Student Loan Forgiveness
As someone who doesn’t fit into the typically political mold, I sometimes find myself arguing with everybody over things where in the end we actually agree more than disagree. Last week President Biden made a long-awaited announcement to cancel a portion of student loan debt. Moderate Democrats hail the move as a meaningful step in closing the racial wealth gap and helping younger Americans get out of significant debt. Progressives criticize the move as not big enough, and Republicans are of course the most critical by warning about adding to inflation and putting all taxpayers on the hook for some student loan debt. Through all the noise, I’d like to make some points.
Student Loan Debt is a Serious Issue
Student loan borrowers in the United States owe a collective nearly $1.75 trillion in federal and private student loan debt as of August 2022, according to the Federal Reserve Bank of St. Louis. This is a shocking number, even to me, someone who has a hobby of looking through economic data. Those with student loan debt put off critical life decisions like buying a home, starting a family, and even buying a car. If anything this has a serious societal impact when it comes to birth rates, etc. Something conservatives might pay more attention to.
But this issue of college could be a whole other piece. College is pushed too much at the high school level, by administrators who want to pride themselves on having a high college enrollment rate and by parents who want their children to be college educated. But the bottom line is that today there are many other opportunities such as online coding boot camps, trade schools, and technical colleges that are significantly cheaper and shorter in duration. As college gets more unaffordable, these innovations will continue to grow and compete with traditional universities. Colleges will have to and should have to adapt to become more efficient. Will they continue to charge so much money for classes that could instead be YouTube videos? Will they continue to charge more for tuition to build fancy new student activity centers? So much money could be saved by streamlining instruction and reducing overhead.
Making college free is an option. However, is that fair to these new innovative options to only cover one path to get an education? If I run a career preparation business should the government cover the costs of my students too? Then of course colleges will never innovate and change if the government is footing the bill. Why would they? Who will decide the tuition that colleges can charge the government? Probably people with conflicts of interest who used to work in academia. What is the risk of the federal government having complete control over how much state colleges get per student? Who will decide how much students get for housing or the minimum number of hours they can take? I could go on and on.
Of course, the price of college isn’t fair to those who can’t afford it. Scholarships go a long with for many but many students deserve more support. I think many taxpayers would support a policy to support students financially in degrees with high value. Also providing free community college is another great compromise. But for many, college is not the right choice for them and more high school students should think about that.
It’s the Interest
The most outrageous thing about student loans in my opinion is the interest. The average interest rate is 5.8%. If someone has $50,000 in student debt for 25 years at 5.8%, that's about $44k in interest. This is crippling. We can do better to reduce the amount of interest that has to be paid. Canceling the interest might even be the fairest solution to all of this. Just pay back what you took out.
It’s NOT FREE
This is something quick I have to mention. When the governemnt “cancels” someones student debt it doesn’t just go away. What really happens is the debt is transfered from the borrower to taxpayers. Accounting-wise, when the loan is issued, the money goes out but it is not recorded as an outlay since it will be repaid. However, if the loan is canceled, the amount forgiven immediately counts as an outlay, even though the money already went out. This is why Biden waited until the end of the fiscal year to announce this plan because it will count for FY2023, allowing him to still claim he significantly reduced the deficit. Canceling the debt doesn’t mean the government suddenly needs to raise money because the money was already spent. However, it does mean there will be higher real deficits in the future since there will be no repayments made.
Suspending loan repayments for everyone is a terrible, regressive policy
I’m going to copy this analysis done by the Committee for a Responsible Federal Budget because I think it is excellent in explaining this.
“The student debt pause continues to be an extremely regressive policy, and each month the pause is extended the policy becomes more cumulatively regressive. The vast majority of the benefit goes to those with college degrees, who currently have an unemployment rate of 2.1 percent. In a typical year, about two-fifths of payments are made by households in the top quintile and only 2 percent by those in the bottom quintile. Of course, many people who don’t make any payments are likely towards the bottom of the income distribution, and they still benefit from not having interest accrue on their loans. However, they receive a relatively small benefit compared to a graduate school student with a high level of debt who was making active payments, making the policy as a whole regressive.”
“By stopping interest accumulation, the student debt pause effectively cancels some debt. High rates of inflation have further eroded that debt, which is paid at fixed interest rates. Using the same methodology as in our previous analysis, we estimate that since the pause began in March 2020 and should it continue through August 2023, a typical recent medical school graduate will effectively receive nearly $90,000 of debt cancellation (from the pause and inflation), a recent law school graduate will get $55,000 of cancellation, and a recent master’s degree recipient will get $25,000. At the same time, a recent bachelor’s degree recipient will get $8,500 of debt cancellation, someone who just completed an associate degree will receive $6,000, and a person who was unable to complete their undergraduate degree will get $3,500.”
Biden extending the moratorium on payments until the end of the year is clearly political as the midterm elections are approaching in November. But there is no excuse. It is a bad policy. If Democrats are going to hammer Republicans for passing the 2017 tax cuts that overwhelmingly benefit high earns, they need to look in the mirror.
Yes, it is expensive
As I explained earlier, forgiving student loans isn’t free. Estimates of the cost of Biden’s announcement are around $500B. This is a significant cost taxpayers will bare over the coming decades and will continue to push our country's fiscal path more in a dangerous direction. The Inflation Reduction Act passed reduced the debt by about $200B, which means with a stroke of a pen, Biden already erased the gains of the IRA.
Of course, Republicans are hypocrites
It is an interesting debate about whether all taxpayers should be footing the bill for someone's student debt. I personally wouldn’t mind too much about this but Republicans shouldn’t either considering their 2017 tax cuts. The Tax Cuts and Jobs Act of 2017 cost a projected $1.9T in the form of large cut cuts for high earners and corporations. Where was the outrage to taxpayers having to pay for tax cuts for the rich and large corporations?
To those who don’t follow, it’s not like canceling the debt is going to make your taxes go up automatically. You’re still going to be paying the same unless Congress suddenly decides we should be paying more taxes, which is very unlikely. But theoretically, all taxpayers are responsible for government spending, so if suddenly $500B of losses are booked, we’re all on the hook. The real cost is the higher deficits that will come in the future that will add to inflation and further crowd out the bond market. It’s something to keep in mind but it isn’t something that is going to hurt people in the short term in the way Republicans have talked about.
Democrats respond by pointing out the PPP loans, but I think this is a weak argument. PPP loans were created to be forgiven. The law authorized PPP loans to small and medium-sized businesses, while also creating a way for them to be forgiven. Many businesses, like my Mom’s, would never have taken these loans if they weren’t going to be forgiven. Student loans on the other hand weren’t created to be forgiven. They are given out with the assumption that there will be no bailout.
I would agree with some of their criticism though. I can understand the frustration of people like my father who worked too hard to save money over 20 years for me to go to college, while those who saved nothing get a bailout. Some parents have sacrificed a lot, and I would be pissed. But of course, not everyone could have saved money, but there are ways to means test support for those who couldn’t save. This isn’t the first time we’ve punished savers in this county, but it’s not a good example to set either way.
There is a big moral hazard
College kids are dumb, as we all know. Now that we’ve started to forgive student debt, we might as well just take out massive student loans. Take out $100K and don’t worry because it will be forgiven the next time there’s a Democrat president in power. Progressives already want to forgive all the debt, so might as well load up. It won’t be long until one of them are president.
My solutions
Here is what I think should happen
- Put pressure on states. Individual states used to put a lot more money into higher education. They already fully fund K-12, they should be the ones to fund higher education, not the federal government.
- Reduce the interest of student loans.
- Cap repayments for everyone at a percentage of their income.
- Properly fund Department of Labor programs for apprenticeships, workforce development programs, and on-the-job training to take the spotlight away from traditional universities.
Also, isn’t it interesting that Biden has the power to do this? What a mistake by Congress to give the president so much power in managing student loan debt.
