Blanket student loan forgiveness, as President Joe Biden appears to be considering, would be a huge mistake. It’s unjust and regressive. It has the potential to increase the number of people struggling with student debt in the long run. And, despite the fact that it is billed as a “one-time” policy, it would set a dangerous precedent. This isn’t to say that there aren’t student borrowers in need of assistance. However, there are better ways to help them than a giveaway that would primarily benefit the wealthy.
Student loan forgiveness of $10,000 or more per borrower is being considered by the Biden administration. This would be a huge step backwards. Few low-income households have student debt, and those who do have smaller outstanding loan balances than higher-income borrowers. For these reasons, economists Sylvain Catherine and Constantine Yanelis recently concluded that blanket debt forgiveness would provide $3.60 to the highest-earning 10% of households for every $1 given to the bottom 10%, with three quarters of the benefits going to households with incomes above the median.
Putting a cap on loan forgiveness eligibility could make the policy less regressive. However, the administration’s proposed income limit — which would exclude only those earning more than $150,000 per year — would have little impact because few people earn that much.
One of the cornerstones of sound economic policy is that people in similar situations should be treated equally. This principle would be shattered by student loan forgiveness. It would be a slap in the face to students from low-income families who went to college but never took up debt or had it paid off. What would the administration say to someone who has been struggling to pay off her student debts for years and was finally debt-free last month? Or to those who, because they didn’t want to borrow, elected to attend their local community college rather than a more expensive four-year university? Or to those who avoided debt by enlisting in the military in order to receive GI Bill benefits?
Student debtors would also be prioritized over other borrowers under the program. This is difficult to justify. Student loan forgiveness also sets a bad precedent. Because future students may fairly anticipate their debt to be erased as well, there is a serious risk that excessive borrowing may be encouraged. This would exacerbate the problem the administration is attempting to address by increasing student loan burdens. It would also feed calls for more debt forgiveness rounds.
Allowing people to repay loans based on how much they make is already on the books as a better way to assist borrowers. The Revised Pay As You Earn plan, the most recent iteration of “income-driven repayment,” sets payments at 10% of a borrower’s discretionary income (defined as income above 150 percent of the federal poverty line). After 20 years of payments, any leftover debt is forgiven. Because IDR connects payments to income, there is a substantially lower possibility of a borrower defaulting on their loan due to expensive payments. Despite the fact that IDR enrollment has increased in recent years, only a small percentage of people participate in the program.
According to the most recent data, little over 30% of borrowers choose IDR. The number of people who use it is smaller among low-income borrowers, who could benefit the most, than among middle-income borrowers. Enrollment in IDR could be increased by making it easier to enroll and expediting the annual process of determining required payments. Although some borrowers prefer the typical mortgage-style repayment plan, there is a case to be made that IDR should be the default student loan repayment plan.
Finally, if the goal is to assist persons with lower incomes who are dealing with college debt, an extension of federal earnings subsidies is an option to consider. A more substantial earned-income tax credit might assist these borrowers pay their obligations while also pushing many of them to work harder and earn more money. The problem of moving money to well-off, middle-class professionals would be avoided if the expansion was focused on low-income and working-class households.
There are no free lunches in this world. Spending federal funds to cancel student loan debt would reduce tax revenue available for other purposes. There aren’t simply two options: complete debt relief or maintaining the status quo. There are considerably more effective ways to assist the most vulnerable among us, such as struggling student loan borrowers, than blanket debt forgiveness.
