The progressive wing of the Democratic Party is urging President-elect Joe Biden to issue an executive order early in his administration to eliminate up to $50,000 of student loan debt per borrower. The argument being made is that it would be part of an effort to rejuvenate the pandemic-devastated American economy.
Progressives like the idea in part because it can be done by the new President without the concurrence of Congress. Another example of a growing trend toward Executive government that by-passes the legislative branch. We saw it with Obama. We have seen it with Trump. And now some would have Biden begin his term in the same unorthodox manner.
In this case we are talking about 1.6 trillion dollars of debt owed to the American taxpayers for loans individuals and families took out to pay for college. The latest statistics are that 44 million borrowers owe an average of $38,000 each. That makes student loan debt the largest category of consumer debt after only mortgage debt.
Advocates argue that student loan debt is a drag on the housing market and that it contributes to the trend in delayed marriages. We are told that those with loan debts are more likely to be living at home with their parents. So forgiving the debt and saddling the taxpayers with the write-off should be an economic win, right? Not so.
Here is what writing off the student loan debt will not do.
It will not fix the student loan crisis. 69% of the students in the higher education Class of 2018 took out student loans and graduated with $30,000 in debt. Forgive the existing loans and we will face the same problem down the road.
It may create moral hazard for current and future students who feel they can take on student debt expecting it will be forgiven in the future.
Writing off the debt will not fix the financing structure of higher education. The most probable result will be greater increases in tuition by institutions. There is a strong argument to be made that federal financial aid policy with its mixture of grants and loans freed colleges and universities from the market worry that tuition rates would determine their competitive position.
Colleges could spend more on recruitment and buildings and amenities to attract students, increasing tuition to pay for it and counting on the student and families using federal financing to avoid making hard choices.
It does nothing to fix the cost structure of higher education which has seen a dramatic increase in administrative personnel. A Department of Education study for the years 1993 to 2009 showed administrative positions up 60%. That growth was not in the faculty ranks.
College and universities have become big business in America. In 2019 there were almost 20 million students enrolled in college programs. Post-secondary degree granting institutions spend over $600 billion a year. Figures from the College Board say that 69% of those who completed high school in the first 9 months of 2018 were enrolled in post-secondary institutions in October of that year.
Statistics show that almost 40% of those enrolled will not get a degree within 6 years of beginning their college experience. “Some college” has become a new category when analyzing educational attainment.
We know many students might benefit from a different path, one more vocationally oriented and focused on job skills the economy needs. Yet our political leaders preach that the future belongs to the college educated, encouraging students who probably will not succeed in a college environment to take on crushing debt for none of the supposed earnings benefits that accrue to obtaining the college degree.
We all see the studies that show that the economic benefits of a college degree outweigh its costs. But those studies don’t show the variance between those with an engineering degree and those who graduated with a general degree in the arts and sciences. They generally leave unmentioned the large number of students who fail to complete a degree but are left with the bill.
The College Board states that average tuition and fees have been higher than inflation for decades while the median family income has barely budged. The federal financial aid system has freed colleges from many of the competitive pressures related to costs and price. The competition these institutions now feel is for recruitment, something that encourages spending not parsimony.
Forgiving student loans addresses none of this. It wipes a slate clean while leaving in place all the factors that caused the problem. It does a disservice to those who worked to pay off their loans.
Ah, but advocates will still argue that we need to do this now for the economic stimulus it will produce. Even there the argue fails.
Harvard economist Jason Furman argues the economy would get little bang for the buck. The pandemic has already led to deferred payments on student loans, so no new money is in anyone’s hands during the current economic crisis. Using public dollars of this magnitude in other ways would have greater impact.
Furman also points to the regressive nature of the proposal since it is most likely going to help many college graduates with the best prospects anyway.
There is one way this policy makes sense, as a pay back to a constituency of young voters. Yet there are many ways to do that without a policy that clears the deck of debts at a moment in time without fixing the problems that gave rise to the loan crisis.
We need thoughtful long-term policy. This isn’t it.