What liberals get wrong on student loan forgiveness
College-educated voters have shifted to the Democratic Party in recent years, and Democratic leaders think itwould be ungenerous not to reward their change of heart. Joe Bidenwants to help people with student loan debts by forgiving up to $10,000 per borrower. Sen. Elizabeth Warren ofMassachusettswants to go big, setting the amount at $50,000, an idea endorsed by several Senate Democrats.
In the heady aftermath of Biden’s election victory, his party is gripped by the impulse to take dramatic actions involving large sums of federal money. His planwould cost $429 billion. That’s not counting the help borrowers have gotten sinceMarch, when the federal government told them they could stop their payments, without incurring interest, until September— later extended to the end of the year, and likely to be renewed.
Besides the cost, the student loan forgiveness proposed by Biden and others suffers fromthree major flaws:
It’s not targeted to help the people most in need; it wouldn’t help the economy; and itwouldn’t solve the massive underlying problem.
Progressives are pushing this remedy despite the inescapable fact that bailing out people with college educations is the opposite of progressive, given that more education generally yields more income. Student loan forgiveness does nothing for Americans whose education ended with high school.
You might assume that lower-income people who attended college would incur far more debt than their higher-income peers. But a report fromthe liberalUrban Institute found that “the most affluent households— the top 25% of households with the highest earnings— held 34% of all outstanding education debt.”
Those are households whose annual income exceeds $97,000. The average person who holds only a high school diploma, by contrast, earns $37,000 per year. Dowe reallywant to deliver a $10,000 gift to someone pulling down a six-figure salary? It should be possible to findways to ease the burden on borrowers who are hopelessly overwhelmed without enriching people of means.
Another element of unfairness is that the erasurewould deliver a lump of coal to borrowers who diligently discharged their obligations. Many of themwould legitimately resent having made sacrifices that others will be spared.
One major rationale for loan forgiveness is that itwould stimulate the economy. “Student loan debt is holding back a whole generation from buying homes, starting small businesses, and saving for retirement— all thingswe rely on to growour economy,” tweetedWarren, who says canceling student debt “would be a huge economic stimulus during and after this crisis.”
Not so. Most of the reliefwould go to people who don’t need it andwould merely sock it away. “This is theworst macro policy I’ve ever heard of,” Justin Wolfers, an economist at theUniversity of Michigan and the left-leaning Brookings Institution, said in 2011. Itwould make far more sense to funnel money to low-income and unemployed people, whowould be likely to use it for food, clothing and housing.
We can deduce this fromthe $1,200 stimulus checks sent out this year to Americans largely without regard to need. Only about 40% of that money actually got spent, partly because so muchwent to thewell-to-do.
It’s true that student loan debt has mushroomed and that many borrowers are crushed by it. Worse, a lot of those who owe money never got a degree, cursing them with theworst of bothworlds.
But erasing these debts doesn’t cure the larger malady, because it leaves the existing loan programintact. “People currently enrolled in college will get their loans forgiven and the next semester will take out loans again,” Jason Delisle, a scholar at the conservative American Enterprise Institute, toldme. “It’s a one-shot fix for a problem that’s not one-shot.” We could forgive all these debts and then face the same problem a few years fromnow.
He proposes an ingenious new system inwhich borrowerswould pay a small, fixed percentage of their income for 25 years, allocating burdens to match means. Someone who drops out of a state university andmakes $30,000 a yearwould get a break, while someone who gets anMBA and makes $200,000would not.
After capturing theWhiteHouse, Democrats can hardly be blamed for being eager to address problems that have been neglected. But they should make sure that their remedies will actually fulfill their aspirations.