Biden wants to forgive lots of student debt, but at what cost?
The president-elect campaigned for $10K loan forgiveness, but many experts say the political carrot is fraught with economic and moral hazards
SALT LAKE CITY — As a presidential candidate, Democrat Joe Biden vowed to forgive at least $10,000 in student loan debt per borrower, which could eliminate loans for some 16 million people — more than a third of current borrowers.
This past week, members of President-elect’s Biden’s transition team said that as soon as he takes office, he will extend suspension of federal student loan payments put into place in the early days of the COVID-19 pandemic.
He will also encourage Congress to pass legislation to forgive $10,000 in federal student loan debt per person, although some Senate Democrats such as Majority Leader Chuck Schumer, D-N.Y., and Sen. Elizabeth Warren, D-Mass., have said that doesn’t go far enough.
The carrot of retiring student loan debt is highly appealing to many college graduates. Americans owe $1.7 trillion in student loan debt, which has risen by roughly $1 trillion since 2009, according to the Federal Reserve. That’s more than any other category of consumer debt except mortgages.
But economists and others say such a public policy would be unfair to most Americans, would reward the wealthiest at the expense of the poor, and simply shifts private debt to public debt. Some studies show that forgiving so much student debt would also cost more than any kind of economic stimulus it would create.
And consider, if students expect to have their debts forgiven, doesn’t that encourage them to borrow even more?
Critics also say forgiving student debt doesn’t help educate more of the population, but only provides benefits to those who already have an education.
More than 44.7 million people carry student debt averaging $32,731, according to a September 2019 report to the U.S. House of Representatives’ Committee on Financial Services.
“This ballooning rate of student loans debt is attributed, in part, to the rising real price of public higher education and stagnant household incomes. The real, after-inflation average cost to attend a four-year public institution rose 48.1% between 2003 and 2017, which corresponds to an increase in the real, after-inflation accumulated amount of student debt of 307% in the same time period,” the report states.
Proponents of the federal Public Service Loan Forgiveness Program say it helps attract talent to the government and nonprofit sectors, incentivizes employee retention and provides relief for public service professionals who are often paid less than they would in the private sector.
The Aspen Institute reported in February 2020 that student loan debt is “a roadblock to long-term financial security” affecting borrowers’ ability to save for retirement or emergencies or to purchase homes.
Not a sure thing
Utah’s 2021 Teacher of the Year John Arthur believed he was on the path to public service student loan forgiveness, a program that calls for 10 years of on-time and consecutive monthly loan payments in order to be considered for discharge of the loan balance.
Arthur, who has about $40,000 in student loan debt after earning master’s degrees in teaching and education from Westminster College, opted to participate in the income-based repayment program.
“My wife and I chose to file our taxes separately, even though we would have gotten a bigger return” had they filed jointly, he said.
Five years into on-time loan payments, Arthur learned of another loan forgiveness program that offered $5,000 in student loan forgiveness for educators who teach at Title I schools. Arthur teaches at Salt Lake City’s Meadowlark Elementary School, which is a Title I school and recently was in academic turnaround.
“So I applied for that $5,000 and I got it. The problem was once I got that $5,000 forgiven, it reset the other program. It went back to zero and I had start over” after seven years of payment, he said.
He was shocked and profoundly disappointed.
“I feel like I’m a relatively intelligent guy. I read paperwork pretty closely but I somehow missed the part where you can’t do both programs. I talked to advisers from the banks and loan people ahead of time, and just no one had ever mentioned that you couldn’t do both,” he said.
Arthur said he is carefully monitoring news reports of loan forgiveness that may be extended under the Biden administration. His experience suggests loan forgiveness is not a sure thing.
According to a September 2020 U.S. Department of Education report, among 229,215 applications to the federal Public Service Loan Forgiveness Program, 205,744 were deemed ineligible — just shy of 90%. Some of the reasons included missed payments, missing information or the loans were ineligible.
Among 179,371 unique borrowers submitting applications in that reporting period, just 1.75% or 3,469 were granted forgiveness.
“If you’re trying to entice people into public service, and this is like the one benefit that the federal government can offer to people entering our profession, then you’ve got to keep it simple and clear and without the denial rate,” Arthur said.
If the goal is to stabilize the workforce, it would make more sense to offer employees signing bonuses rather than extend the prospect of loan forgiveness that may or may not materialize a decade into their careers, he said.
Arthur, who teaches sixth grade, said he is “a patient guy. I can endure a lot with a goal off in the distance, even if I can’t see it. But the idea of being enticed into the profession for something that I won’t get to take advantage of for a decade, is not a decision-maker for me, and I can’t imagine it is for most people.”
Higher education perspective
Kristin Hadley, dean of Weber State University’s College of Education, said students and professors occasionally talk about public service loan forgiveness as students proceed through teacher training programs.
“You know, we do talk about it, minimally,” Hadley said.
But the faculty has not really pushed it because “we’ve received feedback from a number of students who have gone out teaching expecting student loan forgiveness and found that so many of the applications were rejected,” Hadley said.
Students are better served by mechanisms that help keep the costs of college attendance manageable such private scholarships, she said. Thanks to generous donors, many of Weber State’s teaching candidates receive scholarships.
“We have another program that is specifically targeted for our students who are working as teaching assistants in the schools. That is a tuition assistance program and we’ve worked in collaboration with our local districts on that program. It’s been really successful in getting people all the way through and into the profession and staying in the profession, which is huge nowadays,” she said.
In recent years, the Utah System of Higher Education has taken several steps intended to make college more accessible and affordable. Some state scholarships have been shifted to need-based awards and there has been greater of scrutiny of colleges’ and universities’ proposed tuition and fee increases.
The system has also placed a greater emphasis on Free Application for Federal Student Aid — or FAFSA — completion by eligible high school seniors. The application enables qualifying students to access federal, state and institutional aid in the form of grants, work-study and federal student loans.
Political pressure not to forgive
In one of her final acts before stepping down in the wake of the violent attack on the Capitol by pro-Trump rioters, Education Secretary Betsy DeVos told Senate Majority Leader Mitch McConnell that the student loan forgiveness proposal is “misguided.”
“Across-the-board forgiveness of college debts is not only unfair to most Americans, it is also the most regressive of policy proposals — rewarding the wealthiest sector of our labor force at the expense of the poorest,” she wrote in a letter to McConnell.
She urged Congress to consider establishing the office of Federal Student Aid as a stand-alone government corporation apart from the Education Department run by a professional, apolitical board of governors.
“This move would better position the agency to deliver world-class services to students and their families, and to manage what has become the nation’s largest consumer lender, with nearly $1.6 trillion in outstanding loans. I urge you to look closely at that proposal,” DeVos wrote.
Others question the efficacy of loan forgiveness.
An analysis by the Committee for a Responsible Federal Budget released in November, concluded that “student debt cancellation would be an ineffective form of stimulus, providing a small boost to the near-term economy relative to the cost.”
The analysis showed:
- Student debt cancellation will increase cash flow by only $90 billion per year, at a cost of $1.5 trillion.
- Student debt cancellation is poorly targeted to those most likely to spend, given that nearly three-quarters of repayments would come from the top 40% of earners.
- Simply extending the current executive action to defer loan repayments and cancel interest would achieve much of the economic benefit of loan cancellation at only a very small fraction of the cost.
Freakonomics contributor Justin Wolfers was more succinct in his 2011 analysis.
He called it the “Worst. Idea. Ever.”
Student loan forgiveness forgives the debt of people who already have an education, he said.
“Want to increase access to education? Make loans more widely available, or subsidize those who are yet to choose whether to go to school. But this proposal is just a lump-sum transfer that won’t increase education attainment. So why transfer to these folks?” he wrote.
David Schwanke, interim executive director of the Utah Higher Education Assistance Authority, said individual loans serviced by the agency are typically $5,000 to $6,000 or around $15,000 for a borrower with multiple loans.
The prospect of forgiving $10,000 would make a difference to some borrowers but it would be limited to those who have loans through the Federal Direct program. Loan portfolios owned by private entities would not be eligible.
Loan forgiveness initiatives raise a number of public policy, economic and moral questions, he said.
Schwanke, who himself took out student loans and repaid them, said he appreciates that putting yourself through college financially isn’t easy.
“It takes real dollars and it takes work to get it done,” he said. But there are several existing programs that help borrowers manage their cash flows, he said.
“The question is, is it good public policy to administer some level of across-the-board loan forgiveness for the roughly 33% of Americans who obtain a college degree and transfer that to public debt, where you have the other 67% of the population, supporting the higher education of essentially those who have a college degree?” Schwanke said.
Sixty percent of educational debt owed by households is in the top 40% of earners, those earning $75,000 or more annually, he said.
“If you forgive somebody’s loan today what’s to stop the next generation from asking, ‘Are they going to forgive my loan? I’ll just go ahead and borrow because I expect that they’ll forgive it,’ so it creates a moral hazard,” he said.
Loan forgiveness essentially shifts private debt to public debt, he said.
“The money’s got to come from somewhere and it increases the national debt so you’re shifting it from private payments to taxpayer payments. Either taxes have to go up or services have to go down. Somehow it would have to be paid for,” he said.
Schwanke said 30% of undergraduates have no debt while 25% have up to $20,000 in loans.
Ability to repay debt is not necessarily tied to the amount of debt.
“You do read a lot in the headlines about these borrowers who are in dire situations who have $100,000 in debt or more. They really represent only about 6% of outstanding debt,” he said.
“It’s not necessarily those individuals who come out of dental school or medical school with quite a bit of debt that we have delinquency issues with. It’s the individual who borrows $2,500 and then they drop out and they’re making minimum wage and trying to manage a payment. Those are the ones that we worry more about because it’s just more difficult for them to make that payment,” Schwanke said.
A case for loan forgiveness
Meanwhile, a 2018 report by The Levy Economics Institute of Bard College, a nonprofit, nonpartisan, public policy think tank, argues for debt forgiveness.
“We find that student debt cancellation produces positive feedback effects that improve several macroeconomic variables, including gross domestic product and job growth, while imposing only moderate increases on the federal deficit and interest rates and no significant inflationary pressure.
“These results support the continued inclusion of bold proposals such as student debt cancellation in public policy deliberations surrounding the future of higher education in the United States.”
The 2019 report found if the government canceled the debt it owns and bought out remaining private creditors, it would increase the GDP by between $86 billion and $108 billion per year over the next decade and add 1.2 million to 1.5 million jobs.