries like the U.S. where only three Americans control the wealth equivalent to that of half the population. Inequality is a global problem often left in the in-tray. Policy options are limited and usually involve tax levies on the ultra-rich which are always vigorously opposed. We understand the unfairness but we accept inequality as a consequence of a free market determined by individual choice.

However, much of the inequality is imposed rather than determined by choice. The younger generation have inherited inequality that older generations did not inherit. The 2018 Australian Council of Social Service and University of New South Wales study of inequality showed that between 2004 and 2016 the average value of owner-occupied housing wealth for those under 35 declined from $90,000 to $85,000, while the housing wealth of those over 65 grew 37% to $509,000. The young have had the misfortune to land in a housing boom which has priced them out of the market or at least significantly distorted their choices.

The wealth inequality between those under 35 and those over 65 and the wealth inequality within the under 35 cohort has never been greater. Some of the young are beneficiaries of inter-generational transfers but many are not. Policy-makers will need to consider policies that encourage greater transfers of wealth between generations.

While policy-makers are restricted in what they can do about housing affordability, they are not so restricted in policies relating to another debt that the young have inherited and that older generations avoided — student debt. Nearly 3 million Australians now have a HECS/HELP debt and the average debt exceeds $20,000 with more than 150,000 having a debt more than $50,000. We are imposing a debt on those who can least afford it at the time when they can least afford it.

We are not alone. In the United States, student debt has increased 500% since 2003 commensurate with the increase in Australia’s student debt, now estimated to be in excess of $60 billion. We are burdening the young with a mortgage that other generations did not have to pay.

The student debt explosion is attributable to the need for credentials. The undergraduate degree is equivalent to the old high school degree. The education curve has shifted three years to the right. The cost has been imposed on students. The three-year undergraduate degree typically costs about $30,000 for domestic students and more than three times that for international students. Often how the fees are determined is non-transparent. Universities rarely provide the cost breakdown necessary for students to understand.

When a student enrols at a university, they are buying an option on the reputation of the degree. The price of the option is the fee and the return on the option is the lifetime earnings premium. The premium has always been regarded as high but is now decreasing with greater participation. Many students are choosing not to repay the debt, at least not immediately. The most recent data suggests 30% have not lodged a tax return and, of those that have, 70% were earning below the repayment threshold. Students are wedged and they are making a rational choice to defer repayment.

Unsurprisingly, policy-makers are starting to take notice. Elizabeth Warren, a Democrat candidate for the U.S. Presidency, has proposed forgiving student debt fully for debts up to $50,000 and partially for debts above that figure. This will not be the last such proposal. Debt forgiveness will be on the table for many years to come. There are alternatives.

One alternative is to finance higher education through the issuance of education bonds like the semi-government bonds of earlier decades. Another possibility is to offer students more flexibility; for example, repayment of some of the debt in exchange for debt forgiveness of the balance. A further option is a graduate tax levied on all graduates, not just those who have graduated since HECS was introduced, but that would surely test the bounds of inter-generational fairness. Yet we need to explore all possibilities.

Policy makers must understand that the younger generation is in a debt trap that is distorting their choices. We can choose to write off the debt in 20 years when the default and delinquency rates are obvious, or we can choose to be more flexible now with debt forgiveness and other policies.

Dr Kim Sawyer is a senior fellow in the School of Historical and Philosophical Studies at the University of Melbourne.

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