The Case Against Student Loan Forgiveness
Senators Chuck Schumer (D-NY) and Elizabeth Warren (D-MA) call on President-elect Biden to use his executive authority to cancel $ 50,000 at the federal level student loan debt by borrower. At a cost of around $ 1 trillion, this could be the most expensive policy ever passed by executive order. Biden himself favors a smaller loan cancellation $ 10,000 per borrower, but that would still cost over $ 370 billion.
In general, executive orders are not a great way to develop policy. A decision by Biden to unilaterally write off student debt would lead to a deluge of lawsuits and poison any chance for bipartisan cooperation on higher education reform in Congress. Moreover, all of this could fail if a judge decides that the president does not have the statutory authority to cancel loans. en masse.
But even leaving the legal issues aside, there are several reasons to oppose the massive cancellation of student loans for purely political reasons.
The simplest argument against massive loan cancellation is that its benefits are skewed in favor of the rich. The fifth richest household has $ 3 student loans for every dollar held by the bottom fifth, according to a Analysis by the popular policy project. In fact, it probably underestimates how regressive student loan cancellation could be, as many student borrowers in low-income quintiles are young and will likely earn later in their careers.
Why? Borrowers take on student loan debt to attend college, and people with a college degree tend to earn more. Those with the most debt ($ 50,000 or more) almost exclusively have graduate degrees, which carry an even higher income premium.
Student loan forgiveness doesn’t necessarily help low-income students backgrounds. Students from wealthy families tend to borrow more than students from poor families, as rich students disproportionately choose expensive private colleges where even rich families have to resort to borrowing.
It is poorly targeted
To be fair, the problem of regressivity is one that some advocates of loan forgiveness recognize. For this reason, many suggest limiting the forgiveness to a certain amount per borrower, rather than forgiving any debt.
It’s better, but it’s still not an optimal policy. Government resources are scarce, so there is a limited amount of relief that Uncle Sam can distribute, through student loan forgiveness or otherwise.
Of 255 million adult Americans, only 45 million have federal student debt. If economic aid is appropriate, it is very unfair to distribute tens of thousands of dollars to the 45 million while the remaining 210 million get nothing. The cancellation of student loans is based on the logic that people who have attended university in the recent past are more deserving of government assistance than anyone else, which makes little sense. Instead, for the cost of forgiving $ 10,000 in debt per borrower, the federal government could cut every adult American check for just under $ 1,500.
Additionally, people who have never attended university at all have been hit the hardest by the Covid-19 pandemic and recession. Those with only a high school diploma have a unemployment rate of 8.1%, while people with a university degree have an unemployment rate of 4.2%. As an economic relief policy, the cancellation of student loans is definitely going backwards.
It will not stimulate the economy
Many are arguing for a Debt Jubilee as an economic stimulus response to the recession. Loan forgiveness will relieve borrowers from having to make monthly payments, allowing them to spend that money on other things, at least logically. However, required loan repayments are currently on hold, so debt cancellation would not provide any immediate stimulus.
But even if keeping payments on hold were not an option, the stimulus effect of debt cancellation would be less than advocates hope. People make payments on their loans over time, so loan cancellation distributes “benefits” to borrowers over a period of time. many years. Even after the economy recovers, the “benefits” of forgiveness will continue to materialize. But recovery is only justifiable when the economy is operating below its potential. Current economic theory recommends that governments forgo stimulus as the economy returns to full employment.
Plus, student debt forgiveness doesn’t just go away. It is transferred to the national debt and becomes a liability for taxpayers rather than borrowers. This responsibility could become a problem finally.
It creates the wrong incentives
The cancellation of student debt is a retrospective policy: it does not apply to new student loans that the federal government issues each semester. Over the next decade, the federal government will lend $ 1.1 trillion. If the federal government cancels some of the student debt in 2021, the total outstanding debt could rise to current levels within a few years.
In the absence of further reforms, debt cancellation sets a precedent. Student borrowers (and the colleges they attend) can rightly expect another write-off to occur at some point in the future when the stock of debt soars too high again. This creates an incentive to borrow more in order to take advantage of this future jubilee. More perniciously, this gives colleges another reason to increase tuition fees.
Debt cancellation by decree in fact excludes the possibility of combining loan cancellation with other reforms to deal with this moral hazard. But even assuming Congress agrees, a serious policy to drastically restrict new student borrowing is hard to imagine. Free public college would reduce the volume of new loans by only 15%, since most student loans are associated with private colleges and graduate schools.
To truly extinguish the perverse incentives created by canceling student loans, policymakers will need to reduce new federal borrowing to zero. But none of the great politicians who advocate massive loan cancellations have come up with something akin to this.
A better way
Many people who are struggling to repay their student loans deserve the help of the government that provided them with these loans in the first place. But we also have to recognize that for some people, college is a positive net investment. People who receive a significant financial return from their studies should be responsible for a portion of the costs. In other words, people who can afford their student loans should pay off their student loans.
What about borrowers who are not doing well financially? The federal student loan program already has a safety net for them. By using income-based repayment plans, borrowers can tie their loan repayments to their income. Very low income borrowers have no payments. Income-based repayment can make life easier for troubled borrowers, but many are unaware of its existence. According to government surveys, only 43% of undergraduates know the plans.
Making better use of the existing safety net should be the first priority in helping student borrowers. Beyond that, some loan modifications to help borrowers really into a deep hole may be in order. But any such reform should come with limitations on future borrowing and rules to ensure that colleges are held accountable when the education they provide does not bear fruit.
Canceling student loans isn’t the right way to start the Biden administration: it’s regressive and unfair, won’t stimulate the economy, and creates perverse incentives to borrow more in the future. While there are issues with the federal student loan program, they can be resolved with a cheaper, healthier policy.