Student Debt and Higher Education Funding: What Each Position Is Protecting

By the end of fiscal year 2024, roughly 45 million borrowers held more than $1.6 trillion in federal student loans. Once the pandemic-era reporting pause fully unwound, the Federal Reserve Bank of New York estimated that 7.74 percent of aggregate student debt was already 90 or more days delinquent in the first quarter of 2025, and that among borrowers who were actually required to make payments, nearly one in four were behind. The debt had become a defining financial fact of life for an entire generation, and the politics around it — forgiveness or no forgiveness, free college or market discipline — had become one of the most reliably polarizing axes in American domestic policy.

This is not only a debt-stock problem. It is also a cost-of-legibility problem. NCES reports that in 2022–23, average published tuition and fees at public 4-year institutions were $9,800, while average total cost of attendance at those institutions was about $27,100 for students living on campus and $27,800 for students living off campus but not with family. Even after grant aid, the average net price at public 4-year institutions for Title IV recipients in 2021–22 was still $15,200. Families are not only borrowing to buy instruction. They are often borrowing to buy the credential, social signal, and institutional legibility that a labor market still rewards on average, even when the pathway is unstable, overpriced, or badly matched to the job.

Beneath the forgiveness debate is a set of deeper questions that the forgiveness framing tends to suppress: Why did tuition and household exposure rise in the first place? Who should bear the cost of education that benefits both the individual who receives it and the society that gains an educated workforce? What is a college degree actually producing — skills, sorting, social capital, or credential access — and does the answer matter for how we finance it? And is the bachelor's degree the right basic unit of post-secondary education at all, or has it become a credentialing barrier that functions as a proxy for socioeconomic origin rather than a genuine measure of capability?

These are four distinct questions that generate four distinct positions — and the debate goes wrong when people arguing about one question are heard as arguing about a different one.

What the free college and public investment tradition is protecting

Higher education as a public good that should be publicly funded. The case for free or heavily subsidized public college begins with a structural claim: an educated citizenry is not only a private benefit to the people who receive education but a public benefit to the society they inhabit. Democracies function better with an educated electorate. Economies generate more innovation with more educated workers. Public health, civic participation, and social trust all have documented correlations with educational attainment. This is why the United States built a free public K–12 system: not because education is a charity for those who cannot pay, but because the returns to the public from universal education exceed what private markets will produce. The free college tradition is protecting the extension of that logic to post-secondary education: if the benefits are public, the financing should be public, and ability to pay should not determine access to education that shapes life outcomes.

The documented relationship between debt burden and the inequality it was supposed to address. Sara Goldrick-Rab's longitudinal research at the University of Wisconsin documented that the financial barriers to college completion — not admission — are the primary mechanism by which higher education reproduces class inequality rather than disrupting it. Students from low-income families are admitted to colleges they cannot afford to complete; they take on debt for credentials they do not finish; they leave without degrees and with loans they cannot repay. The free college tradition is protecting the recognition that a system in which access theoretically exists but financial reality prevents completion is not a functioning meritocracy — it is a legitimacy myth that individuates a structural problem, telling students who did not complete that they lacked persistence rather than money.

The transfer of risk from institutions to individuals. In the post-war model of American higher education, costs were lower, public subsidies were higher, and institutions bore more reputational risk for poor outcomes. Over time, that balance shifted. SHEEO's FY 2024 State Higher Education Finance report shows that net tuition revenue per FTE at public institutions remains 176 percent above its 1980 level even after recent declines, which is another way of saying that the system spent decades moving more of the bill onto students and families. Federal loans then made that shift financeable. The institution got paid regardless of whether the student graduated or got a job. The student bore most of the downside risk. The free college tradition is protecting the claim that this risk transfer — from institutions to students, from public to private — was a political choice, not an economic inevitability, and that reversing it is a legitimate use of public investment.

What the income-contingent repayment and risk-sharing reformers are protecting

The principle that cost should track what education actually produces. Australia, the United Kingdom, and New Zealand developed income-contingent loan systems — sometimes called HECS (Higher Education Contribution Scheme) — in which graduates repay their education costs only when their income rises above a threshold, with repayment scaled to income and uncollectible debt eventually written off. This design does several things at once: it removes the up-front financial barrier to enrollment, links repayment to labor market outcomes rather than calendar time, and makes the cost of education proportional to the benefit received. The income-contingent tradition is protecting the principle that the design of loan repayment should not impose hardship on people whose education did not produce the expected economic return — while also preserving the principle that education has costs that someone should pay, and that the beneficiary who received the income gain is the appropriate party.

Institutional accountability through shared risk. A more radical version of this position, associated with scholars like Andrew Kelly and Preston Cooper, argues that institutions themselves should have financial skin in the game: if a graduate defaults on their loan, the institution that received tuition from them should bear a portion of the cost. This "risk sharing" proposal is designed to address the core incentive failure of the current system — that universities are paid tuition regardless of whether their programs produce graduates with the skills and credentials labor markets value. The risk-sharing tradition is protecting the claim that the debt crisis is partly an accountability crisis: institutions have been insulated from the consequences of poor program design, weak career services, and credential inflation, and the result is predictable. Making institutions co-responsible for outcomes changes the incentive structure without requiring either free college or market-rate pricing.

The critique of broad forgiveness as distributionally regressive. Broad student debt forgiveness — canceling debt across the board regardless of income — has a structural distributional problem: bachelor's degree holders earn more, on average, over their lifetime than non-degree holders. Doctors, lawyers, and financial professionals carry large debt loads; they also earn incomes that make repayment manageable. Forgiving debt transfers money toward people who, on average, will end up in the upper half of the income distribution — and away from non-degree holders who never accessed the borrowing in the first place. The income-contingent tradition is protecting the claim that debt relief should be contingent on demonstrated need and on outcomes, not categorical — that the way to fix a regressive system is not to add another regressive layer to it but to redesign the underlying risk architecture so that repayment tracks benefit received.

The return is real on average, but averages are not a financing model. This tradition is strongest when it keeps one hard fact in view: the college wage premium is still real. BLS reported that in 2024 workers age 25 and over with a bachelor's degree had median weekly earnings of $1,543, compared with $930 for high school graduates. But the same official data also show why a simple "college always pays" slogan is inadequate. The payoff varies sharply by field, institution, completion, geography, and whether the credential is tied to an occupation with clear labor-market demand. Risk-sharing reformers are protecting the idea that financing should respond to that variance rather than pretending the average return settles the case for every borrower.

What the market accountability and price discipline tradition is protecting

The Bennett Hypothesis: federal subsidies as the engine of tuition inflation. William Bennett, Secretary of Education under Reagan, argued in 1987 that increases in federal financial aid enabled — and in fact caused — increases in tuition: universities raised prices to absorb the additional subsidy, capturing the benefit of aid programs without passing them through to students as reduced net cost. The economic literature on this remains contested, but a significant body of research supports at least a partial Bennett effect — particularly for for-profit institutions, which raised prices in near lock-step with available federal loan limits. The market accountability tradition is protecting the claim that the current crisis was predictable from first principles: when consumers can borrow without limit at below-market rates for a good whose quality is difficult to observe, and when the providers of that good face no price discipline from borrower inability to pay, prices will rise until they absorb the available subsidy. More subsidies do not fix this problem — they compound it.

Transparency as the precondition for any accountability. Before students commit to programs and debt loads, the market accountability tradition argues, they should be able to see what those programs actually produce in labor market terms: median earnings by major and institution, debt levels by program, completion rates by demographic, employment rates at one, five, and ten years post-graduation. The College Scorecard and similar accountability tools are the practical expression of this principle — and the newer field-of-study data matter because they move the question from "does this college pay?" to "for whom, in which program, with what debt exposure?" The tradition is protecting the principle that information is a precondition for any accountability mechanism, public or private: you cannot make decisions about value for money if the data needed to assess value are unavailable.

The fiscal and distributional argument against universal subsidy. Free public college, financed by general taxation, transfers money from non-degree holders — who are disproportionately lower-income — to degree holders, who are disproportionately higher-income. This is the inverse of progressive redistribution. The market tradition is protecting the claim that education policy should be designed around genuine need — generous Pell grants and income-based repayment for lower-income students — rather than universal subsidies whose primary beneficiaries are students from families that would have paid for education anyway. The argument is not against investing in education but against the distributional structure of programs designed to be politically popular with college-educated voters rather than fiscally targeted at those who need help most.

What the vocational pathway and credential reform advocates are protecting

The dignity and economic viability of non-college paths. Bryan Caplan's The Case Against Education (2018) made the most systematic version of an argument that has also come from very different political directions: that much of what a college degree produces is not skill development but signaling — evidence to employers that the holder is smart, disciplined, and willing to conform to institutional expectations. If the signaling model is correct (or even partially correct), then the expansion of college enrollment and the credential requirements that drove it represent a vast collective action problem: each individual has an incentive to get a degree to maintain their relative position, even if the degree is not teaching them much, because employers use it as a screening device. The credential reform tradition is protecting the recognition that this dynamic is particularly harmful to people without the resources to absorb four years of full-time study and tens of thousands of dollars of debt for a credential that primarily signals what their family's socioeconomic position already communicated.

The specific harm of credential inflation to blue-collar communities. Over the past three decades, employers systematically ratcheted up credential requirements for jobs that had previously required no degree — or no degree at all. Peter Cappelli's research on credential inflation documented that employers added bachelor's degree requirements to jobs not because the job changed but because they could: the labor market had enough degree holders that screening by credential became cost-effective. The result is that jobs in supervision, administration, and technical work now require degrees in fields irrelevant to the job function, primarily as a sorting signal. The credential reform tradition is protecting the specific harm this imposes on working-class families whose children cannot afford to spend four years and $60,000 acquiring a signal that is orthogonal to the actual job requirements — and who are told that this failure to signal is a personal failing rather than an artifact of a labor market structure that serves employers' screening convenience.

Working alternatives that the policy architecture makes harder. Germany's dual apprenticeship system — in which large shares of young people complete formal apprenticeships in skilled trades and technical fields, with employers co-invested in training and recognized credentials portable across the labor market — is a working model of post-secondary education that does not require a college degree for middle-class employment. Stackable credentials, employer-recognized industry certifications, community college technical programs with strong labor-market connections, and registered apprenticeships exist in the United States too. BLS reported that recent associate-degree recipients who were not enrolled in further schooling had an 83.3 percent employment rate in October 2024, and its 2024–34 projections still show millions of jobs with typical entry-level education below the bachelor's degree. The vocational pathway tradition is protecting the claim that the solution to the debt crisis is not primarily to forgive the debt or make degrees cheaper, but to build a post-secondary ecosystem in which the bachelor's degree is one viable path among several, not the default gateway to economic participation.

What the argument is actually about

Whether higher education is primarily a private investment or a public good. This is the foundational value conflict. If education is primarily a private investment — the individual receives the benefit in the form of higher lifetime earnings — then the individual should pay, with need-based assistance as a supplement. If education is primarily a public good — society benefits from an educated citizenry in ways that cannot be captured in individual labor market returns — then public financing is appropriate. Most honest participants in this debate acknowledge that education is both, in varying degrees, depending on the field and the level. The problem is that this mixed answer doesn't resolve the financing question: it just makes clear that the resolution requires an explicit judgment about the relative weight of private and social returns, and that the current system — which treats education as primarily a private investment while subsidizing it enough to generate enrollment levels that exceed private demand — is incoherent rather than principled.

The institutional accountability gap at the center of the crisis. Every position in this debate, examined closely, runs into the same problem: institutions that receive tuition have weak incentives to ensure the education they provide produces outcomes that justify its cost. The free college position addresses this by making the payer the government, which could in theory set quality conditions for funding. The income-contingent position addresses it through risk-sharing mechanisms. The market position addresses it through price transparency and consumer choice. The vocational position addresses it by asking whether four-year institutions should be the default in the first place. The accountability problem is not a symptom of any single policy choice — it is structural: higher education is a credence good whose quality is difficult to observe before purchase, whose benefits are realized years after purchase, and whose providers face limited competitive pressure in many segments of the market.

The average-return versus pathway-risk problem. One reason this debate stays confused is that both sides can point to true but incomplete facts. On average, college pays. That matters. But households do not borrow against averages; they borrow against specific institutions, specific majors, specific local labor markets, and specific odds of completion. The closer you get to the actual decision a family is making, the less useful the generic college premium becomes. That is why this argument keeps cycling between national averages and stories of individual ruin. Both are real. The live policy question is which unit of analysis should govern financing: the average degree, the institution, the program, the student, or the occupation.

The forward and backward problem in debt relief. One of the structural tensions in the student debt debate is that debt forgiveness addresses an existing stock of harm without changing the flow of new harm. Forgiving $1.7 trillion in existing debt — whatever its distributional effects — does not change the incentive structure that produced that debt: tuition will keep rising, students will keep borrowing, and new graduates will face the same choices their predecessors did. The credential reform and market accountability traditions are, in part, protecting the recognition that debt relief divorced from structural reform is a palliative that creates the expectation of future relief — and thereby increases current borrowing. The forward problem (preventing the next generation's debt crisis) requires structural changes that the forgiveness debate tends to defer.

The credential treadmill and who gets asked to finance it. Once a degree becomes the cheapest way for employers to sort for low-risk, already-socialized workers, families stop borrowing only for learning. They borrow to avoid exclusion. That changes the moral texture of the debt. A person may be paying not only for education received, but for access to a labor market whose gatekeepers have decided that ordinary intelligence, reliability, and trainability should arrive pre-certified by a college. The cost side of the credential arms race is not simply higher monthly payments. It is that whole households absorb risk in order to remain legible inside a sorting system that keeps raising the floor.

What signaling is doing and who it serves. The signaling model of education — the argument that degrees primarily certify pre-existing traits rather than teach new skills — is uncomfortable for every position in this debate. If it is substantially correct, then expanding access to college (the free college position) expands access to a credential whose economic value depends on its scarcity, and the value of the credential declines as it becomes universal — a collective action problem with no clean resolution. If it is substantially correct, debt forgiveness is partially forgiving the costs of a screening ritual, not an investment. The signaling model is contested empirically — most economists believe education has some genuine skill component — but the question of how much is signaling versus skill is not settled, and the answer matters for every proposed reform. Credential inflation (more degrees required for the same jobs) is what happens when the signaling function expands without bound, and the credential reform tradition is the only one that names this dynamic directly.

Beneath the surface: not a dispute about whether education matters — everyone agrees it does — but about whether households should have to borrow in order to stay legible, whether institutions should bear more of the risk they currently externalize onto students and taxpayers, whether the bachelor's degree has become a sorting device rather than an education, and whether the solution to the debt crisis is to make degrees cheaper or to make the degree less necessary.