Canceling student debt ‘crude, inefficient, and ineffective way’ to address economy

[Editor's note: This story originally was published by Real Clear Education.]

By John Kristof
Real Clear Education

With the White House flipping blue this winter, calls for student loan cancelation are resurging. Fielding questions after an address in Delaware on November 16, the president-elect stated that canceling some student loan debt was part of his economic policy agenda. Biden referenced proposed COVID-19 relief legislation from House Democrats that would cancel up to $10,000 per person. Earlier this month, Senate Minority Leader Chuck Schumer renewed his call for the Biden administration to forgive up to $50,000 of debt per borrower through executive order.

Both ideas are crude, inefficient, and ultimately ineffective ways to help Americans in need. According to a November report from the Congressional Budget Office (CBO), the student debt crisis has been driven mostly by students at graduate programs and selective schools, who overwhelmingly fall into affluent and high-income populations. As a result, canceling student debt would cost billions of dollars each year and would exacerbate, not lessen, economic inequalities.

Among undergraduates, two of every three federal student loan dollars (64.7%) went to students of selective institutions in 2017, up from just over half (52.3%) in 2010. Undergraduates at nonselective schools and two-year programs each hover around 10% of total borrowing during this period. Borrowing at for-profit institutions declined from 27.5% of total federal student loans in 2010 to 15.7 percent in 2017.

Additionally, nearly half (47%) of all outstanding federal student loan debt is owed by graduate students, a sizable jump from 32 percent in 1995. Graduate students are borrowing a lot more than they used to––since 1995, the average federal loan to a graduate student increased by $8,268 in 2017 dollars, compared to just $642 for undergraduates. Graduate programs include professional degrees like medical school and law school.

Graduate students and undergraduates at selective schools are substantially more likely to be financially secure than other student loan borrowers. Undergraduates of selective schools are significantly less likely to default on their debt––their three-year default rate is 9.8%, according to CBO’s most recent data. In comparison, that rate was 17.6% for nonselective undergraduate students, 25.7% for for-profit undergraduate students, and 26.4% for students of two-year programs. For their part, graduate students at selective schools have a three-year default rate of 3.9%, while those at nonselective schools have a rate of 5.6%.

In short, not all students with debt struggle in the same way, and most student debt is concentrated among those with relatively greater financial security.

Capping the relief each borrower receives doesn’t change how top-heavy the policy is. According to the Urban Institute, Biden’s plan to cancel $10,000 of debt per borrower would cost the federal government $369 billion. Of that amount, about $314 billion (85%) would go to Americans above the lowest income quintile. Sen. Schumer’s idea of $50,000 of forgiveness per borrower would cost $961 billion, about $829 billion (86%) of which the lowest income quintile will not see.

Every dollar the federal government spends on forgiving the debt of a financially secure, affluent person is a dollar that cannot be dedicated to other measures. Because most of the hundreds of billions of dollars required would go to the financially secure, these sweeping proposals for loan forgiveness would be terribly inefficient ways to improve the wellbeing of struggling Americans.

Education affordability is, of course, a crucial policy goal. Lack of education access generates far-reaching impacts for low-income Americans. But there are better ways policymakers could help.

In the short term, any loan forgiveness proposal must be targeted to help those who need it. Targeting on a policy level is easier said than done, however. Policymakers could start by identifying borrowers with low incomes, receiving SNAP or TANF benefits, or other indicators signaling a high risk of defaulting.

In the long term, we need systemic reform. Income-based repayment systems, like that designed in the REPAYE plan and practiced by Purdue University, ensure loan repayment works for students’ particular situations. Payments consist of a certain percentage of a person’s discretionary income, whatever that might be, for a set number of years. Making repayment plans automatically income-based would reduce delinquency and improve credit scores because the repayment burden is relative to the family income and circumstance.

Higher education reform requires thoughtfulness and foresight. If lawmakers are serious about keeping opportunity affordable, they cannot indiscriminately throw money at student loans. Doing so gets in the way of actually helping those in need.

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