Should Government Forget Student Loans?

The issue of forgetting student debt has once more risen to the forefront of the media, with six states pursuing litigation to challenge President Biden’s plan to relieve student debt up to amounts totaling $20,000. Conservative and Republican groups have filed lawsuits to oppose the President’s plan, arguing that this plan is unlawful, harmful, and an overreach of executive authority. On February 28, the U.S. Supreme Court heard the oral arguments in two cases concerning the proposed program– Biden v. Nebraska and US D.O.E v. Brown. The issues of law in these cases relate to the standing of the petitioners of the case and the argument as to whether the Secretary of Education has the appropriate authority to forgive student debt en masse. The Supreme Court will likely issue a decision after June concerning this case, which will answer various questions related to the legality and the impact of this student loan forgiveness program.

However, disregarding the current legal climate of this proposed plan, we may examine the generic claims for and against such a significant policy.

The Case Against Student Loan Forgiveness

1. Recessive Program

A primary argument against student loan forgiveness is that it is an unfair policy that disproportionately affects the upper class of society. According to a report by the Education Data Initiative, borrowers in households with incomes in the 60th percentile and higher owe about 60% of student loan debt, while those in the 40th percentile and below owe merely 20%. Such wealthier individuals are likely to borrow more heavily than those in lower socioeconomic classes, as per a paper titled “The Distributional Effects of Student Loan Forgiveness” by Sylvaine Catherine and Constantine Yannelis, professors at Wharton and Booth, respectively. This suggests that a program that forgives loans primarily assists individuals in wealthier households who enjoy increased income premiums in part due to the opportunities that secondary education provides, rather than the low-income students that such a policy intends to benefit. As such, the student loan forgiveness plan would take tax dollars from blue-collar Americans and grant them to the upper class, who are capable of repaying their debt but who will instead reap greater benefits from this program.

2. Poorly Targeted

Apart from serving as a recessive policy, such a plan targets the wrong groups. Government resources are scarce and it would be ludicrous to allocate such assets to certain populations when others are in greater need. However, such a forgiveness plan may do that exactly. According to another report conducted by the Education Data Initiative, 43.5 million federal borrowers account for 92.5% of all student loan debt. Out of 250 million adults in the U.S., approximately 15% of American adults owed student debt. Most of the remaining 85% of adults do not owe student debt, and thus, expending billions or trillions of U.S. dollars to forgive such debt is not equitable to such individuals. 

Furthermore, the cohort without a college education, according to the U.S Census Bureau, on average, earns a weekly wage that is more than $500 less than their college-graduate counterparts and experiences an unemployment rate that is greater by 2 to 3 points. The Covid-19 pandemic and ensuing recession have accentuated this, plunging many such individuals into financial hardship that may be greater than those who have student debt as there has been a loan payment pause for borrowers in place since March 13, 2020.

3. Worsens Deficit

Biden’s proposed plan also has the potential to significantly increase the current federal deficit. The Congressional Budget Office estimated that the plan will cost the federal government approximately $400 billion. This plan will profoundly increase 2023 spending, especially given that in 2022 the federal government saw $6.3 trillion in spending compared to $4.9 trillion in revenue, running a deficit of $1.4 trillion, according to Peter G. Peterson Foundation. The additional $400 billion this policy will expend will contribute to a potential deficit and append to the existing national debt, which may have long-term negative consequences for the economy. This will further push the U.S. towards borrowing an unhealthy level of debt, which, under certain circumstances, can result in increases in inflation, increases in interest rates, crowding out private investment in businesses, and a weakening fiscal ability to respond to future economic challenges. All of this may be exacerbated by the precedent this plan sets for future generations to expect another forgiveness, again increasing costs for the government and its deficit.

The Case for Student Loan Forgiveness

1. Economic Productivity

The counterargument to the aforementioned federal deficit claim is the potential for Biden’s student loan relief plan to increase economic productivity. According to a 2018 study conducted by the Levy Economics Institue of Bard College, canceling all student loans would result in an average increase of $86 billion to $106 billion in GDP per year, and will amount to $1083 billion in a 10-years. This value may be even larger depending on the multiplier effect resulting from the increase in disposable income available to student loan borrowers. The cancellation of student debt provides individuals greater freedom to pursue entrepreneurial activities, investments such as a mortgage, and family life. This increase in economic activity will also be taxed, reducing the potential deficit the government will experience from implementing this plan.

2. Ineffective Existing Programs

There is a supposed “safety net” in place for borrowers who struggle financially to repay their student debts: income-driven payments (IDRs). There are a few fundamental characteristics concerning these programs…

• • Borrowers tie loans to income and pay monthly repayments

• • Repayment period of 20 to 25 years

• • Monthly payments vary by income level and family size

• • The balance remaining after the repayment period is forgiven

• • Certain individuals may qualify for $0 monthly payments

Individuals enrolled in these programs repay the interest on the loan for the specified month and the remainder of the monthly payment contributed to the repayment of the principal amount. Traditionally, this results in the amortization of the loan. However, for individuals whose monthly payments are less than the interest payment for the specified month, there is nothing left to go toward the principal, and thus the balance grows. For thousands of Americans who have been repaying their student loans for years through IDRs, many have larger balances than they originally did. Furthermore, concerning the forgiveness aspect of these plans, a mere 11% of borrowers were eligible for forgiveness and only  0.02% had been granted this cancellation of debt by June 2021, as stated by the U.S Government Accountability Office. These IDRs have proven themselves to be ineffective, thus necessitating executive action, as Biden has done. The reforms in the student relief plan not only offer loan forgiveness but also change the terms of such IDRs to prevent reverse amortization of the loan, alter the criteria for qualification, and lower monthly payments.

3. Fairness

Many borrowers took out student loans with the understanding that a college education is an increasingly important factor in attaining a stable career and financial future. Many expected to observe the tangible effects of their education on their paychecks. However, the rate at which tuition has risen, 317% from 1970 when adjusted for inflation, has placed a significant burden on the American people, such that those who did enjoy monetary benefits from their education spend the additional income on loan repayments. Forgiving debt can be a method to enable all citizens to pursue their dreams and financial stability, regardless of background, race, religion, or socioeconomic status. Providing borrowers with student loan relief may ultimately be the most moral action for the government to implement.

Conclusion

 The issue of forgetting student loans is a contentious one, with both sides presenting compelling arguments for and against it. It is a complex matter that requires careful consideration and weighing of the benefits and costs to make an informed decision that will benefit both individuals and the country’s economy in the long term. The Supreme Court may be the entity that determines the correct answer to this subject, as its expected ruling this year concerning Biden’s student loan relief plan will influence whether or not it is implemented in the near future.