After having issues passing bills in Congress, the Democrats had a legislative win: the Inflation Reduction Act (IRA). It was certainly a political win for the Democrats. Given that the IRA is going to make the economy worse off and contains drug pricing regulations that will make us less healthy, I was less than enthused about the legislation. I was hoping that the Biden administration would be done toying around with shoddy policy at least for the summer, but then came August 24. This was when President Biden announced that he would be forgiving $10,000 in student loan debt for borrowers making less than $125,000 (or a married couple jointly filing that makes less than $250,000). There are 43 million Americans holding a total of $1.6 trillion in student loan debt. The goal of Biden's student debt relief is to "provide more breathing room to America's families as they continue to recover from the strains associated with the COVID-19 pandemic." While Biden is passing this off as bold education policy reform, the truth is that his plan is a far cry from actual reform and it comes with multiple drawbacks.
1. Biden's plan disproportionately helps more affluent households. In January 2022, the Left-leaning Brookings Institution released a report finding that Biden's proposal is regressive, regardless of whether it is measured by income, education, or wealth. Regressive is a technical term meaning that it is going to disproportionately benefit those who need welfare the least. This is because middle- and upper-class households are the ones that can best afford a college education for their children.
While there is some mitigation, Biden's income cap at $125,000 does not negate the regressive nature of the plan. According to the budget model from the highest-ranked business school, the Wharton School at the University of Pennsylvania, 62.2 percent of the student loan "cancellation" is going to benefit households in the top 60 percent. A previous Wharton model had the number at 68.7 percent, but the point is that there is something awry with the government that giving handouts disproportionately to more affluent households is charity. As we will see shortly, it does not make sense to give a handout to those who have greater financial stability to pay off student loans.
2. College graduates are in better financial shape than the average American to pay back loans. Data from Georgetown University show the difference in lifetime earnings (see below). As we see below, the difference between a college degree and a high school degree can be up to $3 million in lifetime earnings. According to the Right-leaning American Enterprise Institute (AEI), "those with only some college gained a lifetime earning increase relative to someone who only completed high school that is 10 times the average debt incurred." That is forty-fold for someone with a Bachelor's degree (ibid.). In other words, the debt incurred is significantly smaller than the rate of return for acquiring a college degree.
Not only that, job security for college degree holders is greater. Bureau for Labor Statistics data from 2002 to 2022 show that college degree holders are less likely to be unemployed (see below). In layman's terms, a college education provides the borrower with greater means to pay back the loan. A college degree is an investment. Like any investment, not all investments pay off. A degree in gender studies is not going to have the same rate of return as a degree in computer science or business. However, on average, a college degree holder fares a lot better than someone with a high school degree. Since college degree holders earn more on average and are more likely to remain employed, the argument for student loan "cancellation" is all the weaker.
3. It is downright unfair. The unfairness is amplified by the regressive nature and the fact that college degree holders on average have better financial footing. There are 97 million Americans over the age of 25 who paid off their college loans (American Enterprise Institute), many of them who made considerable financial sacrifices to pay off the debt. Some deferred going to the hospital, making a home repair, going on vacation, saving for retirement, or making new purchases in order to pay off student loans. Others decided to live in a different city or not-so-nice neighborhood of a large city, attend a less prestigious or less costly university, forego an internship, or work a second job to make sure they could pay their loans.
There are another 82 million that never went to college (ibid.). Why should these Americans pay for someone else to have an experience they never had? What about parents who made sacrifices to pay for their children's education? Was that for naught? And what about those have staggering debts that have nothing to do with college, such as auto loan debt or mortgages? Student loan "cancellation" gives the proverbial middle finger to those who were financially responsible enough to pay off their student loans while incentivizing financial irresponsibility and recklessness (See Point #10).
4. Advocates of student loan "cancellation" overstate the problem. This point merits some clarification since I can see someone misconstruing it for "I don't care about the plight of others." As of May 2021, the median education debt was somewhere between $20,000 and $24,500 (Federal Reserve). I use median debt instead of average here because the average was $37,693 (Education Data). What is causing the difference between the average and median is that graduate school programs cause more debt. Using median indicates that 50 percent of student loans are $20,000-$24,500 or less. As we already pointed out in Point #2, college degree holders are in a better position to pay off debt than other Americans.
As we see below, 63 to 74 percent of undergraduate students do not even take out loans (College Board, 2021, p. 40). The Consumer Finance Protection Bureau shows that over 80 percent pay their loans within 14 years (Gibbs, 2017, p. 11). This is not to say that no one is struggling with student debt or denying the effects that student debt can have on an individual. This is saying that a) most college students do not need to take out debt, and b) student loan debt is manageable for most people (also see Akers, 2019). Drowning in student debt is an exception, not a norm. As such, a targeted debt relief approach to help those in need would be preferable to a broader-based student loan forgiveness.
5. It will cost taxpayers a pretty penny. It is not as if Biden signing an executive order gives magical powers that makes student loans disappear. The student loan has been lent and spent. The services have been rendered, so it is not exactly as if the debt can be cancelled. The government does not have money of its own. There's a reason why dollar bills have the phrase "This note is legal tender for all debts public and private" printed on them. This scheme will either be paid with taxpayer dollars now or through interest payments in the future. How much will it cost? According to the Wharton School's budget model, it will cost taxpayers $519.1 billion over the next decade. With 148.3 million taxpayers, student loan "cancellation" will cost the average taxpayer over $3,500 dollars.
6. It undermines the Inflation Reduction Act (IRA). What was the argument the Democrats used to push the IRA through Congress? It "will make a historic down payment on deficit reduction to fight inflation." Forget for a moment that the IRA will not reduce inflation. Democratic Congressmen said that this will reduce the deficit by $300 billion and that the bill is fully funded. As we saw in the previous point, the student loan reduction will cost $519.1 billion. In other words, Biden is willing to erase the first decade of deficit reduction from his signature legislation. This shows that the Democrats are not sincere in wanting to reduce the deficit.
7. It is not economically efficient nor does it help stimulate economic growth. There are some that think that student loan "forgiveness" will generate increased consumption and savings, thereby boosting the economy (Fullwiler et al., 2018). However, it seems that the boost to the economy would be small in comparison to its cost. In 2021, the bipartisan Committee for a Responsible Federal Budget (CRFB) estimated that "cancelling" student loans would create 3-27¢ of economic activity for every dollar spent. If you want more detail on the multiplier effects and economic stimulus aspects of the debate, you can read this well-written report from the Texas Public Policy Foundation here.
8. It does nothing to make higher education more affordable. Forgiving loans is not educational reform. Paying down student loans now does not change the system that drove up college tuition costs, it does not improve the quality of education, nor does it improve educational attainment rates. As I brought up in November 2020, student loan "cancellation" does not target the main culprit of skyrocketing college costs: federal student loan subsidies. As Left-leaning policy analyst Kevin Carey said, "debt forgiveness alone would be like treating a contaminated river without stopping the source of the pollution." Student loan forgiveness is like putting a Band-Aid on a bad case of COVID.
9. It only provides a temporary decrease in the student debt bubble before it rises again. Because it does not address rising college costs, we are going to run into the same issue in the near future. According to the bipartisan Committee for a Responsible Federal Budget, the student loan debt will return to 2022 level by 2027. The Right-leaning American Action Forum puts it at 2026. What will the government do then? After all, 2026 will be another midterm election that year. Is the government going to do another round of loan forgiveness to placate a certain group of voters?
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10. It creates moral hazard and will most likely cause inflation in the postsecondary education market. In economics, moral hazard is when an economic actor is encouraged to increase their risk (e.g., go to a more expensive school, select more expensive room and board for college, less likely to constrain other living expenses) because someone else is bearing some or all of the negative consequences of their riskier behavior. In the context of student loans, moral hazard means incentivizing future students to take out more loans and do so more recklessly because the government has set the expectation that there will be other rounds of "cancellation" in the future. This is plausible given that student loan "cancellation" does nothing to prevent another loan debt bubble from emerging (See Point #9).
Such encouragement would boost demand for a college education, which in turn increases the price of college tuition. This goes beyond the inflation for college that has existed for years (College Board). It provides perverse incentives to colleges. Student loan forgiveness will not encourage colleges to lower costs. If the government will bear the costs of student loans no matter what, it will incentivize universities to jack up the sticker price of the college experience so they can get more money for such endeavors as new faculty, recruit new and better students, upgrade facilities. Rather than bring tuition to a more affordable amount, it will provide every incentive to keep college costs sky-high.
11. The moral hazard will erode lending institutions. The moral hazard goes beyond the borrowers or postsecondary institutions. To quote the Acton Institute, "You took out a loan, therefore you have a fiduciary responsibility to repay it. An institution vetted you for this loan, assessed that you were worthy of the risk, and in taking the loan, you made a commitment. People cannot thrive and societies cannot grow in environments where you can renege on contracts without penalty." Whether you look at the Fraser Institute Economic Freedom Index or the Transparency International Corruption Perceptions Index, one thing that is clear is the soundness of institutions has a strong impact on the quality of life. If our economic transactions and our institutions are based on distrust, corruption, economic stagnation, and social decline become rampant. Think about it for a moment. Access to credit allows to do such things as go to college, buy a car, get a mortgage on a house, and buy a myriad of goods and services. I'm not saying that lending institutions are run by angels, but if we break down this institution, it also affects our quality of life.
12. There is the distinct possibility that Biden's executive order will increase inflation in the greater economy. There is a reason why 59 percent of Americans believe that student loan forgiveness will increase inflation: because it is plausible. If people are not spending on paying down debt, that frees up dollars to be spent elsewhere. If a significant percentage of those individuals decide to spend that extra cash on goods, that would drive up prices even further, thereby creating more inflation.
There are Left-of-center economists who believe it will contribute to inflation, including former Obama economic advisors Jason Furman and Lawrence Summers, the latter of whom warned us in early 2021 of the upcoming inflation. This, of course, depends on how individuals react to receiving debt relief. This is why there have not been estimates as of yet to determine the effect on inflation. While we do not know the degree to which it will take place, it is nevertheless conceivable that a significant enough amount will go to consumer spending that will contribute to inflation.
9-1-2022 Addendum: The bipartisan Committee for a Responsible Federal Budget projects that Biden's student loan "forgiveness" will increase inflation by 15 to 27 basis points next year.
13. This is an abuse of executive power. Using executive orders is nothing new. Multiple presidents have used them. Abraham Lincoln used one for the Emancipation Proclamation. It's not as if Biden is setting a record. That would go to Franklin D. Roosevelt at over 3,000 executive orders. However, he is blatantly using the executive order to bypass Congress.
Biden trying to misinterpret the Higher Education Act of 1965, specifically 20 USC §1082(a)(6), to get his way. However, the preamble in the Act limits this power to what Congress authorizes. According to the Constitution (Article 1, Section 7, Clause 7) and other legal statutes (31 USC §1301; Antideficiency Act of 1982), Biden cannot spend money on anything that Congress has not authorized. Legislation would need to be passed by the legislative branch. What a concept! Biden already tried this stunt with the vaccine mandates, the environment (West Virginia v. EPA), and the CDC's eviction moratorium, so I cannot say that I am surprised. Even so, such a power play is problematic because it sets precedent for future presidents to bypass Congress, thereby eroding the balance of power between the legislative and executive branches.
Conclusion
As we can see, there are multiple issues with student debt "cancellation," ranging from the economic and legal to the educational and moral issues. College is too expensive, that much is true. It is also true that the federal government is the major culprit with its student loan subsidies. Student loan "cancellation" does nothing to fix the problem of rising costs. If anything, it makes the costs higher while incentivizing future generations of borrowers to take on more debt. Not that I am for handing out money like it was hotcakes, but if you are, why do it for college graduates who can better retain a job, earn a higher salary, and have better access to liquidity? I hope that the legally questionable nature of such a move will result in the Supreme Court overturning this loan "cancellation." But if it does not, at least the Biden administration's legacy for higher education is to make college less affordable and accessible for future students.
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