👩🏼🎓 Is Student Loan Forgiveness A Good Idea?
3 arguments against forgiveness. 3 rebuttals. And 3 questions.
Last week President Biden announced plans to forgive billions of dollars in student loan debt. Student loan forgiveness is politically popular and often seen as a viable way to both combat inequality and increase economic output.
So why isn’t everyone on board?
Why forgive student debt in the first place?
It’s not just the price of gas and furniture - the cost of education in America has also gone up and has been rising steadily for decades. Most Americans take on debt to pay for the cost of higher education, irrespective of how much education they receive.
It’s super easy to take on this debt. Think about it, banks lend over $100,000 to students who have no income (try getting a $100,000 home mortgage loan with no income). That easy money comes at a price because lenders make student loans very difficult to discharge or defer - some student loans even transcend death.
Easy money incentivizes colleges to raise prices, but that’s not the only reason the cost of higher education has been rising:
State funding for education is decreasing: state funding overall for students has decreased 8% over the past decade.
While demand for education is increasing: from 2000-2018 the demand for undergraduate education increased 26%.
And the business model is changing: colleges and universities are increasingly incubating startups (hello, Difference Engine), spending $$$ to attract staff and faculty and building cutting-edge but expensive facilities. Spending on instruction, student services, administrative support, operations, and maintenance have all gone up.
Student debt over time creates generational inequality. Increasing student debt also decreases national growth because younger people with higher debt burdens take longer to become contributing members of society. And the higher the debt burden is, the higher the delinquency rate is … taxpayers often eventually bear the burden of unpaid student loans.
But its the overall trend over the past three decades that is the most troubling: as student debt has gone up, so has the cost of goods … all while incomes have remained stagnant. Because these same college graduates spend far more than their non-college educated peers, the implications for their indebtedness on the economy are dire.
What’s in the plan?
Biden’s plan forgives up to $20,000 in federal student loan debt for Pell Grant recipients and up to $10,000 for those others who qualify. Who qualifies? Individuals earning less than $125,000 and married couples who make less than $250,000 yearly.
Sounds great! What’s the problem?
Most reasonable people agree that rising student debt is a contributor to inequality for many communities. Most people also agree that the rising cost of college is bad for the economy because it discourages people from enrolling in college and impedes economic participation for those who graduate with high debt burdens.
What they disagree on is the effectiveness of the president’s solution.
Here are three of the most common arguments and three rebuttals … just for fun (and because I can’t help being a lawyer):
🎈 “More government money = more inflation”
43 million people will have their loan payments eliminated or reduced altogether under Biden’s plan. That’s money they will be able to spend on “PlayStations and Beanie Babies.” But more spending power is just going to increase inflation, raise the cost of goods and increase inequality for at-risk and marginalized communities, including those who have thousands more in college debt remaining.
Rebuttal: there will be no discernible impact on inflation because the total amount spent on debt forgiveness for a relatively small number of Americans isn’t the same as the $1200 relief checks everyone received during COVID. It’s not like people will see $10k in their bank accounts. They just won’t need to make as many payments.
💸 “College-educated people already do well economically, they don’t need the help.”
People going to college agreed to take on debt. No one forced them. And now they get a free pass? What about the 60% of Americans who never went to college? They’ve taken on debt too, except in their case its to pay medical bills or the rent - they didn’t have much of a choice. Some lawyers and doctors make less $125k starting out in their careers … they’ll go on to make much more. Do they really need the money?
Rebuttal: Biden’s plan largely funds college grads who contribute to the economy but may never become high-powered lawyers or doctors. The plan benefits those making less than $125,000 and 90% of those who will qualify make even less, about $75k.
🎓 “This is going to make college even more expensive”
Biden’s plan is a political band-aid, it doesn’t do anything to reduce the long-term cost of college and may even make it worse. Students will be encouraged to take on even more debt knowing that part of it may be forgiven in the future. Likewise, knowing that student debt may be forgiven in the future, colleges may be encouraged to increase the cost of college (without necessarily increasing the quality of education) and passing those costs on to the government and taxpayers.
Rebuttal: just because this plan doesn’t address the long-term cost of college, doesn't mean it shouldn’t be implemented. It will still bring relief to many highly indebted young people and free them to be drivers of economic prosperity. Longer-term solutions will require congressional action and this smaller policy achievement may be the spark to get those legislative wheels moving.
Like I said, few disagree about the problem - but there are reasonable concerns people have about Biden’s solution. I haven’t really given you answers here - just a few arguments and counter-arguments as food for thought. I’m going to chew on all this for a bit longer and share my thoughts in a future newsletter.
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