Thoughts on Student Debt Forgiveness

Let's get this out of the way before I express the concerns I have about the new policies announced by the Biden administration yesterday. I usually consider myself left-of-center politically. I'm for universal healthcare, the increasing of unions, some wealth redistribution, state-owned utitlies, paid parental leave, and so on. I am also genuinely happy for many of my friends who are going to benefit from the student debt forgiveness announced by the administration a couple of days ago.

But, I have some pretty big concerns about how all of this forgiveness is going to work, and how it's going to affect the economics of higher education in particular. I also have concerns about how it's going to incentivize poor financial decisions for students and parents. Many of my thoughts are probably directly affected by the fact that I work in higher ed, and I spent eight years working in a billing office for a university. I've seen the financial decisions that have been made by colleges when it's registration crunch time. I've seen what students and parents do when they feel like they're forced into a tough position (borrow too much money for little Johnny to stay at school, or let him learn a hard lesson when the bill comes due, etc.).

(Also, I'm avoiding all of the what-about-ism nonsense in the discourse -- specifically related to PPP and big corporate bailouts. Those are separate issues that ought to be dealt with separately.)

Here are my concerns, in no particular order:

This was a blanket policy that was relatively untargeted.

Let's get the good parts out of the way: targeting Pell recipients was a good move. You have to be pretty low in the income spectrum to be a Pell recipient (I was one after we got married and had a baby -- we were POOR). Students who receive Pell often start in a really difficult spot financially. Even after graduating, it can be difficult to build wealth for these individuals than it is for those that come from families with even a modest amount of wealth.

Other than that, the limit on income ($125k for individuals, $250k for couples) seems unreasonable to me. I want to grant that $125k in some parts of the country is very different from other parts of the country. But that's an amount of affluence that is unheard of compared to much of the world. And who is most likely to be able to make that amount of money (or more) in the first place? College graduates! That means that we're giving targeted debt relief to the people who are most likely able to pay off this debt in the first place. If we're going to choose a group of people who are saddled with debt or in poverty or need assistance, why would we choose college graduates (the group most likely to attain financial security) over individuals who didn't have an opportunity to attend school in the first place?

There are deeper cultural problems with higher ed that this does not address, and in fact possibly exacerbates.

This is a multi-faceted concern. I'll let Matt Bruenig (a far left guy on economics and law!) talk about my first concern here. IDR stands for income-driven repayment. He is specifically referring to the cap on loan repayment to 5% of the borrower's income.

At some point, it seems like expensive private universities will realize that providing tens of thousands of dollars of need-based discounts to certain borrowers who are likely to wind up on IDR does not make sense and that they should instead charge the maximum amount a student can cover through federal loans. As the law schools show, the surplus generated by that scheme could even be shared a bit with the students via an LRAP. Even certain public universities may end up reconsidering the wisdom of state-funded tuition subsidies. Tuition subsidies that lower the cost of attendance for public university students that wind up on IDR don’t actually benefit the student. Instead, they are just indirect transfers of money from state governments to the federal government. -- read the whole thing here

Ok, so that's one -- colleges now are incentivized to act in bad faith financially, even if they don't necessarily intend to. Why would they give students institutional aid or keep tuition and fees lower if they and the student know that there is no difference for the student if they borrow $20,000 or $100,000? It's not really different because the student knows they can borrow the maximum amount and not be required to pay back the entire amount. The university knows that the student knows this, so they can feel free to increase prices without "price sensitivity" (Bruenig's term). In other words, we are actually encouraging universities to get financially bloated on the government's dime (read: my and your tax dollars), all while not increasing value via better educational quality.

Number two: we have a deeper cultural problem here. Students and parent borrowers are feeling relieved because many feel like they were sold a bill of goods (I count myself in this group) -- that college was and is the key to financial security and stability. But they went to college and pursued whatever passion they were interested in (theology for me, any number of liberal arts or whatever for others), while also being told that this was the way they could get this education in this passion of theirs and it would all somehow magically "work out." Shocker, it didn't, for many people. We culturally fetishized college education, all while tuition and fee costs ballooned. This student debt relief via forgiveness and IDR not only don't fix this problem, they exacerbate it. This tells all of our colleges that it's ok that they make bad promises to students -- the government will bail them and borrowers out regardless of how bad of a decision it was.

Number three: perhaps as a subpoint to number two, colleges bear little-to-no risk or responsibility for this problem. I have other thoughts about what higher education is for (it shouldn't be just a method of advancing one's career and gaining capital), but the truth is that we're selling it like that right now. If a college offers a product like a degree and markets those degrees as methods of investing in one's future, and the government is funding that investment for students, the university ought to at least bear some responsibility for the outcomes of those students. We'd, of course, expect some students to not be able to pay off the debt due to unforeseen circumstances. But if students cannot get into the career field they were promised, or if they can but cannot make enough income to pay off that debt, the university doesn't currently have to deal with that problem. The government does. Outside of crazy default rates, the government doesn't really prevent colleges from allowing students to use Stafford loans to attend their school. Why not require schools with large endowments to lend to students? Surely that would immediately shift the calculus, both on who is admitted and who gets to borrow? I'm not saying it's all-or-nothing, but right now, colleges get off pretty easy when it comes to dealing with the student debt problem.

This could incentivize poor financial decisions on the part of borrowers.

People may think I'm wrong here, and that's fine. But I also think that student debt forgiveness now will create the expectation for future borrowers that their debt will be forgiven as well. If that's the case, students will continue to choose institutions that are not built with their best interest in mind -- instead, they will be more likely to choose flashy institutions with more amenities and higher costs rather than a local or more pragmatic institution.

Further, with IDR in the back of their minds, what stops a student from borrowing the maximum amount of loans when they don't need it? Anecdotal, I know (but it's also a common reality in my experience), but many students borrow more than they need to borrow. If you haven't been to college in a long time, then you may not know that when a student has an excess in aid, they get that aid returned to them in the form of a check. The idea here is that students can use this excess money to live on. But many institutions are built so that housing and meals are paid for already before the check is sent. This means that the cash is excess -- students can do literally whatever they want with this money. They can buy consumer goods, purchase a car, eat at expensive restaurants (when their food is already paid for), and so on. If a student knows that IDR is a reality and the debt will be forgiven at some point in the future after a certain amount of years paying for the debt, why shouldn't the student take out more debt instead of being frugal? It's actually leaving free money on the table to not take out your max loans.

The same is true for the Parent PLUS Loan. This is a secondary type of loan offered to parents/guardians of students. Students can have their bill fully paid for and the parent can still apply for the PLUS loan. And guess what. PLUS loans are covered under Biden's plan! Often, PLUS loans go to pay for tuition and housing and all the necessary(?) costs of higher ed. But it also happens quite frequently that parents get the ENTIRE amount of the PLUS loan back to them in the same way students get a financial aid overpayment check. So what stops a parent or guardian (and both parents can apply!) from taking out the loan, using those funds for something other than their intended use, and having the loans forgiven -- either outright or via IDR payment plans?

Do I want people saddled with out-of-control debt and not be able to start a family or buy a home or be stuck in a bad job? Of course not! But I think it's good for people to make investments in their career and financial future and then take responsibility for that investment. I think college education can be a good thing for many people, but is not the best decision for everyone. I think this policy from the Biden administration has the potential to worsen the higher ed financial landscape -- giving more power and money to institutions that do not deserve it. It puts the financial burden of bad or ignorant borrowing decisions on the the rest of us. It is not likely the rich that will end up paying for this policy. It will be the rest of us, in the form of inflation, increased interest rates, and higher taxes.

More reading on the topic here:

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