Biden’s About to Make a Big Mistake on Student Loans
There are better ways to help people than across-the-board debt relief.
Blanket forgiveness of student loans, as President Joe Biden appears poised to offer, would be a huge mistake. It’s regressive and unfair. Over time, it could well increase the number of people struggling with student debt. And while billed as a “one time” policy, it would set a terrible precedent. This is not to say there aren’t student borrowers who need help. But there are better ways to support them than a giveaway that would primarily benefit well-off professionals.
The Biden administration is actively considering student loan forgiveness of $10,000 or more per borrower. This would be extremely regressive. Relatively few low-income households have student debt and, among those who do, outstanding loan balances are smaller than for higher-income borrowers. In part for these reasons, a recent study by economists Sylvain Catherine and Constantine Yannelis concludes that blanket forgiveness of $10,000 in debt would offer $3.60 to the highest-earning 10 percent of households for every $1 it gave to the bottom 10 percent and that three quarters of the benefits would flow to households with above-median incomes.
Putting an income cap on eligibility for loan forgiveness could make the policy less regressive. But the income limit the administration is eyeing — excluding only individuals making more than $150,000 per year — would have little bite because few people have incomes that high.
One of the bedrock principles of sound economic policy is that similarly situated people should be treated similarly. Student loan forgiveness would take a hatchet to this principle. It would be a slap in the face to individuals from modest backgrounds who attended college but never took on debt or have already paid it off. What would the administration say to a person who struggled for years to pay off her student loans, finally becoming debt free last month? Or to the people who chose to attend their local community college rather than a more expensive four-year college because they did not want to borrow? Or to the people who avoided debt by serving in the military to qualify for GI Bill benefits?
The policy also would privilege student debtors above other borrowers. This is hard to justify. People who suffer serious injuries from car accidents may have substantial medical debt through no fault of their own, while student borrowers made a choice to take out debt. What would the administration say to the indebted survivor of a car accident, struggling to pay off medical bills?
Student loan forgiveness sets a terrible precedent as well. Because future students might reasonably expect their debt to be forgiven too, there is a real risk it would encourage excessive borrowing. This would make student debt burdens even larger, worsening the very problem the administration hopes to solve. It also would fuel calls for additional rounds of debt forgiveness.
Biden’s potential proposal has already angered some on both the left and the right. As economists, we won’t get into the political tripwires facing the president’s plan. But we will note that we lean toward different sides of the aisle and believe there are better solutions that could garner bipartisan support.
One better option to help borrowers is already on the books: allowing people to repay loans based on how much they make. Under the latest version of “income-driven repayment,” the Revised Pay As You Earn plan, payments are set at 10 percent of a borrower’s discretionary income (defined as income above 150 percent of the federal poverty line). Any remaining debt is forgiven after 20 years of payments. Because IDR ties payments to income, there is much less risk that a borrower will face unaffordable payments or default on their loan. Although enrollment in IDR has risen in recent years, a surprisingly modest number of people take advantage of the program. In the most recent data only just over 30 percent of borrowers opt for IDR. Take-up is lower among the lowest income borrowers, for whom it could be most helpful, than among middle-income borrowers. Making it easier to enroll in IDR and streamlining the annual process of determining required payments could increase IDR enrollments. Although the standard mortgage-style repayment plan is best for some borrowers, there is an argument that IDR should be the default student loan repayment plan.
Removing the significant barriers to discharging student loan debt during bankruptcy also could help. Under current law, and unlike other debt, student loan debt can be discharged only if a borrower shows they would face “undue hardship” in repaying the debt. As interpreted by the courts, this has been a demanding standard to meet and only a miniscule number of student borrowers succeed in discharging their debt through bankruptcy. Placing student loan debt on the same footing as other debt in bankruptcy could go a long way toward alleviating the burden of student debt for borrowers who truly cannot repay it.
Finally, if the goal is to help people with lower incomes who are struggling with student debt, another option to consider would be an expansion of federal earnings subsidies. A more generous earned-income tax credit could help these borrowers manage their bills while also encouraging many to increase their labor market earnings. An expansion targeted on low-income and working-class households would avoid the problem of transferring money to well-off, middle-class professionals.
There are no free lunches. Spending federal dollars to forgive student loan debt would leave less tax revenue for other programs. The choices aren’t just blanket debt forgiveness or accepting the status quo. There are far more effective ways to help the neediest among us, including struggling student loan borrowers, than across-the-board student loan debt forgiveness.