President Biden is facing pressure from some Democratic lawmakers to use executive action to forgive $50,000 of student debt for each federal borrower. After all, roughly 42 million Americans have student loans amounting to a staggering $1.5 trillion dollars—it’s a larger share of household debt than credit cards.
Such debt relief would help underprivileged minorities, says Senate Majority Leader Chuck Schumer (D-NY). “During a time of historic and overlapping crises, which are disproportionately impacting communities of color, we must do everything in our power to deliver real relief to the American people, lift up our struggling economy, and close the racial wealth gap,” he stated in support of the cancellation, which would cost the government around $1 trillion.
But this argument gets it exactly backward. Large-scale student-debt cancellation would disproportionately benefit the wealthy and make an imperceptible difference on the racial wealth gap—or even make it worse.
Although more people are going to college, they are still on average better off than the non-college educated. In 2019, Adam Looney of the Brookings Institution found that presidential candidate Elizabeth Warren’s proposal to forgive up to $50,000 of debt for households who earn less than a quarter-million dollars a year would be regressive, with the bottom 60% of households receiving only 34% of the benefit.
What of Schumer’s claim that it would stimulate the economy?
Good stimulus measures immediately put extra cash in people’s hands. Forgiving student debt wouldn’t achieve this. The Trump administration already suspended payments during the pandemic, and Jason Furman, former chairman of President Obama’s Council of Economic Advisers, estimates that debt forgiveness “likely has a multiplier close to zero.”
What about the racial wealth gap? Many advocates of student-debt forgiveness point to uneven rates of borrowing between young black and white adults, with the former often taking more debt than the latter.
The Duke University economist William A. Darity Jr., a supporter of student-debt forgiveness, examined this question in a 2019 paper that included analyses of the proposal by Warren and another by Bernie Sanders, who wanted to eliminate all student debt. “On the face of it, this would be a universal program that would disproportionately benefit black students because they hold a larger average amount of debt,” Darity wrote. But we also have to weigh this fact against the “enrollment rates for each group, because those who do not enroll in college or university do not acquire student loan debt.” Once you take this into account, by simply wiping out student debt, the “effect on the mean gap” between black and white wealth would be “imperceptible.”
A 2015 analysis by the think tank Demos was even more pessimistic about the impact of untargeted debt forgiveness. “While eliminating student debt for all households regardless of income increases median net worth for young white and Black households, white families see a greater benefit likely due to a higher likelihood of completing college and graduate degree programs,” it said. “Policies which eliminate all student debt for young households would expand the divide between median Black and white wealth by an additional 9%.”
So why are leading Democrats entranced by the proposal?
One way to look at politics is through the lens of class interests. The Democratic Party is increasingly the party of college graduates. In states such as Georgia, well-educated suburban whites formed the backbone of swing voters whom the party has relied on to make gains. A student-debt bailout is essentially representing their class interests, even if it’s far from an ideal policy to help the underprivileged.
None of this is to argue that we should do nothing about student debt. It is a growing problem worth addressing, and there are proposals on the left and right worth considering, ranging from lowering interest rates to holding colleges themselves accountable for the amount of debt their students accrue.
For his part, Biden has asked Congress to send him a bill to forgive $10,000 of student debt per borrower. While simply writing off a $50,000 debt would be a giveaway to an awful lot of well-paid doctors and lawyers, forgiving up to $10,000 of debt could be welcome relief for students who attended college but dropped out—the average person in this category has less than $10,000 of debt without getting the earning benefits of a college degree.
But if we really want to achieve the goals Schumer espouses, we should talk about aiding the least among us. As Matt Bruenig of the People’s Policy Project has shown, poverty in America is heavily concentrated among the children, elderly and disabled. These people would not directly benefit from a student-debt bailout—but there is a promising proposal that could do a lot to help them.
The Utah Republican, Senator Mitt Romney, is proposing the Family Security Act, to create a monthly cash benefit for families, with $350 per child up to age 5, and $250 for each child between ages 6 and 17. The Niskanen Center estimates that Romney’s legislation would cut child poverty by around a third, which would not only immediately benefit poor families but would have cascading effects on the prospects of their children. It would also please fiscal conservatives because Romney’s proposal is deficit-neutral, consolidating federal programs while ending the State and Local Tax deduction, which is a regressive deduction.
We live in a rich country, but one with a substantial number of people who aren’t sharing in that wealth. We could choose, like Schumer, to spend $1 trillion that would end up benefiting many who are already financially stable, healthy and upwardly mobile. Or we could focus our resources on those who are not sharing in the great promise of America. The choice is obvious.
Zaid Jilani is a journalist based in Arlington, Virginia. He has worked for University of California Berkeley’s Greater Good Science Center, The Intercept, and the Center for American Progress.
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I think this discussion needs to be viewed in context. A large part of the situation with student debt needs to be understood within two political choices. First is the Great Recession brought on by the mortgage crisis. Republican stonewall refusal to provide adequate aid to the states drastically impacted state budgets as most states are prohibited by statute from running deficits. Law makers cut budgets for state schools and increased tuition. This pushed prospective students further into dependence on the financial services industry that had created the situation in the first place. Second is the legal structure of student loans which is another give-away to the financial services industry, in that such loans are unusual in that they cannot be ended by bankruptcy. Effectively this turned the students into a revenue stream for the financial industry and their loans into simply another asset class. Monetizing their access to education in this way creates a private good (the income stream to the financial industry) while depriving society of a public good which is the education which these students would ultimately use in society (students deterred from college by cost are a societal loss) and their lack of the freedom to apply this in creative ways that they might be able to do if not saddled with debt.
If we look at it instead from social benefit perspective then it is not really in the interest of the society to create another asset class that benefits a small, already wealthy financial sector. However it is in the interest of society to have as large a group as possible able to think critically as this is a further support for democracy and a bulwark against authoritarianism. Certainly college is by no means the only way to learn critical thinking, but it is _one_ way and it provides this educational opportunity to many people who would otherwise not have it. It is also in the interest of society to have the broadest possible access to the widest array of talented people to obtain as high an education as the aspire to and can complete. This produces benefits not only for the individual but for society as a whole in the form of new ideas, new solutions, and of course new financial ventures and non-profit enterprises.
For this reason and ideal situation would be one in which there is no tuition and thus no financial barrier to matriculation. Alternatively the (already mentioned) Australian model is a possibility, in which the loan is paid back via taxes, payment is never more than a certain percentage of income and payments are suspended during periods of unemployment or financial hardship.
Coupled with this would need to be an examination of the cost structure of universities. At the moment there is an increase in well compensated high level administrators coupled with increasing tuition and an ever expanding sub-class of low-pay/no-benefit adjuncts who keep the wheels turning. Both students and adjuncts are squeezed financially in system that rewards a higher administrative segment. An adjustment to this model coupled with a significant re-commitment to public support for universities would reduce the cost of tuition.
A discussion of whether tuition is desirable from a societal point of view could then proceed. In any case making our talented, curious, young people into debt servants would cease.
There are many obvious steps that could be taken to improve the student debt situation, but Americans seem to have lost the knack for obvious policy reform. Three changes that would help:
1) Reverse the special status of student debt as not subject to bankruptcy relief.
2) Imitate the Australians and make debt repayments contingent upon income.
3) Student loan interest rates used to be much cheaper than other debt, and now is often much more expensive. Drop the rate to something like inflation plus 1 per cent, with a 10 per cent cap.
Leaving debt aside, if you want to "go big or go home" in higher education: make junior college and vo-tech programs free (or repayable through contingent income) across the country.