In a recent town hall event in Milwaukee, President Joe Biden reiterated his support for $10,000 in student loan debt relief, while also under pressure from members of his own party to go further and cancel up to $50,000 per person. To use a medical analogy, is treating the symptom the right approach, or would tackling the causes of the disease make more sense?
In new research for the Mercatus Center at George Mason University, we uncover much about one contributing cause: the little-understood relationship between occupational licensing and student loan debt. Reforming licensing laws could diminish the need for more extreme measures that would provide welfare for the wealthy and endanger the foundation of the student loan system.
Workers who hold occupational licenses are about 10 percentage points more likely to have borrowed for their college education than those without licenses. They’re also almost 6 percentage points more likely to have outstanding student loan debt. Among student loan borrowers, the licensed — on average — borrow about $12,000 (or 38.5 percent) more, and have student loan debt balances about $7,000 (or 42.5 percent) higher than the unlicensed. Most of the difference can be attributed to borrowing for required graduate school programs.
The relationship between licensing and student loans has existed for several decades and appears to have grown over time. Our findings imply that licensing reform may help mitigate student loan borrowings, in addition to easing some other well-documented labor market inefficiencies.
Occupational licensing has become one of the most important labor market institutions. The fraction of licensed workers increased from about 5 percent in 1950s to about one quarter in the 2000s. Nowadays, it covers many low- or middle-paying jobs, such as cosmetology, social work, and teaching, as well as high-paying jobs like medicine and law.
Licensing regulations typically set minimum education requirements, which is the lynchpin tying it and higher education together. Moreover, education requirements specified by licensing laws have gradually increased over time. For example, the requirement for physical therapists changed from a bachelor’s degree in 1990 to a doctoral degree in 2015 in most states. The number of minimum college credit hours for certified public accountant candidates increased from 120 to 150 hours nationally.
While this gradual ratcheting of licensing requirements may seem reasonable on the surface, in these and similar cases, credible studies cast doubt on whether patients and customers actually benefit.
Apart from our study, there are good reasons to reconsider aggressive student loan forgiveness.
It is true that outstanding student loan debt is more than $1.5 trillion, and that some people fail to repay their student loans. But it’s also true that borrowers are on average more educated and earn more than non-borrowers with or without college education. As a result of the college wage premium, financing college education with student loans has generally been a good investment.
A recent Brookings Institution study shows that households in the top 40 percent income group owe 58 percent of outstanding education debt and make 73 percent of monthly education debt payments. In contrast, households in the bottom 40 percent income group only owe 19 percent of the outstanding debt and make only 10 percent of the payments. Hence, the proposed student loan forgiveness is a regressive proposal benefiting the well-off much more than the needy.
It’s also worth noting the problematic incentives created by these proposals. There’s less reason to repay a loan that you expect to be forgiven. Public student loan programs are meant to address failures in private loan markets. Borrowing can be difficult for young people without secured collateral like a house. But without that borrower collateral, it’s even more important that the programs are self-financing and sustainable, and that borrowers are accountable.
As shown in another study by one of us, borrowers are sensitive to a change in the incentive to repay student loans. One-time student debt cancellation may have a longer-term effect on the sustainability of public student loan programs.
Taken together, these facts mean that policymakers should consider tackling the root causes of the student debt problem, rather than addressing it with temporary student loan forgiveness. Licensing reform is one way to help mitigate the increase in debt. Not only could it remove any unnecessary higher education requirements for licensed occupations, but it comes with the added benefit of opening up more quality jobs to more Americans who need the help.
Kihwan Bae is a research fellow and Edward Timmons is director of the Knee Center for the Study of Occupational Regulation at Saint Francis University in Loretto, Pa. They are authors of the new Mercatus Center at George Mason University study, “On Borrowed Time: How Occupational Licensing Affects Student Loan Debt.”