Democratic plan to forgive student loans could raise tuition fees and hurt those at the bottom of the ladder
Leading Democrats in Congress are urging the federal government to “forgive” $ 50,000 in student loan debt per borrower, writing off that amount of balances borrowers have to pay off. For his part, President Joe Biden said he was ready to forgive $ 10,000 in student loan debt.
While this may seem like a lot to the millions of young adults in debt at university, student loan cancellation is not free, for them or for the rest of the country. In fact, with that comes a huge price tag and significant moral hazard.
Forgiveness proposals would unfairly pass a borrower’s debt on to strangers, including those who have made a conscious decision not to go to college to avoid getting into debt or going to a school they don’t. would not otherwise because it was cheaper. At the same time, it would almost certainly lead to an increase in the cost of college education for future students.
Canceling student debt requires those at the bottom of the income ladder to pay off the debt of college graduates who, statistically, are likely to earn them more. Almost two-thirds of adults do not have a bachelor’s degree today. A bachelor’s degree is worth an average of $ 2.8 million over the course of a lifetime, with graduates earning 74 percent more than individuals with just a high school diploma, according to Georgetown University research. Those who earn professional degrees (to attend law school or medical school, for example) are likely to benefit even more, earning 61% more on average than someone with a bachelor’s degree during their working life. .
The forgiveness would also punish responsible borrowers who worked carefully to pay off their debts, sacrificing restaurant dinners or living in modest apartments to repay their loans. Like Carlo Salerno of CampusLogic points out, this would reward the person who “borrows to get a Ferrari rather than the one who got a Kia”.
Worse, ironically, the cancellation of the loan would create enormous inflationary pressure to raise tuition fees. There is evidence to support the theory that federal grants, which include loan forgiveness and subsidized student loans, increase the cost of a college education.
Over the past 20 years, total inflation-adjusted federal spending on student loans has increased. skyrockets, from $ 50 billion for the 1999-2000 school year to $ 87 billion in 2019-2020. At the same time, tuition fees in public universities increased by 120 percent in real terms over the same period.
According to developed economic theory By former Reagan administration secretary of education William Bennett, increases in federal student aid allow colleges to increase tuition fees since students have more access to funding. Researchers Gray Gordon and Aaron Hedlund supported this theory with quantitative models by concluding that increasing the limits of subsidized loans led to a 102% increase in tuition fees between 1987 and 2010. Without these additional federal grants, the authors estimate that tuition fees would have increased by only 16% on the net.
Likewise, a study by the Federal Reserve Bank of New York found that the increase in subsidized federal student loans leads to a 60 cents tuition increase for every additional dollar of subsidized federal loans. In other words, for every additional dollar Washington spends on federally-subsidized student loans, colleges are estimated to increase tuition fees by 60 cents to take advantage of students whose purchasing abilities have increased due to the new federal grants. .
At the same time, it’s important to keep in mind that for most borrowers, student loan repayments are a manageable part of their income (the median the monthly student loan payment is $ 222). Plus, income-based repayment plans already exist for borrowers who need help with making payments. Large debt balances are usually the domain of graduate students and students pursuing professional degrees—Those most likely to earn high incomes in the future.
These future students with higher incomes are the ones who would benefit the most from a waiver of their student loans. A recent study modeling the distributional effects of the loan forgiveness revealed that the average person in the top income decile would get more than five times as much forgiveness as the typical borrower in the bottom income decile.
It is also questioned whether the cancellation of the loan would really help borrowers struggling with debt. Low-income people currently see their monthly payments capped at 10 percent of their discretionary income through the Federal Income-Based Reimbursement Program (IDR). Indeed, because of this existing policy, the economist Sylvain Catherine notes that for some borrowers, canceling the $ 10,000 debt would have no impact on their monthly student loan payments, as it would write off debt that should never have been repaid.
Of course, all of these problems could get worse if this forgiveness – whether for $ 10,000 or $ 50,000 – is not one-size-fits-all. Prospective students could reasonably expect their debts to be canceled, which could inflate the costs of the university even further. Students would likely be inclined to borrow more for college, assuming it was later amortized, allowing universities to raise prices further.
Yet forgiving the debt of current borrowers seems unfair to students who need to borrow in the future, let alone students who have already graduated from college, as well as the many Americans who have not attended. And what about those who have already conscientiously repaid their loans? Could they expect some sort of reward?
When borrowers take out federal student loans, they sign a contract with the US taxpayer stating that they will pay off their debts. Borrowers have an obligation to keep this promise. If Congress and the Biden administration are to help, they should pursue policies that actually lower tuition fees rather than shifting debt payments to taxpayers.