November 23, 2020

Student Loan Forgiveness

Last Monday, President-elect Joe Biden expressed support for legislation in which the federal government repays “up to $10,000 in private, nonfederal student loans for ‘economically distressed’ borrowers.” NPR

Also last week, over 200 progressive organizations sent an open letter calling on Biden “to use executive authority to cancel federal student debt.” Americans for Financial Reform

See past issues

From the Left

The left is divided.

“The cost of a year at a private college is now $37,650, on average, and $10,560 at public institutions, more for out-of-staters. The heft of those bills obligates a majority of attendees and many of their parents to take out loans; in fact, 2019 graduates owe an average of $29,900. The United States is an outlier in the size and scope of its loan infrastructure; in many peer countries, higher education is seen as a public good and a college degree is low-cost or free. Even as getting millions more Americans into college has had tremendous social value, this metastasizing debt crisis has had tremendous social costs…

“Millennials are on track to be the first generation in modern history to end up poorer than their parents. Student loans are delaying retirements. They’re suppressing the housing market. They’re suffocating new business formation. They’re even leading young people to delay getting married and having children. They are also widening the country’s racial wealth gap… Although having a federal student-loan debt jubilee would not fix higher-education financing or end the COVID-19 recession, it would take a boulder off of millions of Americans’ backs.”
Annie Lowrey, The Atlantic

Survey after survey shows [student debt forgiveness] racking up well over 50 percent support; even if you assume that those polls are missing a lot of conservative voters who never went to college (see: polling during the 2020 election) and that the issue would become more partisan if Biden actually pursued it, the results still suggest that cancellation could be much more popular than Donald Trump’s signature legislative achievement, the Tax Cuts and Jobs Act, which Republicans jammed through despite widespread voter opposition…

“Insofar as there are concerns that canceling student debt would be a giveaway to white-collar professionals, it would be fairly easy to structure the program as a relief effort for the middle class by limiting it to borrowers with somewhat lower incomes… It’s not crystal-clear that forgiving student debt via executive order would actually hold up in court if it were challenged… [But] in a situation where major legislation isn’t possible, it might be one of Biden’s few serious openings for doing lasting good.”
Jordan Weissmann, Slate

“The ‘regressiveness’ objection is that the population of borrowers is richer on average than the larger population of non-borrowers. This is true as far as it goes… There’s also some truth to the ‘moral hazard’ concern. A student loan jubilee now would give students in the future that have to take out loans to finance their educations some reason to be hopeful that their own burdens will be relieved later. Cancelling current loans without doing anything about the underlying problem perpetuates the cycle of students taking out loans and struggling to ever pay them back…

“But neither of those give us a good reason not to cancel current debt. Instead, they give us an excellent reason to create a fair system of higher education going forward — meaning that we should make public higher education, community colleges, and vocation schools tuition-free.”
Ben Burgis, Jacobin Magazine

Critics, however, argue that “If a quick boost to the economy is the goal, there are better ways for a new President Biden to use his executive power… To have any appreciable effect, people would need to go out and spend the money they'd have otherwise used to make their monthly loan payments. Would they do so? As Matt Bruenig of the People’s Policy Project, a think tank, points out, student loan holders tend to be higher on the income scale. Higher-income people tend not to live hand to mouth -- if they get a little extra money they’re more likely to save it than spend it…

“Those who do go out and spend stimulus money tend to be people who don’t have much liquidity. But Americans have been repaying their debts for years and have built up a decent amount of cash. Thanks to that, and to low interest rates, household debt-service payments are at multi-decade lows. So canceling student debt [is] probably not going to make American consumers spend much more, and thus would be a very weak stimulus.”
Noah Smith, Bloomberg

“Sixty-five percent of Americans haven’t graduated from a four-year college. Will that large majority really favor a multi-billion-dollar bailout for people who hold those degrees when their indebtedness was freely taken on and has granted them a credential that gives them a ticket to lifetime higher earnings?… Those who carry student debt are nowhere near the neediest people in the country. In a world of finite resources, where priorities need to be made, they should be nowhere near the top of the list of those receiving a multi-billion-dollar handout from the federal government.”
Damon Linker, The Week

The $50,000 across-the-board relief championed by Schumer and Warren is wildly out of synch with the traditional approach of progressive policymaking. Food stamps, for instance, serve households whose median income is about $19,000 a year, and provide $2,300 in value for the average household. Families that claim the Earned Income Tax Credit — the largest cash income support for working families — earn about $36,500; their average annual benefit is about $2,200. The median income of parents of Pell Grant recipients was about $28,800. By contrast, the median income of households with student loans is $76,400…

“[Schumer and Warren’s proposal] would equal the total amount spent on cash welfare since 1980. And its largest effect would be to improve the finances of college-educated workers, who have already tended to be winners in an economy marked by ever-rising inequality. A better approach would cap forgiveness at $10,000, as Biden and House legislation propose. That could eliminate debt for the 15 million borrowers with smaller balances who, paradoxically, tend to struggle most, accounting for about 60 percent of all defaults.”
Adam Looney, Washington Post

From the Right

The right is generally skeptical of Democratic proposals for student loan forgiveness.

The right is generally skeptical of Democratic proposals for student loan forgiveness.

“Student loan forgiveness, even according to formulae that exclude the very well-off, has very few broader economic benefits. As Jason Furman (Barack Obama’s chair for the Council of Economic Advisors) notes, debt forgiveness would be taxable — which would cut into any stimulative effect on the economy… Most Americans, especially most poor Americans, don’t have student debt, because most didn’t go to college in the first place. Moreover, most people who did go to college have no or very little student debt…

“According to the liberal-leaning Brookings Institution, roughly 30 percent of undergrads have none. Another 25 percent have up to $20,000 in loans. Despite what you may have heard about the student debt crisis, only 6 percent of borrowers owe more than $100,000. Virtually all of them borrowed so much because they attended graduate school. You can argue that people who choose to get graduate degrees — including many young doctors, lawyers and engineers in training — deserve relief. But do they deserve help more than truck drivers, mechanics or short-order cooks?”
Jonah Goldberg, New York Post

“Senate Minority Leader Chuck Schumer and Sen. Elizabeth Warren have authored a resolution calling for the next president to forgive $50,000 in debt per student borrower. Who benefits the most from such a plan? The rich. Federal Reserve data reveals that the highest-income 40 percent of households owe approximately 60 percent of outstanding student debt, while the lowest 40 percent owe just under 20 percent… Plus, the majority of student debt is held by graduate degree earners, who earn approximately 25 percent more than their undergraduate counterparts…

“Biden’s idea of helping out low-income students who are struggling due to the pandemic is, on its face, more admirable than any of the aforementioned policy proposals. Still, he is providing adverse incentives for universities to jack up prices. That is especially concerning given the pandemic has rendered a college education practically worthless. Students are paying tens of thousands of dollars per year to live at home and be lectured via Zoom. Do we really want to tell colleges that they can get away with providing a subpar service for an exorbitant cost? In the case of any of these student debt plans, working-class Americans who chose not to or could not afford to go to college will be subsidizing the education of the professional class.”
Amber Athey, Spectator USA

“Progressive calls for President-elect Joe Biden to forgive student debt in his first 100 days of office should be ignored in lieu of a more moderate proposal: forgiveness capped at $5,000 of debt… Borrowers with the largest balances are the least likely to default. That’s because they’ve often invested in professional or graduate degrees that lead to careers with high earning potential. Borrowers who owe less than $5,000 are the most likely to default. Many in this category started a degree but didn’t finish, and thus aren’t enjoying the higher earnings afforded by a degree…

“Each dollar spent on loan relief is a dollar raised in taxes, and far less than half of taxpayers have a four-year degree. Student-loan cancellation would bleed the working class to alleviate debt for those with more-lucrative career options.”
Beth Akers, Wall Street Journal

“Forgiving student loans with such a broad stroke would create tremendous moral hazard. Individuals who scrimped for years, forgoing dinners with friends and vacations and fancy phones to pay off their student loans, would effectively feel ripped off knowing that had they only been more profligate, the federal government would have wiped away all of their debt. Those who were much less careful about their spending patterns, on the other hand, would feel vindicated…

“If a president could wipe away debt with a stroke of a pen, Biden would not be the last president to do so. Those taking out debt in the future would be sent the signal that if they simply hold out long enough, they can avoid repaying the money. In addition, it would, in effect, mean a huge injection into the higher education racket that would encourage colleges and universities to raise tuition even higher. Many studies have shown that the increase in federally subsidized student loans explains much of the extraordinary tuition increases we’ve seen in recent decades. If loans are forgiven, it will increase demand for new loans and thus provide an opening for further tuition hikes.”
Editorial Board, Washington Examiner

Some argue, “Are we just supposed to ignore the fact that the United States government has been aggressively selling [a college education] to its young citizens for decades? College is the path to a better life, and Uncle Sam will help you along the way… Let’s not pretend the government is blameless just because they used carrots over sticks…

“The reckless programs by which the state coaxed students into college simultaneously enabled the price gouging and institutional bloat that now define the American education system. Years of refusal either to change their own practices or to rein in the abuses of the schools has created a disastrous feedback loop in which the costs rise every year at higher and higher rates, while the return on investment vanishes as the ranks of degree-holders swell to unsustainable magnitudes…

The long-term solution is to take an axe to the government-university cartel. The vast majority of government funding to colleges—including federal loans—must be cut, and mustn’t be replaced with anything. Take the carrot away, and let the masses of young people drawn to college by Uncle Sam’s siren song filter back into productive work, reinvigorating their communities in the process. Take the government money from the schools, and watch the bloat shrivel. That is the only way to ensure that the next generation of Americans don’t find themselves in this situation to begin with.”
Declan Leary, The American Conservative

A libertarian's take

“The most libertarian policy preference in my view is two-pronged: get the federal government out of the lending and guaranteeing game, and make student loan debt reasonably dischargeable in bankruptcy. These two policies would realign the incentives of colleges, lenders, and students to bring down prices and saddle fewer potential students with loans they are unlikely to repay…

“A longer repayment plan tied to income is also a sensible way to think about the returns of student loan debt, which under the conventional 10-year repayment model sees borrowers making the highest monthly payments when their income is lowest, and their lowest monthly payment after 10 years of post-college earnings. People who'd rather get payments done in 10 years (or sooner) would, of course, reserve that option. People who are struggling right out of school could pay more as they earn more, while people who will carry their debt to the grave no matter how it's structured should be able to seek relief in bankruptcy.”
Mike Riggs, Reason

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