The debate over student loan cancellation has been going on in America for so long that there is no longer a need for argument and repetition.
However, the inconsistency of the opponents’ arguments may not be so well understood. So we’ll focus on that.
First, a quick tour of the student loan landscape.
The option to cancel a student loan is to wait 20 years and then cancel it after you ruin someone’s life. The government will not repay in any way.
Marshall Steinbaum, Jain Family Institute
Initially, the total amount of outstanding student loans for higher education has exploded over the past two decades. Today, the debt of more than 45 million borrowers stands at about 8 1.8 trillion, up from about $ 300 billion in 2000.
According to EducationData.org, the average student balance on graduation day grew faster than the normal rate of inflation, rising to more than $ 36,000 in 2020 from about, 18,200 in 2007. This includes undergraduate and professional school graduates.
If it had grown at the same pace as the Consumer Price Index since 2007, it would have been only $ 26,000 today. For the undergraduates, the balance has grown even faster – from about, 15,250 in 2007 to about ,000 30,000 in 2020. Even public university students are graduating with large debt obligations, averaging over $ 26,300.
It is clear that many borrowers struggle to pay off their debts. Federal data shows that more than one-third of all borrowers borrow more than they actually borrowed 12 years after graduation due to the compounding of interest rates. Like virtually everyone else in the department, black students are the most burdensome – 66% of them owe more than 12 days after the start.
Obligations on this scale not only lead to economic growth – high student loans mean burdened families delay or give up home ownership and have difficulty starting a family or building savings – but also ridicule Americans’ most cherished assumptions about high prices.
“The whole foundation of the major higher education industry is a college degree,” said Marshall Steinbaum, a higher education finance specialist at the Jain Family Institute. “A significant cancellation would disprove that notion because why would we cancel all these loans when we said your income would increase enough to pay it off?”
As these factors heat up in the front burner, the pressure on the Biden administration to cancel the huge balance of student debt has intensified.
The Trump and Biden administrations have already given borrowers a lot of relief by keeping all federally supported student loans (more than 90% of the total) in tolerance during the epidemic, since March 2020. From then until this August, the borrowers do not have to repay the principal on those loans and no interest is accrued on the unpaid balance.
Analysts at the committee estimate that for a responsible federal budget, an airy for deficit hawks, the loan repayment break is equivalent to canceling a $ 5,500 loan to the average borrower by May 1. For some reason, the committee thinks it’s scandalous.
However, during his presidential campaign, President Biden backed the cancellation of loans up to $ 10,000 per borrower. Democrats in Congress, particularly Sen. Elizabeth Warren of Massachusetts, and Charles E., a majority leader in the New York Senate. Counting, $ 50,000 is pushing for cancellation
Now let’s look at the most common arguments against student loan cancellations and examine why they don’t hold water.
The first argument is that canceling an existing loan would be unfair to those who have already repaid their loan. As I have explained in the past, this is a logic of pure selfishness and a source of permanent government paralysis.
It is a favorite among conservatives and those whose comfortable prosperity makes them sensitive to the understanding of others. In 2020 GOP operative Matthew Dowd commented in a deleted tweet, “I paid for my college by working and I took out student loans that I repaid in less than ten years. Just cancel all student loan loans?”
Similarly, in response to a survey of economists conducted by the University of Chicago, David Autor of MIT commented, “In addition to my children’s student loans, I want the government to pay my mortgage. If the latter idea strikes you, the first one should too.”
The truth is, of course, that in a healthy society government policy moves forward by noting existing inequalities and trying to resolve them. Following their camp’s “I paid, why you shouldn’t” implication of the camp’s conclusion is that today we will not have Social Security, Medicare or affordable care laws.
All of these programs were designed to liberate Americans from what Franklin Roosevelt called “the pitfalls and changes of life.” Is it really wise to say that we should not have them because before their law seniors had to starve and suffer from illness without assistance and some families needed to buy health coverage in a separate market that was closed due to medical condition or helplessness. More expensive?
Warren responded to a voter who raised the objection during his 2020 presidential campaign, saying, “Look, we’re making this a better way to move forward. In the same vein, what we used to do, we didn’t start Social Security because we didn’t.” Start last week for you or last month for you?
The general economic inequality may have something to do with what we are hearing today. As economist Benjamin Friedman writes, “America has made the most progress while the living standards of the majority of its citizens have improved … the opposite has been true when incomes have stagnated or declined.”
The next environment, Friedman observed, was “intolerant, anti-democratic and liberal behavior – racial and religious discrimination, hostility towards immigrants, lack of generosity towards the poor.”
It is important to remember that higher education has not always been as expensive or economically exclusive as it is today. Tuition at the University of California was exempted from its founding in the 1860s and was reaffirmed in the state’s 1960 public higher education master plan, acknowledging the university’s role as a driver of economic growth.
Increasing the cost of education for students, the master plan said, “would deprive the state of the full idea of the wide-ranging educational opportunities made possible by the idea of a university.”
Free tuition disappeared in 1970, when a “tuition fee” – tuition under another name – was set at $ 150 a year. The system and the state never looked back. UC tuition today is $ 13,104 for residents and $ 44,130 for non-residents, making it the “largest single source of core operating funds” for the university.
At the time it was established, free tuition at UC was a source of immense intellectual resources for the state. Among those who took part in the arrangement were former governor and U.S. Chief Justice Earl Warren, diplomat Ralph Bunch, the late LA mayor Tom Bradley and author Maxine Hong Kingston, all children of low-income families.
If UC were to reinstate free tuition – a change that would cost about $ 5.3 billion based on this year’s university budget – would those who had to pay for their UC education think they were perverted? Or will they look more for the benefit of the state in general?
The second major argument against debt cancellation is that it will disproportionately benefit the rich. The rationale is that wealthy families carry more debt than low-income families, so they will benefit more by reducing their balance. In other words, the backlog will be canceled.
This idea has been effectively disproved by scholars at the Brookings Institution and the Roosevelt Institute. Those who later calculate that “the bulk of debt cancellation dollars go to the people with the least wealth.”
In particular, the average person in the 20th to 40th percentile will receive four times more debt cancellations than the average person in the top 10% and twice as much debt cancellations as the 80th to 90th percentile for household assets. “
(For reference, according to the Federal Reserve, the average net worth for households in the 20th to 40th percentile ranges from about $ 6,368 to $ 67,470; the 80th percentile starts at $ 558,200 and the 90th percentile starts at 1.2 million.)
Experts at the Roosevelt Institute find that the idea of giving a large gift to rich people is based on calculating the impact of cancellation on borrowers at each asset level, not just counting on all households.
This cancellation seems to be reversible because “high-income and high-wealth families who carry student debt carry it in large quantities.” However, most of these families do not have any student loan, so the benefit of cancellation is comparatively less for the rich family as a whole.
Under Warren & Schumer’s proposal, the Roosevelt Institute says the estimated debt cancellation amount of $ 50,000 would be only $ 562, including non-borrowers, in the top 10% of households. However, it would be $ 17,366 per person for all black households and $ 12,617 for the lower 10% white family for the net price.
Andre Perry and Carl Romer of Brookings, in collaboration with Steinbaum, showed last year that student loan cancellations would help reduce the wealth gap between black and white families.
Part of the reason is that black families are more likely to finance their higher education with loans than white families. As a result, student loans become another barrier to wealth creation by black families, as the “homeownership rate for black people with a college degree is lower than the dropout rate from white high school.”
White households have more power than black households to fund tax-exempt college savings accounts such as 529 accounts from current income, another factor that compels black households to borrow from colleges.
The most neglected factor in student loans is that some part of it will be forgiven anyway, not immediately or at once. These are balances subject to income-driven repayment plans, where about one-third of all borrowers are enrolled. These plans pay off a certain percentage of the borrower’s income and arrange to cancel any remaining balance after 20 or 25 years (depending on the program and the nature of the loan).
IDRs, as they are known, have been around since the 1990’s These are not very popular because they are not adequately marketed and are still optional; Advocates say they should choose the default for all borrowers. Since the required payments are often not enough to cover the interest accrued, the debt balance continues to increase over time until the cancellation date is reached – a possibility that may discourage some borrowers from signing up.
Yet the impact of IDR is almost universally ignored in the student loan debate.
These plans are “de facto student loan cancellations,” Steinbaum told me. With the IDR, he notes, “The alternative to canceling a student loan is to wait 20 years and then cancel it after you ruin someone’s life. The government is not going to repay it in any way.”
That debate should be placed at a different level. Government policy aims to move more borrowers towards income-driven repayments, a recognition that its debt will and should be canceled. Then why wait? Let’s do this now.
The longer the debate lasts, the greater the pressure on student debt to widen the gap between rich and poor and black and white, and the higher the value of higher education. It will not be good for anyone.
The story was originally published in the Los Angeles Times.