Student Loan Relief Should Target the Neediest
(Bloomberg Opinion) -- Up to now, President Joe Biden has resisted calls from the left of his party to cancel up to $50,000 of student loans for most borrowers. But the pressure from leading progressives such as Senators Elizabeth Warren and Bernie Sanders, and more recently from Senate Majority Leader Chuck Schumer, isn’t letting up. The president might be tempted to waver.
He shouldn’t. Debt forgiveness on that scale would be very expensive, even by current standards of fiscal liberality. More important, the cost can’t be justified. This kind of relief would mainly help people who don’t need it, and there are better ways of assisting those who do.
By one estimate, the cost of Warren-style debt forgiveness would be roughly $1 trillion — on top of the $5 trillion Congress already provided for pandemic relief and the further $2 trillion and more that Biden wants to spend on “infrastructure” (which he’s defined to encompass almost any kind of public outlay). These colossal disbursements are undeniably popular, but the fiscal implications will sooner or later have to be dealt with. No responsible government just sets that consideration aside.
Yet the most striking thing about the $50,000 proposal — advanced with such passion by the country’s leading progressives — is that it would be strongly regressive in its effects. Note that this objection also applies to scaled-down versions of the plan, which Biden has previously said he’s open to.
As one study indicates, more than 90% of children from the highest-income families have attended college by age 22, compared to 35% from the lowest-income families. Over the course of their careers, graduates earn on average $500,000 more than people with only high-school diplomas. Although the Warren plan would exclude households making more than $250,000 a year, it would nevertheless involve an enormous outlay of public money on the relatively affluent. It also makes people who’ve chosen to work their way through college, and those who’ve struggled to pay off their debts since graduating, look plain foolish.
People in financial distress because of student debt, perhaps in combination with the effects of the pandemic, can and should be helped — but the aid should go to those in need. Some such measures are already in place. The Biden administration was right to extend the policy started last year by President Donald Trump that paused student-loan payments and interest during the Covid-19 emergency. A variety of other programs deliver help to low-income borrowers.
The best way to relieve financial distress among graduates with heavy student debts would be to expand and simplify the current programs of income-based repayment. This approach automatically makes the debt affordable and can pause repayments during spells of unemployment. It involves an element of subsidy, but this flows, as it should, to the least well-off.
Many borrowers are already eligible for schemes of this kind, limiting monthly payments at 10% to 20% of disposable income and providing forgiveness of the remaining balances after either 20 or 25 years. But take-up is lower than it should be — partly because the schemes are bewilderingly complex. There are multiple plans, each with its own rules and features.
The fairest approach would be for Congress and the administration to expand, promote and above all simplify the income-based repayment option, for new and existing borrowers alike. Ideally, this would become the default mode of student borrowing. Such a reform would do lasting good, rather than delivering a one-time windfall to people who mostly don’t need it.
Editorials are written by the Bloomberg Opinion editorial board.
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