12 Leaders The EconomistFebruary 22nd 2020
1A
merica’s totalstudent debt, at over $1.5trn, is larger than
the national borrowing of most countries. It has quintupled
in size since 2004, overtaking both borrowing on credit cards
and car finance. This growth is often presented as evidence of a
crisis. But the rise in total debt, though arresting, is not the real
problem. It largely reflects increased borrowing by graduate stu-
dents, such as budding lawyers, who will go on to be high earn-
ers. And 92% of student debt is owed to the federal government,
meaning defaults pose no risk to the financial system (see Fi-
nance section). The real problem is that 11m Americans, many
poor and non-white, and many duped into studying for worth-
less degrees, struggle to repay even modest debts.
Some Democratic candidates for president seem not to know
this. Bernie Sanders, the front-runner, wants to
cancel all student debt—a handout that would
indeed provide relief to those who are strug-
gling, but would also offer an enormous wind-
fall to the well-off. Elizabeth Warren would can-
cel all debt up to $50,000, a policy that is
similarly indiscriminate. Thankfully Joe Biden
and Mike Bloomberg, who announced his stu-
dent-debt policy on February 18th, have plans
that are better suited to the problem.
Messrs Biden and Bloomberg want to put all existing and new
borrowers for undergraduate degrees into an income-linked re-
payment scheme, under which borrowers must repay only a
fraction of their annual earnings above a certain threshold.The
Economisthas long argued in favour of such a repayment mecha-
nism, which works well in Britain. Linking repayments to in-
come makes it impossible to be impoverished by student debt,
and frees graduates to take risks early in their careers.
America already has income-linked repayment schemes for
distressed borrowers, but they are flawed. The earnings thres-
holds at which repayments begin are too low: typically around
$18,000, compared with £26,000 ($34,000) in Britain. The inter-est rates, which are typically around 6%, are unjustifiably high
for borrowing from the government. And the schemes are an ad-
ministrative nightmare. Students must choose from one of four
options and fill out new paperwork every year to avoid penalties.
Any outstanding debt is forgiven after 20 or 25 years, but debt-
forgiveness is taxable, putting struggling debtors at the mercy of
the Internal Revenue Service.
By enrolling everyone automatically, Mr Biden’s and Mr
Bloomberg’s plans would greatly improve the status quo. Both
would cut repayments from 10% of income above the threshold
to 5%, less even than in the British system. Mr Biden would raise
the repayment threshold to $25,000 and make all debt forgive-
ness tax-free. Mr Bloomberg would forgive debt that was in-
curred at failed or predatory for-profit universi-
ties and exempt debt forgiveness up to $57,
from tax. Both candidates should also consider
cutting the high rate of interest.
Making student loans less onerous for bor-
rowers is only half of the remedy, however. Con-
gress should also clamp down on low-quality,
for-profit colleges. These institutions depend
almost entirely on federal student loans for
their revenues, charge the highest possible prices and market
themselves aggressively. When students graduate and cannot re-
pay their debts, the taxpayer foots the bill. Barack Obama’s White
House tried to rein these colleges in, but Donald Trump’s has
loosened the rules. All the Democratic candidates recognise this
problem. Republicans are supposed to be suspicious of feeding
frenzies at the government trough, but they are in denial.
A reform agenda might also include the federal government’s
lending to graduate students. Unlike that to undergraduates, this
is unlimited. Though not a large source of debt distress, it may be
fuelling a pointless and costly arms race among the affluent.
Governments have a part in helping finance higher education,
but well-meaning policy can often go badly wrong. 7Getting the maths right
United States
Student debt, % of GDP024682006 10 15 19How to fix America’s student-finance problemStudent debtF
ew post-wareconomic institutions have been as successful
as the Bundesbank. Its tough stance on inflation in the 1970s
ensured that, while the world battled double-digit price rises,
those in Germany were relatively contained. Its credibility with
the public and markets was so strong that other countries were
keen to harness its might, leading to the creation of the single
currency in 1999. Jacques Delors, a European politician, once
joked not all Germans believe in God, but they all believe in the
Bundesbank. Others in Europe were ready converts, ceding mon-
etary sovereignty to the European Central Bank (ecb), which is
based in Frankfurt, and was at first heavily influenced by Germaneconomic doctrine.
The Bundesbank has a distinct role and identity—it repre-
sents Europe’s biggest economy at the ecb, runs payments sys-
tems, operates in the bond markets and continues to be admired
by most Germans. But relations with the ecb have soured, partly
as a result of the euro-zone sovereign-debt crisis. After 2011 influ-
ence gradually drained away from the Bundesbank and power
became concentrated under Mario Draghi, then president of the
ecb (see Finance section). His successor, Christine Lagarde,
wants a fresh start. Both sides need to make up. If they do not,
they risk a botched response to the next recession and a deadlyCouples therapy
The euro zone’s two big hitters have fallen out. They should make up before the next recession hitsThe Bundesbank and the ECB