Finding a fairer way to manage student loans
President Joe Biden is set to “write off” $10,000 in student loan debt per borrower, for a total of $360 billion in loan elimination. It may seem like a simple and straightforward solution, but the direct result will be to increase inflation, drive up college costs even further, and put less expensive and more effective education alternatives at a disadvantage.
College is much more expensive than it should be, and many students graduate with significant loan debt. Worse still, employers are increasingly reporting that colleges aren’t giving students the education and skills they need in the workplace.
These are important issues that require solutions. But Biden’s plan documents the fact that government policies are the cause of these problems. Student loan “forgiveness” will aggravate these problems, not eliminate them. And it is morally reprehensible, economically wrong and pedagogically harmful.
• Morally bad. Forgiveness of a debt might be a morally virtuous act, but forgiveness – by definition – can only come from the one to whom the debt is owed. In the case of federal student loans, it is the taxpayer. Biden’s plan to transfer $360 billion in individual student loan debt to taxpayers without their consent is closer to theft than “forgiveness.”
Student loan debt forgiveness is also incredibly regressive, as people with higher education tend to have the highest incomes. Fifty-six percent of all student loan debt belongs to a select group of people with higher degrees, such as doctors, lawyers, and engineers. Meanwhile, the much larger group of people in the United States — 37% of all adults age 25 and older — who have a high school diploma or less have no student loan debt.
The Committee for a Responsible Federal Budget estimates that households in the top two income quintiles would receive 57% of the student loan “forgiveness,” while those in the bottom two quintiles would receive only 17%. Working-class Americans without a college degree, people who went to school without a loan, and those who worked hard to pay off their loans will be the ones to pay the “forgiveness” of other people’s student loans.
• Economically bad. The economy and inflation are the main concerns of Americans today, and canceling loans would hurt both. In addition to trillions of new dollars in federal spending, the Committee for a Responsible Federal Budget estimates that 90% of new consumption induced by student loan forgiveness would result in price increases instead of economic growth. Stimulating spending by high-income households when the average worker is $1,800 poorer over the past year due to inflation is bad economic policy.
• Pedagogically harmful. More pertinently, the cancellation of student loans would exacerbate existing problems in the American higher education system. The root cause of issues such as college costs has more than doubled (in real dollars, adjusted for inflation) over the past two decades, low graduation rates – with only three in five students earning a four years in six years – and graduates not acquiring the knowledge and skills they need in the workplace is government intervention in higher education.
Student loan subsidies increase education costs without increasing the value of degrees. A Federal Reserve study found that every dollar of federally subsidized student loans colleges receive results in a 60-cent increase in tuition. Federal subsidies for higher education have also limited the growth of more efficient and less costly alternatives, such as performance-based education programs and revenue-sharing arrangements and employer-driven education.
The discount would likely encourage students to borrow at even higher rates in the future, in anticipation that they, too, would have some of their loan balance forgiven. And they might also be incentivized to attend more expensive schools.
Instead of adding another problematic and harmful policy on top of existing ones, federal policymakers should remove current policies that are driving up the costs of education, increasing student loan debt, and deepening the growing skills gap.
Among the solutions in a recent Heritage Foundation report:
• Phase out federal grants for higher education to reduce inflated costs and allow for a more level playing field between different education options.
• Allow apprenticeship programs to grow by asking the Ministry of Labor to revive the nascent but thriving industry-recognized apprenticeship program.
• End failed federal job training programs so individuals can obtain more effective training from the private sector and more responsive initiatives from state and local governments.
Removing problematic policies may not be as politically appealing as “giving” the wealthiest Americans $10,000 of other people’s money, but it would do far more good for civil society, to the economy and the future of the American workforce.
Rachel Greszler is Senior Fellow at the Heritage Foundation’s Hermann Center for the Federal Budget. Lindsey Burke is director of the Center for Education Policy at Heritage.