Biden'ts student loan forgiveness has generated the expected press and political firestorm. What socio-political event doesn't, nowadays? Conservative sources rage about the forgiving of debt being unfair for those who paid their debts, and about the cost. Liberals talk about racial equity and relief from predatory colleges. Almost no one talks about the conditions for forgiveness, or the economic impact.
-20,000 in debt relief to those holding Pell grants;
-10,000 in debt relief for those holding other federal educational debt;
Relief goes only for-
-income under 125,000 (250,000 for a married couple)
-federal debt only, no relief on private borrowing
-no relief for loans taken out by parents
-extend loan payment holiday until 12/31/22, only and final
-cut maximum loan payments in half, to 5% of disposable income
(income after food/housing/utilities)
-improve loan forgiveness for public service
-strengthen colleges' cost accountability
This seems to me targeted debt relief. The majority of beneficiaries are Pell grant holders, whose average income is low, and for whom the 10% of disposable income payments can be onerous. Improved loan forgiveness for public service is a good idea as well. I have my own thoughts on cost accountability that don't involve a federal bully pulpit, and that's all this order's college 'accountability is.
Ranged against these fine outcomes is anger from those who paid their debts, and concern about how we're going to pay for the 300 billion in costs.
There are practical, theoretical, and spiritual elements to the answers to this argument.
It is accounted righteous to pay the debts you owe. One of the degraded aspects of US society is the casual acceptance of debt as a way of life, including defaulting on it. 16% of student loan borrowers are currently in default on their loans, an outrageously high number. Thoes who have paid their literal debts to society are righteously angry with those getting a free ride. Forgiveness of debt by the federal government also further the idea that we can do whatever we like and our federal sugar daddy will save us.
The idea, however, that loan forgiveness is being paid from 'your taxes' is false, at least in the direct sense. The money from these loans went out a long time ago from the treasury to the universities. No money is being sent to anyone. The loans, or a portion of them, are simply being wiped off the federal balance sheet, depriving the government of future payments totaling 300 billion. That cost is absorbed by the national debt. This is no different than a corporation or bank writing off debt which is then taken as a charge against earnings. The US is simply rolling the debt to a bigger debt.
Another issue to consider is the 16% default rate. The loan forgiveness is about 20% of outstanding student debt, but 16% of it, nearly as much, is already uncollectable. It is not unfair to say the two in effect cancel each other out. The government was going to be out 300 billion anyway.
Loan forgiveness also has economic benefits. Those helped have more disposable income, 10% more, to inject into the economy. Loan forgiveness, as opposed to default, also has no effect on credit rating, thus not damaging the future buying power of the recipients.
A final issue to consider is the
cost of the student loan program. It was expected to generate 1 billion in federal income annually, but in fact has cost the feds money because of slow repayment and other factors.
There is a larger context to student debt, however. Total US debt is at 30 trillion dollars, or 130% of GDP.
The US ranks 8th in the world in debt-to-GDP ratio. The debt ratio of 108% is based on 2018 data, and it is sobering to consider that total US debt has increased by 22% in only 4 years. In national terms this is the largest cost of covid and our foolish decisions to shut down and quarantine the healthy. Since we have a national debt of such outrageous proportions, one may argue that adding anything to it is foolish. By that standard, all our politicians are fools and our media enablers in deception (well THERE'S a surprise!), since almost no one talks about the budget deficit and accunulating debt. However, if we ignore this issue, adding 300 billion to a debt of 30 trillion is an extra....1% on the debt of the United States. I think we can tolerate this....
There is also the effect of student debt on total indebtedness. Here is
data on non-housing household indebtedness from the Federal Reserve. Total non-housing household debt is 4.34 trillion. Of this, student indebtedness is 1.58 trillion, or 36% of total US household non-housing debt.
If mortgages are added (some of which are second mortgages and HE loans that pay off consumer debt) then total household indebtedness is 15.24 trillion, and student debt is still an astonishing 10% of all household debt. It is apparent that student debt is a substantial burden.
Paying off individual debt is, then, a differential benefit that punishes the responsible, and is morally corrosive. It is also a practical solution to a complex problem that is federal in origin. Unless we want to saddle our future society with this much debt, it is reasonable to forgive part of it, even if morally wrong.
Coupled with this there must be a longer-term, structural solution.
Educational debt exists for two reasons, one primary and the other reactive. The primary driver is the ready availability of federal money for college education. The other is the outrageous rise in college tuitions. These tuitions rose in repsonse to fedeal guarantees, not the other way around. Guaranteed money is another way of saying 'we can spend what we want and charge what fees we want.' College prices and loose lending rules have made the mess we're in.
My solution is to underwrite these loans, albeit in a slightly different way, rather than just giving out money. The effect of education on income can be loosely estimated, and so can the effect of various majors. Here is expected income by major type- (scroll right for rest of table)
Source: Georgetown University Center on Education and the Workforce, The Economic Value of College Majors
The income advantages for STEM is apparent, as is the income disadvantage of teaching and humanities. Loans might be determined by a process similar to the underwriting of other loans. Instead of looking at income and collateral, the student's major and future income potential could be determinants in the amount of loan provided. That way no student gets more money than can be paid off. Loans could be capped at a fixed percentage of expected income. A history major would get less money than an engineering major, and thus incur less unpayable debt. The process would ignore tuitions, so that there would be incentive to attend schools within the limits of the loan. There is no point in majoring in Womens' Studies at Cornell, incurring 270,000 in debt for a major that will pay so little that paying back the loans is a practical impossibility. Records of courses taken and major field would have to be provided every semester (they usually are already, to prove the loan recipient is actually in school).
This method would prevent the profligate borrowing by too many students, without thought about how to pay the loans back.
Finally, there is a odd spiritual analogy for those who are angry they paid their debt while the young freeloaders get theirs forgiven. In the parable of the workers in the field, those who arrive last are given the same wages as those who had been there all day. There is an obvious unfairness but also a kind of justice. There is no enhanced reward for being 'good', or as the old adage says, virtue is its own reward. There is, admittedly, a communist overtone- everyone gets what they need while everyone contributes what they can; ie, the wealthy pay the taxes and tuition while the poor pay nothing and get free money. I think, however, that's the wrong frame. Seen societally rather than individually, student debt relied benefits society and the economy broadly, so that everyone benefits, directly or indirectly. Everyone gets the reward.
The US is in a terrible mess socially and financially right now. Like many bad or emergent situations, immoral or awkward solutions are necessary that might otherwise be rejected. This is how the student debt problem strikes me. The solution is morally bankrupt but I can think of no better one. It is essential going forward to sharply limit federal and other student loans, and link them to future income, to avoid further dislocation.
Ted
This is merely another example of progressive privilege, a political payoff to potential democrat voters. Student loans should not be treated any differently from any other kind of loan. Borrowed money should be repaid, it matters not why the money was initially borrowed, college, car, house, appliances, furniture, vacation home, etc. And it is not necessary to borrow huge sums of money to obtain a good education. I have three children and six grandchildren, all of whom have at least some college education, including a veterinarian, three nurses, an interior designer, and a civil engineer. They all have good jobs and are responsible, productive members of our society. None of them have any student debt because they attended state schools, community colleges, or a small private design center. Some of them put off going to college to work and save some money prior to entering, or worked summer jobs o help with expenses. Why on earth should any of them have to pay for someone else's education? There is no "debt forgiveness", there is only debt transfer, from those who should pay it to those who should not be responsible for it.
ReplyDelete