ONE-TIME RELIEF CAN LEAD TO EVEN MORE FUTURE DEBT
proportionately benefit middle- to upperclass college graduates of all colors and ethnicities, especially those who attended elite and expensive institutions, and people with lucrative professional credentials like law and medical degrees.
An October analysis by the Brookings Institution found that almost 60% of America’s educational debt is owed by households in the nation’s top 40% of earners, with an annual income of $74,000 or more.
People who go to college “are often from more advantaged backgrounds, and they end up doing very well in the labor market,” said Adam Looney, a former Treasury official who helped write the analysis.
Without a parallel effort to curb tuition growth, one-time debt relief could actually lead to more higher-education debt in the future as students take on larger loans, hoping the government would at some point wipe them clean, a “moral hazard” that often accompanies one-time interventions. And it would be expensive: Canceling even $10,000 per person in debt would eliminate more than $400 billion in government assets, although calculating the true cost to the Treasury is tricky because of student loans’ long repayment time and high default rate.
Looney said canceling $50,000, at a projected cost of $1 trillion, would be “among the largest transfer programs in American history,” on par with decades of targeted spending on programs that exclusively benefit low-income families, such as the $992 billion spent on federal Pell grants since 1972 and the $1.4 trillion spent on welfare since 1975.
If debt relief overall would disproportionately flow to better-off Americans, even modest debt forgiveness would help many financially vulnerable people, especially people of color. Student debt load has tripled since 2006 and eclipsed both credit cards and auto loans as the largest source of household debt outside mortgages, and much of it falls on Black graduates, who owe an average of $7,400 more than their white peers at the time they leave school. Black borrowers also default at higher rates.
An economic working paper published by the Roosevelt Institute casts debt forgiveness explicitly in racial-justice terms. The total percentage of Black households that would benefit would be greater than white households, and the relative gains for those households’ net worth are far larger, the researchers found. The greatest marginal gains come from canceling the smallest debts; wiping out $20,000 would end student debt for half of all households with loans.
Sens. Chuck Schumer of New York, the Senate Democratic leader, and Elizabeth Warren, D-mass., said in a joint op-ed last week that $50,000 debt cancellations would give “Black and brown families across the country a far better shot at building financial security” and would be the “single most effective executive action available to provide massive stimulus to our economy.”
To truly break the debt cycle, though, forgiveness would need to be paired with policy changes addressing the underlying cause of America’s skyrocketing student debt: affordability.
“The real problem is the cost of higher education,” said Betsy Mayotte, president and founder of the Institute of Student Loan Advisors. “Unless you’re going to solve the problem, forgiveness is just throwing away money.”
Biden’s campaign platform proposed making public universities tuition-free for families making less than $125,000 a year.
“The virus epidemic has accelerated some of the trends that are strangling public higher education,” said Louise Seamster of the University of Iowa and a co-author of the Roosevelt Institute paper. She said a momentous move like debt forgiveness could spur “new ways of thinking.”
“A lot of the debate has gotten stale because we’ve been limited in thinking about the fixes,” she said.
But student debt forgiveness could have serious political implications. In 2009, relief extended by President Barack Obama to homeowners with houses suddenly worth less than their mortgages was the original spark for the Tea Party movement, driven by people who fastidiously paid their home loans and felt left out. The dynamic would almost certainly repeat itself as earlier and later borrowers wondered why they had to pay off their loans.
“I don’t believe any president has the authority to give away hundreds of billions of dollars through the stroke of a pen,” said Sen. Ted Cruz, R-texas. “And I think doing so is profoundly unfair to the millions of Americans who worked hard to pay down their student debt.”
The legal argument for debt cancellation by executive action hinges on a passage in the Higher Education Act of 1965 that gives the education secretary the power to “compromise, waive or release” federal student loan debts. Schumer and Warren maintain that Biden can broadly use that power, and several lawyers have written analyses backing that view.
But former government lawyers have warned that across-the-board forgiveness would face legal challenges from Republicans. And Biden has never publicly endorsed the idea. Some close to him say he recognizes the risks and consequences of bypassing Congress.
There is more consensus that the $10,000 proposal would reach the most vulnerable borrowers, the estimated 15 million who have low debt under $10,000, often because they did not complete their degrees.