President Biden drew sharp attention to student loan policy when this week revealed that the administration is “considering different options” for the full forgiveness of student debt. That means backing away from his campaign promise to forgive no more than $ 10,000 in student debt per borrower. Biden’s rhetorical shift also seems to contradict some of his previous statements, suggesting that he dislikes the regressive nature of widespread credit cancellation; in other words, it’s actually more of a handout for the already rich than a program designed to help the poor.
Given the possible forgiveness of student loans on the horizon, this is a good time to dispel some myths and issues related to the student debt crisis that I have faced while participating in the political debate on this issue and arguing against loan cancellation.
Q: Why do you hate poor people?
A: In short, I don’t. This is the most fundamental misunderstanding in this space. Student duty, it turns out, this is not a problem of “poor people”. It is wise to think that only poor or “poor” people cannot afford to go to college without a loan, so debt forgiveness should be a sensible way to help this group. Unfortunately, all this is wrong.
We know that students from the most affluent families take out a loan most – Yes, most of all. This is because they go to expensive colleges and stay in school longer (often graduating from graduate school and vocational training). And the fact that they are borrowing does not even indicate a lack of cash. Even if the family had the money to pay for the child’s education, the subsidized interest rate on student loans is so low that it may make economic sense to borrow to pay for school and invest elsewhere.
It is also true that people with student debts are becoming the wealthiest in our economy. And you don’t have to trust me in that. Research from Sandy Baum of the City Institute and Adam Looney of the Brookings Institution show that much of the outstanding student debt belongs to the highest-income Americans. The first 40 percent of households in terms of annual income have “nearly 60 percent of outstanding student debt and make nearly three-quarters of payments”.
It makes sense if you think about it. Loans allow you to invest in education. Investing in education brings in more returns. It should come as no surprise, then, that debt for education is largely a problem for the rich.
Q: Yes, but become real. Not everyone with student debt is rich. And there are definitely people who are struggling. Wouldn’t that help them?
A: It would help them. Like. It would be like fighting hunger by making food for free rather than expanding the supplemental food aid program (aka “food stamps”). A poorly targeted approach ignores existing infrastructure that more effectively helps those who are really struggling.
All student borrowers (non-parent borrowers) are already eligible to participate in programs that reduce monthly loan payments to affordable income-based levels and forgive debts that remain unaffordable in the long run (defined as 10, 20, or 25). years depending on the borrower). programs, collectively referred to as income-based repayment, create income-verified security networks for borrowers.
These programs do not work perfectly and definitely require reform. But they have nothing to do with the conversation. Approximately one in three borrowers now uses these programs to repay their debts. The reason we no longer hear about them in the discourse on the student loan crisis is that their existence undermines the arguments for widespread loan cancellation. And “fixing the IDR,” although sensibly in terms of politics, is more difficult to sell politically.
Q: Lawyers sometimes argue that abolishing student loans would be a big step toward reducing the racial difference in wealth. Isn’t that reason enough to do that?
A: Racial wealth in America is an issue that certainly requires attention and possibly substantial intervention, but correction should not occur through student credit policies. Trying to eliminate the racial difference in wealth by canceling the loan would be similar to correcting the gender pay gap by giving tax breaks to every female CEO. Mathematically this could reduce the measured imbalance, but it does not give the essence at all.
If we want to reduce the racial gap in wealth, we need to address it directly. The idea that we should give money to millions of wealthy white Americans to modestly close the gap in racial wealth is nonsensical. We can do better.
Q: Wouldn’t that be good for the economy?
A: This question I heard a lot a few months ago in the context of stimulating the economy after the recession of the pandemic. At the time, the federal government was handing out money to Americans and hoping they would spend it to get the economy back to full employment. It seemed obvious to many observers that the abolition of the student loan could help in the same way.
The problem with this approach will be twofold. First, canceling a loan would be a bad form of incentive. This would be costly compared to its immediate effect, because the government will bear the costs of the entire balance, but will only affect the current costs of households in the amount of their monthly payment. And the fact that the benefits will mostly get rich also weakens the effect. Usually we focus on stimulating low-income households because they are more likely to spend money rather than save. And if the economy needs to be boosted, then costs, not savings, will work.
Q: Okay, but it won’t hurt anyone. What’s the problem with helping borrowers, even if it’s not the magic pill we imagined.
A: Well, it hurts someone. In fact a lot of people. And it hurts the people we probably want to hurt the least; low-income.
As economists annoyingly remind, nothing is free. Canceling a student loan may not look like a cost program because new money isn’t coming out of the door. But it costs all taxpayers because of the huge amount of lost revenue it brings. That is, the money that the government planned to have in its coffers from repaying loans, simply will not be. This will leave us with three options: cut costs, raise taxes or increase the deficit.
When I have discussed this issue in the past, I have often come across the argument (seemingly based on modern monetary theory) that spending outside of our funds is not worth it; that it does not create inflation, as predicted by classical economic theory. Until recently, we had been growing the deficit for decades without inflation as a result, so this structure seemed to allow for spending without restrictions. But that has changed. And, as everyone who has a pulse knows, inflation has taken over our economy, causing prices for everything from food to housing and gas to grow at a rate we haven’t seen since 1980s.
Costs that are not affordable, do not go without costs and have real consequences. The costs required to repay outstanding student debt will not only be taxed by taxpayers, many of whom do not have the luxury of earning a college degree, but will also lead to long-term costs through rising prices in the economy. To add resentment to harm, we know that inflation tends to affect low-income Americans more negatively than high-income ones.
Finally, and perhaps most importantly, the cancellation of the loan is likely to lead to rampant inflation over tuition, which will exacerbate the challenges we are already facing. Students who go to school next fall are likely to expect the political inevitability of the next round of loan forgiveness and will be willing to spend and take more than otherwise. Institutions will almost certainly respond to this readiness by further raising prices.
Beth Akers is a senior fellow at the American Institute of Entrepreneurship and an author about how college pays: an economist explains how to make a reasonable bet on higher education and The game of credit: the rhetoric and reality of student duty.