Frederica Freyberg:

It’s not without controversy, but this week by executive order, the U.S. Department of Education will wipe away hundreds of billions of dollars of student loan debt for some 47 million borrowers. Up to $20,000 of debt cancellation will be given to Pell Grant recipients. Those are grants given to those with exceptional financial need. Up to $10,000 of federal student loans will be forgiven for other borrowers. Only those earning $125,000 or less are eligible. Additionally, the pause on federal student loan repayment remains in place until the end of this year. Another prong of the order caps monthly payments for undergraduate loans at 5% of a borrower’s income. In Wisconsin, according to the U.S. Department of Education, more than 687,000 student loan borrowers owe more than $21.4 billion, with an average student loan balance of just more than $31,000. To understand the impact, we go to Nick Hillman, a professor at the UW Madison School of Education and director of the Student Success Through Applied Research Lab. Thanks very much for being here.

Nick Hillman:

My pleasure, thank you for the invitation.

Frederica Freyberg:

The controversy comes from those who think it’s too big a giveaway and those who think it’s too little. As an expert in this area, what’s your reaction to the student loan order?

Nick Hillman:

That’s right. The politics of this — so the agreement of whether it’s too big or too small cuts across Republicans and Democrats, where typically Republicans are saying it’s too big. We shouldn’t be doing this at all, even within the Democratic Party, Biden’s own party, there is disagreement on whether it was big enough or small enough. And so certainly that is debated right now and I think the research evidence says $10,000 in cancellation can do a lot of good for a lot of borrowers.

Frederica Freyberg:

So you think that this could meaningfully help Wisconsin borrowers?

Nick Hillman:

Yes, and they’re two reasons. One is that a lot of times the borrowers who have small loans, they have small loans because they only enrolled in school for a little while and then left without a degree, and struggle because they now don’t have a degree that pays off in the labor market. Those debts are often times less than $10,000. So that could have a direct impact for a lot of struggling borrowers who have relatively small loans. On the other side of this, there are a lot of borrowers with that size of debt. 30% of Wisconsin borrowers have less than $10,000 in debt and so the impact here — that $10,000 threshold has a couple of different reasons to have been chosen.

Frederica Freyberg:

The worst case of that, though, is a borrower who has just a whole lot of debt and didn’t get that degree.

Nick Hillman:

That’s right. That’s right. And that’s a big problem that this cancellation can help a little bit but doesn’t necessarily prevent from happening again in the future.

Frederica Freyberg:

How has the student loan debt load ballooned over the decades?

Nick Hillman:

Probably two big factors contribute and they work together. One is that tuition has risen, but it’s not just tuition. It’s the tuition, the fees, the room and board, all the other expenses that it takes to stay in college have been rising rapidly. Doubling since the 1990s, even after adjusting for inflation. That’s one side. The other side is family incomes have either plateaued or declined or barely even moved, and the incomes that we have just aren’t keeping pace with the expenses of going to college and as a result, more individuals are having to share that responsibility or carry that responsibility themselves through the loan system to pay for college.

Frederica Freyberg:

In your mind, is that debt worth it in terms of educational opportunity?

Nick Hillman:

It is worth it on average. There are always going to be situations that just don’t fit that average story, but on average, there’s really strong evidence that not only for the individual does the education pay off in the labor market but for your community. We’re better off when we have well-educated plumbers or healthcare workers or you name it. There are a number of reasons why the pay-off is still there but it’s — the value proposition is being questioned and this is kind of tapping into that question right now.

Frederica Freyberg:

People we know can take decades to pay off their school loans. What role do interest payments play in the long pay off schedule?

Nick Hillman:

They make it more expensive. Your loan — say you took out $10,000, in several years, it might actually still be higher then. You might owe $12,000 or even $13,000 if those payments are only going to interest. The Biden administration is also proposing to cap some of those interest rates on — in repayment plans and there are some conversations around how to remove some of those interest rates or make them lower, but they are still there. They’re still part of the network and the infrastructure of our student lending system.

Frederica Freyberg:

Part of the plan also cuts undergrad payments to 5% of income. How meaningful is that for folks?

Nick Hillman:

I think that should be pretty meaningful. These income-driven repayment plans are what they’re called. I don’t know. There may be 7 or 8 different ones now and borrowers have to opt into these plans and their monthly payments are then tied to how much they earn. So 5% of your discretionary earnings — that’s basically your income you have above the poverty line, so it’s supposed to be a way to just make payments, you know, less burdensome for individuals.

Frederica Freyberg:

What kind of student gets most hurt by taking out big student loans?

Nick Hillman:

That’s a great question. You know, there are so many different stories and so many different problems that happen in our loan system. And in many cases, this debt can’t be discharged in bankruptcy or it’s very difficult to navigate the repayment system itself. In those processes, you can be harmed, the administrative processes, the complexity of our loan system. And other ways, loans can really help students stay enrolled in school. It’s really this double-edged sword where without loans people might not have gone to college in the first place and now you have them and they can create big problems. It’s really a hard, hard public policy problem to solve.

Frederica Freyberg:

In your mind, should paying for college be reenvisioned?

Nick Hillman:

I think it will be reenvisioned. I think this is a big moment in that reimagination, and I think that our loan-based system, it originated in the 1950s and 1960s and it was really designed to meet a very small need at the time. And over the years, we just kind of accepted that model and have just used that model as our current model, and I think it’s being questioned on whether that works today.

Frederica Freyberg:

Yeah, indeed. Nick Hillman, thanks very much. Thanks for your expertise.

Nick Hillman:

Thank you.