The Problem With Forgiving Student Loan Debt
On February 21st, the Biden-Harris Administration announced that it would forgive $1.2 billion in loans for over 150,000 student loan borrowers as part of the Saving on a Valuable Education (SAVE) Plan. Overall, the Administration has approved debt cancellation for nearly 3.9 million Americans, summing up to about $138 billion in relief.
SAVE has been quite productive so far – the DOE even projected that low income people will see their payments reduced by up to 83 percent, which will mitigate some of the longstanding structural barriers in higher education. It is, however, important to note that there are 43 million Americans who currently have outstanding federal student loan debt, not including those with private loans. Individuals on the brink of poverty (lower middle class) who cannot qualify for means-tested programs like SAVE are equally in need of financial assistance and likely make up a substantial majority of the remaining federal debtors.
This raises the question: why not simply forgive everyone's debt?
For a long time, policy makers have debated the idea of universally forgiving federal student loan debt. Elizabeth Warren and Bernie Sanders have been strong advocates of it for years, but nothing has really come close to fruition.
Here’s why:
First, funding. It would cost close to a trillion dollars over a 10 year period to forgive all federal debt. That is money that we simply do not currently have, meaning that the policy would be funded by tax dollars from the 87% of American adults who don’t have student loans. More specifically, it would probably be a combination of taxation, federal debt, and tradeoffs in social spending, all of which have detrimental economic repercussions. In fact, the Committee for a Responsible Federal Budget (CFRB) found that debt cancellation would boost inflation by “15 to 27 basis points” in just one year, undermining gains from the Inflation Reduction Act and elevating the chance of recession.
Second, regressiveness. While it's true that many people face significant challenges in repaying their college loans, the majority of college debt is held by borrowers in the top 60 percent of income distributions. That number is also an understatement, because it only considers the short term. Think about it logically – even if a person in medical school is in a low income decile right now, they will probably have an above-average income in the future, and will thereby have the means to pay off their loans. Broadly speaking, people who go to college end up making more money than their counterparts anyway, which is why universal forgiveness may not actually reduce inequality. In fact, a report from the University of Chicago found that forgiveness would give more money to the top 10 percent of earners than to the entire bottom 30 percent of earners.
Third, price hikes. If people have more money, colleges charge more money. This may seem underwarranted, but it’s empirically true. The National Bureau of Economic Research found that Federal student aid accounts for most of the college tuition increases between 1987 and 2010. In a capitalist economy where higher education is almost entirely privately funded, federal financial aid perpetuates an endless cycle of escalating tuition prices. The aforementioned analysis by the CFRB projected that student loan debt would return to $1.6 trillion by 2028 if a universal policy was passed now.
All in all, the anticipated advantages of forgiveness are empirically disproven and limited to the short term. While a solution to the educational inequity crisis is desperately needed, universal student loan forgiveness is not it.
References
https://www.crfb.org/blogs/student-debt-changes-would-boost-inflation