Student Loan Forgiveness – Not Holding My Breath

This past summer, during two different personal financial consulting sessions for two separate 30-somethings, I was struck by something both clients said about their student loans balances. One carried $120,000 in debt, the other about $40,000. I worried about their sizable student loan. They did not. 

Both said, in effect, “I’m not going to pay off my student loans early because if Biden wins my loans will probably be taken care of.” 

I was stunned. That is not at all what I expected to happen this past summer. Biden won, but it is still not at all what I expect from his administration. 

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An estimated 44 million Americans carry an estimated $1.5 trillion in student loan debt. The student loan debt burden is higher than credit card debt. Since the pandemic-relief CARES Act passed in April 2020, borrowers have had the option to defer student loan debt payments without interest accruing until December 31, 2020. Absent further action, student loan payments become due again in a few weeks. This backburner financial concern just became a frontburner issue.

Despite its newfound urgency, the apparent belief by some in a future student loan jubilee – far more widespread than I had previously imagined – seems misguided. 

The belief doesn’t come from nowhere, however.

As President-elect, Joe Biden raised hopes on this front, specifically by calling for up to $10,000 in student loan debt forgiveness for graduates who pursue public service. His campaign also called for specific income-adjusted payment plans. He has proposed that if you make less than $25,000 per year, you could defer payments without accruing interest. Above $25,000 in income, borrowers could pay 5 percent of “discretionary income” toward debt, with a promise of forgiveness 20 years from now after full payment compliance. The income-calculation math already begins to sound quite complicated with this second proposal regarding disposable income-adjusted payment plans. 

Besides complicated math, the politics is complicated too. How would such a bill pass? Could it be achieved through executive order, or would Congress need to pass a law?

We can easily imagine what people on different sides of the political aisle say in this debate. Trump’s Education Secretary Betsey DeVos bashed the idea as a “truly insidious notion of government gift giving.” 

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On the other side, leading Democratic Senators such as Chuck Schumer and Elizabeth Warren have argued that President Biden has the authority to cancel up to $50,000 in student loan debt through executive action. 

One part of thinking about generous student debt forgiveness is whether it efficiently achieves what I understand is the goal Schumer and Warren seek. They want to level the economic playing field. They want a student debt policy that would tend toward economic equality.

Enter, data. Economists at the University of Chicago argue in a November 2020 whitepaper “The Distributional Effects of Student Loan Forgiveness” that student debt forgiveness mostly does not achieve that goal of greater equality.

The benefits of universal student loan forgiveness, of the type Schumer and Warren advocate, would skew mostly to upper income people. 

The economic effect of universal student loan forgiveness is what economists call “regressive,” meaning it benefits higher earning folks far more than lower earning folks. The economists estimate that debt forgiveness like this would be almost six times more beneficial to borrowers in the top decile of earners than borrowers in the lowest decile of earners.

Why is that? The biggest reason is that higher student loan totals actually correlate with higher incomes. So on average, the people who get the biggest benefit from large student loan forgiveness are, on average, higher earners. This basic finding should at least give us pause that the Schumer and Warren proposals are an effective means of achieving their goal of reducing inequality.

In addition, intuitively, we can see that people who do not attend any college – frequently, lower earners – would receive none of the $10,000 to $50,000 benefit advocated among Biden’s supporters.  

I understand if you are reading this while feeling broke and needing $40,000 in loan forgiveness, that debt forgiveness does not feel personally regressive to you. It would in fact feel really good. I get it. But public policy isn’t about your specific situation. It is, at best, about achieving collective goals through fairness and efficiency. 

We already have in place certain programs for student loan forgiveness. The current version of loan forgiveness for public sector employees is something called the Temporary Expanded Public Service Loan Forgiveness. 

The Government Accountability Office (GAO) issued a report last year which says that Secretary Devos’ department appears to have hewed closely to her personal beliefs, rejecting 99 percent of applications to this program. Clearly, that isn’t working in its current form.

The University of Chicago economists point out that expanding income-based student loan deferral and forgiveness could be accomplished through existing programs, although clearly under different leadership and expanded criteria for approval. Under scenarios they study, the benefits of loan forgiveness could be shifted down from top earners to middle earners under certain circumstances. It still remains the case, however, that folks who do not borrow for higher education – likely the same ones suffering at the bottom economic rungs of society – do not benefit from student loan forgiveness programs.

Considering the political side, it seems that universal or even generous student debt forgiveness is a lot more controversial than its proponents think it is. Unless it is framed carefully, higher education student loan forgiveness will make many people very angry. Recalling my conversations from this past summer, I got the sense that these borrowers considered debt forgiveness non-contentious. I doubt it.

Certain types of student loan forgiveness are not politically contentious. Military service veterans – and their children too – receive extraordinarily generous tuition waivers or educational subsidies. Military benefits like this are not controversial, although the financial benefit per person is somewhat staggering. My wife benefitted from a loan forgiveness program for her $180,000 of medical school debt, by qualifying for and pursuing a medical research career valued by the National Institute of Health. Certain types of work following education can seemingly transform our perceptions of socialistic “government gift giving” to patriotic “thank you for your service.”

It feels like the issue is not so much debt forgiveness as a concept, but rather whether forgiveness feels earned and societally useful. If Biden does pursue these policies, he will have to convince skeptics about the earned and societally useful part, as well as address the regressive nature of universal student debt forgiveness.

A version of this post ran in the San Antonio Express News.

Please see related post:

The Effective Nationalization of Student Loans

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