Jeremy Abroad

Student loans are a 10–50% tax on children of the lower/middle class

March 26, 2015

We don’t complain about primary or secondary education being free, yet somehow the topic of whether higher education should be made affordable is extremely controversial in America.

I think it’s pretty reasonable to say that a higher education from a public school shouldn’t cost $108k given that a degree in today’s economy is mandatory to landing a job that doesn’t destine you to a life of wage-slavery and living paycheck to paycheck (eg. flipping burgers).

Education is a positive externality that benefits not only the educated, but society as a whole (though some disciplines are more obviously beneficial than others). Having better doctors and engineers benefits not only those individuals, but everyone they serve. Educated people make better decisions, whether that be at their jobs or in the voting booth.

Free education is paramount to a society grounded on meritocracy and equal-opportunity for all. It’s the great equalizer. But when your ability to get an education becomes subject not to your own merits, but to the finances of your parents, society starts to resemble more of a plutocracy than a meritocracy (not to mention America is one of the only countries where universities give priority to “legacies”, or children of alumni. One third of the kids in the recent Harvard class are legacies).

So why are we putting people into debt slavery for pursuing an education? Isn’t education something that should be encouraged?

How much does a public education cost?

I grew up in northern Virginia and went to a public high school. At my school, the “smart kids” with straight-A’s typically went to the University of Virginia. It’s the #2 ranked public school in the country (according to U.S. News’ 2015 rankings) and costs less than half what an elite private school would cost (which are practically impossible to get into nowadays without being a legacy or sacrificing anything resembling a youth).

The annual cost to attend UVA is $27,126, which amounts to $108,504 for a four-year Bachelor’s degree (the minimum requirement in today’s job market). And that doesn’t include the interest accrued on any student loans.

The average UVA graduate makes $54,100. For someone without the privilege of having parents pay for his/her education, this amounts to a debt/income ratio of 2.0. Monthly loan payments would eat up about half of that student’s starting salary under the standard repayment plan (10 years). Switching to the recently introduced “Pay-As-You-Earn” program would cap those payments to 10% of disposable income, but then the graduate would most likely be stuck making monthly loan payments for 20 years, after which he/she will have to pay a “tax bomb” on the remaining forgiven balance.

The most absurd part is that unlike any other type of loan (eg. credit card debt, mortgages), student loans can’t be discharged in bankruptcy (thanks to the Republicans in 2005). So if for whatever reason you can’t afford to pay (say: you can’t find a job), you’re essentially fucked and the government will garnish your wages and Social Security payments (if that’s even still around by the time we’re old enough to receive them).

This is debt slavery.

Student loans are effectively a tax on children of the lower and middle classes, those who stand to benefit the most from education in the first place. College is supposed to be the great equalizer, but it’s penalizing the very people who need it the most.

My Experience

I have $120,000 in federal student loans at a 7% interest rate from getting a Bachelor’s from Virginia Tech and a Master’s from Columbia University. My monthly payments under the standard 10-year plan amount to $1,373/month. I’m fortunate enough to make six-figures (pre-tax), but that still means one-fourth of my paycheck is going to student loan payments. And my father has been helping me out with the payments on my undergrad loans. If not for that, my debt would probably be at least $20–40k higher.

I can’t realistically afford to buy a house or start a family anytime soon. I’ve delayed my retirement by at least 5 years. I can’t really take a year off to travel the world or make music while I’m in the prime of my life because the interest on the debt is too high. I’ll be stuck making these payments for the rest of my 20’s and probably most of my 30’s too. I feel like an indentured servant.

But I’m one of the lucky ones. I have a job and make decent money. Most college graduates aren’t making as much, if they’re even able to find jobs in the first place. And the problem is only going to get worse because colleges aren’t adapting to the workforce and technology is automating jobs away.

Generation of Indentured Servants

Household income adjusted for inflation has declined ~8.8% since 1999, and it’s around the same level as it was 20 years ago. But if you factor in that 10–50% of our salaries (“our” being those of us born to lower/middle class parents) are going to student loan payments, we’re making 10–50% less than what income statistics report.

I think there’s a fundamental problem with the system. The university itself is outdated and largely a waste of time for most people, yet we’re still forced to go and pay for it because employers demand it. Until employers stop demanding degrees (or entrepreneurialism becomes easily accessible to all — highly unlikely), that’s not going to change.

How can we start fixing this?

Now, anyone can complain about a problem, but the more difficult part is coming up with a solution.

Ultimately the entire system as it is is unsustainable and needs to change. But that’s a topic for another post.

In the meantime, I’ll close this post with some simple suggestions that would be more realistic in terms of getting congressional approval.

1) Make student loans dischargeable in bankruptcy.

This is the #1 most urgent priority. It doesn’t matter if there’s a 5-year post-graduation minimum attached to it, making student debt impossible to discharge is completely unethical. If you lend money, then you assume the risk of not getting your money back. If Greece can default on its debts, students should be able to as well.

What makes me pessimistic about the odds of this going through Congress is that the U.S. government makes a ton of money off student loans. There is over $1 trillion in student debt, and if everyone were to default, the government would be losing out on a lot of profits (on the backs of the middle-class).

But it doesn’t matter. Debt should always be dischargeable in bankruptcy.

2) Lower interest rates

My rates average around 7%. It’s absurd that the government is profiting off student loans via interest rates.

3) Make interest payments tax deductible

There’s already a Student Loan Interest Deduction, but it’s capped at $2,500/year and limited to those earning less than $75,000/year.

Mortgage interest is tax deductible. Why not student loans? Is getting an education not as fundamental to the “American Dream” as owning a house?

4) Lower the cost of education

In 1950 tuition was so cheap that students virtually had free education, whether that be in-state or out-of-state, public or private. Yet here we are 65 years later and the same education costs as much as a house. There’s no reason that a society as technologically advanced as ours can’t provide free or near-free education, a service that we were able to provide 65 years ago before the computer and the internet.

We could start by cutting out the administrative fat, starting with reducing the outrageous compensation packages of university presidents. It’s not just private universities that are paying their presidents $2m+/year with $800k/year retirement packages, it’s public universities as well. Outrageous for universities, especially since they’re funded by the government.

Textbook prices are also notably inflated. Every year the publishers rearrange the chapters and call it a new edition to slap a premium price tag on it, despite the fact that the material itself often hasn’t changed in 200+ years.

Virtually every European country has managed to provide free or cheap university education. There’s no reason we can’t.

5) Lower the price of public education

Apparently it would only cost ~$40 billion to pay the tuition of every single public school student in America. Obviously $40 billion is a lot of money, but in the context of the U.S.’s $3.9 trillion budget, it’d amount to about 1%. And perhaps this could be funded in part by the $41 billion in tax breaks Ivy League universities receive every year.

We already pay for colleges through our tax dollars. If the government is going to continue subsidizing public and private schools, then that money needs to be conditional on schools charging their students less.

We are the generation of indentured servants. I hope the old farts in Congress can muster up the courage to do something (if they’re even aware of the severity of the problem, since college was so much cheaper in their day, and half of them are millionaires anyways). Too many Americans are unnecessarily slaving away and even committing suicide due to our own government’s incompetence.

Jeremy Bernier

Written by Jeremy Bernier who left the NYC rat race to travel the world, work remotely, and find the meaning of life.