Canceling Student Loans Could be a Blunder for Biden
Progressive Democrats have a new rallying cry: “Cancel Student Debt!” They are putting immense pressure on President Biden to wipe out the entire $1.5 trillion of Federal student loans by issuing an executive order.
These are the same folks who came up with that catchy phrase, “Defund the Police!”
Radical demands like these have provided great ammunition for Republicans to attack Democrats. Republicans are thrilled with this latest gift from progressives.
Some progressives have demanded that the Biden Administration cancel all student loans, while others have argued that the government should forgive $10,000 or $50,000 per borrower.
President Biden said last week that he was not considering the $50,000 figure but was “taking a hard look” at debt forgiveness. Biden had promised to cancel $10,000 during his campaign.
The Wrong Approach
Forgiving student loans across the board is a misguided approach, because of its moral hazard and high cost. This step would also be unfair to millions of American taxpayers, by subsidizing a bail-out that would benefit many affluent people. This policy could drive even more working-class and lower-middle class voters away from the Democratic Party.
We certainly have a problem with the soaring cost of college education in the U.S., and many young people are struggling to repay their student loans. But cancelling student debt would not address high tuition costs, and there are less expensive, more targeted approaches for helping strapped borrowers.
In any event, if President Biden does decide to forgive some student loans, he should limit the relief to $10,000 per borrower. Furthermore, Biden should restrict loan cancellation to Americans with incomes below $75,000.
The Student Loan Landscape
As we consider the possible merits of wiping out all federal student debt, let’s bear in mind a few salient facts:
About 30% of Americans hold a college degree. To put it another way, about two-thirds of Americans don’t go to college.
Taking out a loan to attend college is a voluntary decision. No one is forced to borrow that money.
Student loan balances are concentrated among voters who are under 40 years of age. They represent two-thirds of borrowers.
The average balance of a federal student loan is $27,000, not the $100,000-plus amounts featured in numerous scary articles. Many borrowers with higher balances have advanced degrees and larger incomes.
Not surprisingly, default rates are much higher for college dropouts than for graduates, particularly those with a bachelor’s degree. About half of borrowers in default have not graduated from college. Students from for-profit colleges have remarkably high levels of default compared to those who graduated from traditional institutions
Forgiving all student loans would blow a significant hole in the Federal government’s finances. The government would have to find some way to fill the gap, by borrowing more money, raising taxes or cutting other programs
Borrowers Asking Biden to Cancel Their Student Loans/Getty Images
Why Give Student Loans Special Treatment?
It’s easy to understand the temptation for the Biden administration to help strapped younger voters, particularly since the outlook for the midterm elections is daunting for Democrats. But there are strong arguments against forgiving education loans across the board, whether the write-off is $10,000 or $50,000.
First, here’s the basic question: why should student loan borrowers get special treatment? They voluntarily decided to borrow money to attend college, and they signed a contract to pay back their loans over time.
After all, many Americans struggle mightily, and make lots of sacrifices, to pay their mortgages and credit cards. They would undoubtedly resent a special bail-out program for Americans with education loans.
Put yourself in the shoes of a blue collar or lower middle-class worker...Black, Latino, or White. Unlike middle-class and affluent Americans, you could not go to college. It was simply not an option. And there’s no way that your children will attend college, either. So you might be really angry if the government lets the “rich kids” get off the hook, while you have to keep paying for your house and your 20%-plus credit card loans.
a Possible White Blacklash?
And if you are a white working class voter, you might probably be even more pissed off.
The Democrats have been losing the support of white working-class and lower middle-income workers for decades. They feel ignored and abandoned by Democrats. These voters are alienated by Democrats’ focus on minority voters and city dwellers, as well as various “cultural war” issues. A sweeping bailout of college graduates would probably increase their resentment of “the elites” and accelerate their flight from the Democratic Party.
Calls for “Racial Justice” Could Boomerang
It does not help that many progressives have argued that forgiving student loans is necessary for “racial justice”. Their rationale seems to be that a higher percentage of minority students than white students take out loans, because their families have less wealth than white families. Default rates for Black and Latino students are much higher than for whites, and that may be partly because they tend to borrow more.
But you can imagine the reaction of white working-class voters, who also don’t have much money. They are not likely to feel sympathetic toward Black or Latino college grads who have trouble paying their bills. In their eyes, those are “rich kids” who already have cushier lives than they do. Instead, they will ask, “how about some ‘justice’ for me?”
Republicans would ride this wave of racial and class resentment in the mid-term elections. They know how to fan these flames.
An Expensive Proposition
Canceling student loans would cost the Federal government a lot of money, even if the Biden administration chose the $10,000 amount.
Progressive politicians have claimed that eliminating the debt will somehow spur the economy, but they have not addressed how the government will plug the resulting gap in its finances.
To set the context, revenues for the Federal government run about $3.5 trillion a year. When a commercial bank writes off its loans, that hits its income statement. The Federal government should account for any loan forgiveness program in the same fashion.
A $400 Billion-Plus Solution?
Using that approach, the New York Federal Reserve Bank’s staff has calculated that canceling $50,000 per borrower could cost the government about $900 billion. Forgiving $10,000 per borrower would cost about $320 billion.
And that is just the one-time cost of writing off the principal. The Federal government would also give up interest payments that it would otherwise collect on the loans.
The Federal government has already lost about $100 billion in revenues, in 2020-21, by allowing borrowers to defer their interest payments because of the Covid epidemic. If we assume that annual interest payments remain about $50 billion, the government would give up another $500 billion over the next decade.
These numbers are not chump change, even for the United States of America.
An Income Limit ?
President Biden and his advisors may have read the New York Fed’s conclusions about the high cost of writing off $50,000 per borrower, as they considered how much relief they should consider granting on student loans.
The NY Federal Reserve Bank suggested that the government consider limiting loan forgiveness to Americans who earn less than $75,000. That approach would cut the cost further and skew the benefits more toward lower and middle-income Americans.
In a subsequent article, we will discuss this proposal and other possible alternatives for tackling the student loan crisis.