Cancelling student loan debt: bad politics, bad policy

(Kimberly Paynter/WHYY)

“Cancel federal student loan debt!”  That’s the latest rallying cry of liberal politicians.

During their presidential campaign, Joe Biden and Kamala Harris called for forgiveness of up to $10,000 in federal student loan debt.

Now the pressure’s on to up the ante and cancel $50,000.

“We are not going to let up until we accomplish it, until $50,000 of debt is forgiven for every student in the country,” Sen. Chuck Schumer, the majority leader, said Thursday.

To use a word linked to so many progressive causes these days, there would be nothing “equitable” about going down this road. 

What would this mean for Oregon?

As of Sept 30, 2020, 483,500 Oregonians had outstanding federal student loan debt totaling $12.4 billion. The number who hold $50,000 or less of debt is approximately 413,100. A $50,000 loan forgiveness program would mean eliminating the debt of 413,000 debtors. That would leave just 70,500 with outstanding debt, each of whom would see their debt reduced by $50,000 as well.[1]

But would that be fair and equitable? Not likely.

First of all, the fact is most Americans don’t have federal student loan debt, including about 30 percent of college undergraduates, and about 25 percent of all bachelor’s degree recipients graduate with less than $20,000 in outstanding loans. Fewer than 20 percent of all borrowers owe more than $40,000.

And despite all the hysteria and political posturing, most who do have outstanding federal loans are not overwhelmed with huge amounts of debt. Average debt at graduation from public and nonprofit colleges was $28,800 in 2019, less than the average amount Americans pay for a new car ($36,718 in 2019, according to automotive information site Edmunds).

An initial rationale for forgiving federal student loan debt was that it would help struggling students who couldn’t get ahead because of burdensome loan payments stretching far into the future.

Then came the justification that it would particularly help Blacks because Black students borrow more, have lower levels of family income, wealth, and parental education and have much higher loan default rates. That’s partly because Black students are more likely to attend for-profit colleges, where default rates are higher in general. Also, completion rates at many HBCUs are high, leaving too many students with debts but no degree. 

Now proponents of loan cancellation are trying to connect the idea to Covid-19, arguing that Covid has made paying bills harder (even though Pres. Bi9den has already signed Biden also signed an executive order extending the payment pause on federal student loans due to Covid-19 until October).

One problem is that if you pay off $50,000 of federal student loan debt just for those with current outstanding loans, many students just graduating will owe nothing, while new freshman will be starting to build debt again.

Loan cancellation would also tend to benefit the better-off among us who are more likely to have completed college and this be able to pay off college debt. Even in a $10,000 debt forgiveness program, an analysis by the Urban Institute indicates that about $150 billion would accrue to the top 40 percent of U.S. households by income.

Also, students and parents who have been faithfully paying off their loans for years, often at great sacrifice, may see little benefit if their balance is now close to zero.  

As Jeff Jacoby, a Boston Globe columnist put it, “…a massive bailout of borrowers would be unfair to countless families that saved and worked to pay for college, to say nothing of those who responsibly repaid their loans.”

Another problem. Students and parents with private loans will still owe it all. Americans owe more than $132 billion to private student lenders.

Then there’s the cost, probably about $1 trillion. But neither party seems overly concerned about that now. Even the media doesn’t care. The Hill, like many other news sites, recently managed to write an entire article on the idea without once mentioning how much it would cost. The cancellation advocates say not to worry because taxes on “rich people” will cover the cost. The problem is they want “rich people” to pay for every other new budget-busting program as well.

The argument progressives make that forgiving student loans would be a huge stimulus to the economy doesn’t make sense either.  

The Committee for a Responsible Federal Budget says the stimulus benefits would be minimal and aimed at those who least need the help. Total student loan debt may be atrociously high, but borrowers often pay back their loans over 10, 15, or even 30 years. That means debt cancellation would increase their available cash for injection back into the economy by only a fraction of the total loan forgiveness. 

“Stimulus dollars that are spent rather than saved provide a stronger boost to near-term economic output,” the Committee says.

The fact is, subsidizing people who run up large college loan debts penalizes those who took their responsibility seriously and acted responsibly, James B. Meigs wrote in City Journal, a publication of the Manhattan Institute for Policy Research, a free-market think tank. That leaves a lot of people feeling like chumps, he said.

 “…the chumps of modern America feel that the life choices they’re most proud of—working hard, taking care of their families, being good citizens—aren’t just undervalued, but scorned,” Meigs wrote. 

Then there’s the “moral hazard” of a one-time cancellation of student debt. It would encourage students and parents to continue running up risky big loan balances on the assumption that their debts will be forgiven at some point. That would cause a distortion of borrowing decisions, making them insensitive to the ability to repay. 


[1] The office of Federal Student Aid (https://studentaid.gov/data-center/student) doesn’t break down student debt numbers showing debt owed of $50,000 or less. Instead, it shows debt owed between $40,000 – $60,000. I arbitrarily split the amount of the debt and the number of debtors in half to determine the figures for debtors owing $50,000 or less.