“Graffiti, Leake Street,” Duncan C.

“You can pay me now—or you can pay me later.”

Once, this was an advertisement for an oil filter. Today, it is an apt description for the leading cause of our nation’s mounting—$1.6 trillion and rising—student debt overhang.

Between 2000 and 2012, a 2015 Pew report indicates, average state spending for higher education fell nine percent (adjusted for inflation), while enrollment grew 45 percent. Did the nation experience a remarkable gain in higher education efficiency?

Well, not exactly. Part of the funding decline was made up for by increased federal spending, which included rising research spending (for example, National Institutes for Health grants), but also higher spending on veterans’ education benefits and Pell grants. Even so, an increase of a little over $1,000 per student in federal spending did not compensate for a $2,500 decline in spending per student by state governments.

What made up the difference? We all know the answer—new federally guaranteed student loans. In the early 1990s, originations (in 2014 inflation-adjusted dollars) totaled around $20 billion. By 2000, these had doubled to a little over $40 billion. By 2010, annual student loan originations exceeded $100 billion. Combined, Pew reports that local, state, and federal spending in the 2013–14 academic year totaled $157.5 billion. For $157.5 billion in taxpayer dollars, we got over $260 billion in education services delivered.

What a deal!

But that deal had a cost. The car owner in that oil filter advertisement saved $4—this was in 1972, mind you—by not buying an oil filter, but had to pay $200 for an engine bearing. The full costs of our collective decision to buy higher education on the cheap and defer payment until tomorrow are still not fully known. But the costs are plain for all to see—if we bother to look, that is.

A recent Washington Post article by business reporter Christopher Ingraham identifies a number of ways this debt overhang—which currently sits at 7.59 percent of annual national income—is harming the country. Among these costs are the following:

  • Delay in marriage: In the words of a recent Science News article, “Debt is becoming a barrier to marriage, as many couples first live together so that they can save, pay off debt and then be in a position to afford their preferred wedding.” Recently, Consumer Reports chimed in, with an article titled, “Getting Married? What You Need to Know about Your Student Debt.”
  • Decline in small business formation: a Federal Reserve study that finds “a significant and economically meaningful negative correlation between [higher levels of] student loan debt and net business formation.” It is harder to borrow to start a business when you’re paying off loans.
  • Reduced homeownership: Summarizing data from the Federal Reserve’s Survey of Consumer Finance, Ingraham reports, “Student loan debt prevented about 400,000 young families from purchasing homes, accounting for about a quarter of the drop in home-ownership rates in this demographic from 2005 to 2014.” As with starting a business, it is harder to borrow to buy a home if you’re already in debt.
  • Family economic instability: Ingraham reports that, “Another Federal Reserve report, this one from 2013, found that student loan debt jeopardizes the short-run financial health of households” because there is less room to respond to financial mishap when you’re saddled with debt payments.
  • Depressed retirement savings: Participation rates in 401(k) plans are nearly identical for those with debt and without—indicating a reasonably universal interest in saving for retirement. But ability? That’s a different question. On average, those with student loan debt contribute half as much to their accounts.

Impact of Student Debt on the Racial Wealth Divide

Ingraham leaves out the impact of student debt on the racial wealth gap. But the impact on racial wealth inequality has been profound. Writing for the nonprofit Demos, Mark Huelsman, in his report, Debt to Society: The Case for Bold, Equitable Student Loan Cancellation and Reform, explains, “The burden of student debt reaches deep into communities of color, and increasing evidence suggests that it is hampering the ability to build wealth in the ways Americans have traditionally done.”

The numbers, to say the least, are beyond discouraging:

  • 12 years after beginning college, the average Black female student loan borrower has an outstanding balance that is 13 percent greater than the amount initially borrowed.
  • Over half of Black male borrowers will default on a loan within 12 years of beginning school.
  • The default rate over a 12-year period, even for Black students who complete college and graduate, exceeds 20 percent.

It’s worth noting that, while there is significant variation by race, the debt burden is broadly shared. The median student still owes 80 percent of their balance 12 years after beginning school. Default rates—at 28 percent overall over 12 years—are high across the board. For whites, the default rate is 20 percent, for Latinxs 35 percent, for Black women 45 percent, and for Black men 55 percent. These numbers, Huelsman notes, state the “percent of borrowers who started college in 2003–04 and defaulted on a loan within 12 years.”

Why do Black borrowers face higher default rates? In addition to ongoing racial discrimination and having fewer initial financial assets, Huelsman offers two reasons. As Huelsman explains, “41 percent of white college-educated families get an inheritance (or one-time gift) of $10,000 or more, making debt an afterthought or wiped away with one stroke. Only 13 percent of Black families can say the same. Meanwhile, Black people are more likely to financially help older family members, preventing wealth accumulation and leaving them more financially vulnerable.”

Six Options to Lower the Debt Burden

The focus of Huelsman’s report, however, is on policy options to reduce the debt burden. These options, briefly summarized below are, as follows:

  • Partial forgiveness
  • Means-tested forgiveness
  • Complete or near-complete forgiveness
  • Reform bankruptcy law to allow discharge of student debt
  • Implement a meaningful public sector loan forgiveness program
  • Simplified income-based repayment

As Huelsman notes, not all options are exclusive of each other. For instance, clearly the government could reform bankruptcy law to allow the write-off of student loan debt—as was the case until 1976—and also fix the nation’s troubled public sector loan forgiveness program.

In other cases, though, clearly choices would have to be made. Huelsman examines what the three different forgiveness options would look like and who they would impact.

What counts as partial forgiveness, of course, varies depending on what part is forgiven and for whom. In his paper, Huelsman suggests an across-the-board write-off. If, for instance, $20,000 was written off from everyone’s student loan balance, that would cost the treasury $612 billion, leave 56.1 percent of borrowers (25.4 million people) without any debt and 77 percent (34.9 million people) with their debt at least cut in half.

Huelsman notes that the policy would help “all borrowers, particularly undergraduate borrowers, community college graduates, and those with low balances and high likelihood of default.” However, graduate school borrowers would benefit less. The nonprofit New America Foundation reports that, “Overall, graduate degree recipients in 2015-16 left school with an average of $70,000 in debt.” Some graduate programs, notably in law and medicine, lead to debt in the $140,000–$160,000 range.

Perhaps higher lawyer and doctor salaries make these debt burdens manageable. But as a New York Times article explains, “Although undergraduate student loans are limited to $31,000 for students who are financially dependent on their parents and $57,500 for those who are not, there are no hard caps on how much someone can borrow for graduate school.” As a result, some students end up with outsized debts in low-paying fields.

Means-tested forgiveness can be more targeted, but administration can be difficult since beneficiaries must demonstrate “need.” Huelsman floats a proposal to “Forgive a Percentage of Student Loan Principal for Anyone Enrolled in a Means-Tested Public Benefit Program at Least 2 Years After Leaving College,” but does not offer a cost figure.

It should be noted that Democratic presidential candidate Senator Elizabeth Warren’s proposal would combine partial forgiveness and means-testing. Specifically, she proposes to cancel “up to $50,000 of debt for all borrowers earning less than $100,000, with proportionally less debt relief for those earning up to $250,000” and estimates its total cost at $640 billion. According to Huelsman, Warren’s proposal “would wipe away all debt for three-quarters of borrowing households, including 80 and 83 percent of black and Latinx households, and would narrow the racial wealth gap.” (She has also proposed a wealth tax that would raise $2.75 trillion over 10 years­—i.e., enough to eliminate the $1.6 trillion debt overhang and then some.)

The racial impact of complete debt forgiveness, as Democratic presidential candidate Senator Bernie Sanders has proposed, is mixed. Huelsman observes that because those who didn’t attend college would get zero, “white families would disproportionately benefit.” But Black students, who were 13.9 percent of all college students in 2003–2004, would be among the chief beneficiaries of complete forgiveness, since Black students constitute “more than 27 percent of those with $50,000 in debt, and nearly 22 percent of those with over $100,000” in student debt.

The other options Huelsman offers—making student debt eligible for discharge at bankruptcy, creating a functioning public service loan forgiveness program, and simplified income-based repayment—cost less, and, alas, do less. That said, these reforms could still be important.

For example, astonishingly 114,000 Americans currently have social security payments garnished to collect on student loans; policy reform could end this. Huelsman suggests modifying the public sector loan forgiveness program to reduce loan balances after every two years of qualifying public or nonprofit sector employment to avoid people being “surprised” ten years down the road to learn they are getting no forgiveness.

For simplified income repayment, Huelsman proposes that income below 250 percent of the federal poverty level be exempt from payments, with a phaseout of the exemption above that level. Under this scheme, Huelsman writes, a “married family with one child would not have to worry about any loan payments until their income was slightly over $53,000.”

Of course, not really addressed in all of this is what comes next. Wiping out the debt once—even all of it—could be largely futile if a system isn’t devised to cover higher education’s full costs—or at least close to full costs—up front going forward.

At one point, Huelsman notes that forgiveness, to be effective, needs to be “paired with a new guarantee that all students have a pathway to higher education free of debt” if we are to return “to a system that once existed, in which student debt was a much smaller piece of the economy and was taken on as a choice rather than a necessity.”

In short, we as a society will need to pay for the higher education services that we consume. We chose to pay later, but our higher education system repair bill may finally be coming due.