Who Gains Most From Canceling Student Loans?

A tantalizing possibility has been dangled in front of millions of Americans who took on crippling debt to acquire a college education: What if that financial burden was lifted? The Democratic Party endorses the idea of the government forgiving at least a portion of the nation's $1.6 trillion in student loans, but opponents in both political parties see it as the wrong move for the economy. Bloomberg Opinion columnists Noah Smith and Michael Strain, both of whom have written about the proposal, recently got together online to debate.  

Noah Smith: With the Senate likely to remain in Republican hands, some are calling on President-elect Joe Biden to cancel student loans as a way of stimulating the Covid-stricken economy. In a recent column, I argued that this would not make an effective stimulus, since the type of people who have loans are not likely to spend more if their debt is canceled.

But I also argued that a one-time student debt cancellation would be good for the economy in the long term. A big overhang of debt is holding back workers whose careers were injured by two huge recessions. It’s stopping them from starting businesses and tying them to their current jobs. While loan forgiveness shouldn’t be a regular thing, a one-time cancellation, recognizing the extraordinary impact of these two recessions, would thus increase dynamism and growth in our economy without creating undesirable incentives for students to borrow more in the future.

Michael R. Strain: Canceling student debt is a terrible idea. Over half of student debt is held by graduate-degree holders, while only 14% of adults hold graduate degrees. One in every five dollars of education debt is held by the 3% of adults with professional or doctoral degrees. I would be shocked if forgiving the student loans of high-income, highly-educated professionals resulted in any measurable increase in entrepreneurship, dynamism or economic growth.

Even if it did, it would still be a bad and bizarre use of taxpayers’ dollars. Americans hold about $1.6 trillion  in student debt, and forgiving balances of up to $50,000 has been estimated to cost around $1 trillion. I can think of several dozen uses of the marginal tax dollar — and the marginal $1 trillion — that would be better for the economy and for society than giving a grant to surgeons and lawyers.

Moreover, I do not believe the government would be able to convince many people that this would be a one-time policy. Instead, a lot of students would be less responsible about their decisions to take out loans, and the problem of student debt — which, to be clear, is a real problem for many — would only be exacerbated. That, or it wouldn’t end up being a one-time event.

NS:  First of all, based on the proposal for Biden to cancel up to $50,000 per person in student debt, you don’t have to worry about high earners getting hundreds of thousands of dollars forgiven. Most of the $1 trillion won’t go to doctors and lawyers.

Meanwhile, the majority of student borrowers are lower-income Americans, some of whom completed college, some of whom dropped out (possibly because of the cost). This only stands to reason; talented people who come from modest economic backgrounds don’t have parents who can pay their way, so they have to borrow in order to get an education and better themselves. These are exactly the sort of talented people with scarce resources that have the greatest unfulfilled economic potential.

And student debt is holding these people back, preventing them from buying houses, starting businesses, and moving up in general. Even the Heritage Foundation, a deeply conservative think tank, is worried that our system of education finance is contributing to the decline in upward mobility in the U.S. That system should be reformed going forward, with a shift toward income-based repayment. But the only way to reform it retroactively, for the people who already finished college, is to cancel their debts.

MS: Our system of education finance does need updating, and we are in complete agreement on the need to advance economic opportunity to more low-income young people. But it takes a wide leap to get from there to canceling student debt, which would only benefit people who already have an education.

Limiting the grant to $50,000 does little to assuage my concern. While, as you say, a majority of borrowers may be low-income, the majority of student debt is held by high-income professionals with graduate degrees.

With that in mind, permit me a straightforward question: Imagine two surgeons live next door to each other. The first has paid off all his student debt. The second has not. Why should the second receive a $50,000 gift from the government and not the first?

NS: When student debt relief per person is capped, it doesn’t really matter that the majority of loan dollars are held by high-income professionals. Each of them can only get relief up to the cap. That means most of the overall loan forgiveness will be spread out evenly among borrowers, most of whom have only modest income. If you’re still worried that a $50,000 cap is too high, lower it to $30,000. In any case, haggling over this limit, when so many low-income Americans are being held back by their student loans, smacks of being penny-wise and pound-foolish.

You also raise the issue of fairness, which is definitely going to be politically important. People who already paid off their loans might feel cheated if those who delay repayment get their debt forgiven. The solution is to offer rebates to people who paid off their loans early. That way, those people still get rewarded after the fact.

Ultimately, concerns over regressivity and fairness seem like only minor hurdles to me. They’re easily fixed with small tweaks to the loan forgiveness policy.

MS: These strike me as major hurdles. But let me end on a note of agreement: The U.S. should do more to help low-income Americans succeed in the labor market. To advance that goal, I would suggest prioritizing programs that focus on low-income households well ahead of forgiving student loan debt.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Noah Smith is a Bloomberg Opinion columnist. He was an assistant professor of finance at Stony Brook University, and he blogs at Noahpinion.

Michael R. Strain is a Bloomberg Opinion columnist. He is director of economic policy studies and Arthur F. Burns Scholar in Political Economy at the American Enterprise Institute. He is the author of “The American Dream Is Not Dead: (But Populism Could Kill It).”

©2020 Bloomberg L.P.

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