The Consequences of Forgiving $1.5 Trillion in Student Loans

Senator and Presidential hopeful Elizabeth Warren (D, MA) recently proposed a policy to cancel student loan debt.

She wants to cancel up to $50,000 of debt for borrowers with annual household incomes under $250,00, including full cancellation for households with incomes under $100,000. It would be financed with an “Ultra-Millionaire Tax” – a massive redistribution of wealth from America’s 75,000 wealthiest families to 42 million Americans, many of whom have successful careers and enjoy a fruitful middle-class lifestyle.

Warren is billing the policy as the solution to an emerging student loan debt crisis that is preventing millions of Americans from completing college, buying homes, and starting businesses; thereby thwarting economic progress. But is there a crisis?

According to data from the New York Federal Reserve (NYFR), total student loan debt reached $1.5 trillion by the end of 2018. This amounts to an average loan balance of around $33,000. Although starting one’s career deep in debt may seem daunting, most economic research suggests that a college education still yields, on average, a positive return on investment in terms of increased lifetime earnings.

If students experience long-term financial benefits from going to college, despite accruing debt to finance the rapidly growing cost of higher education, this hardly suggests that rising student loan debt is a crisis. There are, however, some caveats.

[Ten Things Destroying Higher Education]

First, there is considerable variation in debt loads. As of the end of 2017, 63.2% of borrowers had student loan balances under $25,000, and 82.4% owed less than $50,000. However, 11.8% had balances between $50,000 and $100,000 and 5.7% owed more than $100,000. Many high balance debtors either attended expensive private institutions or completed professional graduate programs, so they are still likely to earn a positive return on their investment. But some of these debtors are drowning in excessive debt with little prospect of getting their heads above water.

Next, the economic benefits of college are largely associated with degree completion. Nationwide, nearly 40% of full-time students at four-year colleges fail to graduate within six years, according to the National Center for Education Statistics. Many of these students accrue substantial student loan debt but do not reap the increased earnings associated with earning a degree.

Additionally, many graduates major in fields or attend schools offering dismal career prospects. According to the NYFR, roughly one-third of college graduates are underemployed – working in jobs that typically do not require a college degree.

We recognize excessive debt, high dropout rates, and underemployment of graduates as significant social issues. These problems, however, are largely the result of unintended consequences from government policies designed to increase the number of people going to college, in the first place.

[Five Reasons Why Student Loans Are a Looming Disaster]

Particularly culpable is the federal student loan program, which was originally intended to improve access to college among students facing financial constraints. In 1987, Education Secretary William Bennett famously predicted that increases in federal student aid would drive up tuition.

According to the College Board, inflation-adjusted federal student lending increased from $45.8 billion in 1997-98 to $93.9 billion in 2017-2018, an annual growth rate of 3.7%. Over this period, real tuition and room and board fees at private and public four-year colleges grew annually by 2.4% and 3.1%, respectively. In other words, there has been significant growth in both federal student lending and tuition fees over the past two decades. But this merely reflects correlation, not causation

Andrew Gillen provides a theoretical framework explaining how government loans increase the ability for students to pay for college, which in turn is captured as additional revenue by colleges, leading to higher costs. A 2017 paper provides causal empirical evidence linking the growth in federal student lending to increased tuition.

To the extent that growing student debt is a crisis, the root of the problem is federal student loans for all policy. It has not only fueled significant increases in the cost of college but also encouraged a growing number of academically underprepared students to take on debt to attend college. High dropout rates and underemployment of college graduates provide evidence of this. As economists Richard Vedder and Bryan Caplan suggested in recent books, public policy may be encouraging too many people to attend college who are unlikely to graduate and realize its economic benefits.

[The $1.5 Trillion Student Loan Debacle Has a Tipping Point]

Christine Emba recently defended Warren’s student loan cancellation idea, suggesting that the biblical institution of jubilee provides a Judeo-Christian justification for this misguided policy idea. She notes that “during jubilee years all debts were to be forgiven and prisoners freed. It was a periodic remission that allowed families to extract themselves from the burden of unpayable debts, an acknowledgment that nothing belongs to anyone permanently, and a reminder that a society cannot survive without a certain amount of forbearance.”

Theologian Art Linsey describes that, during Jubilee, outstanding debt balances were zeroed out – there was no redistribution of wealth. Jubilee protects permanent ownership by allowing the land to remain with the family. Jubilee was not an institutionalized period of mass debt cancellation to be financed by the rich, but rather a celebration of debt being fully repaid.

Taxpayer-funded cancellation of student loans is certainly not supported with this understanding of the jubilee tradition. It is also bad economics. A taxpayer-funded bailout of student loan debt would neither address the underlying cause of ballooning debt nor impose any accountability on colleges that have allowed their students to accrue large debts without preparing them to lead productive lives. It also fails to help students find a college and major that is right for them and graduate on time.

A better long-term policy would be to get the government out of the student loan business altogether. Student loans should also be made dischargeable in bankruptcy like other forms of debt, but colleges and universities should have some skin in the game and be held at least partially accountable for the losses from loans gone sour – not taxpayers. In the short-run, there already exists an income-based repayment plan to help those struggling to earn enough to make ends meet.

While Warren’s debt cancellation idea is bad economics, it may turn out to be brilliant politics. It will provide a very large incentive for 42 million debt-holding voters, who may view the prospect of a government bailout as manna from beltline heaven, to support Warren’s Presidential campaign.

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35 thoughts on “The Consequences of Forgiving $1.5 Trillion in Student Loans

  1. It is incorrect that government benefits such as Social Security cannot be garnished. But there is a legal limit on the amount that can be diverted.

    I am stunned at the poor literacy of many of the posts here. If these are examples of the educational accomplishments achieved in U.S. education in the context of student loans.

    While I support some form of loan forgiveness, I should point out that facts should matter, even to the apparently poorly educated. The government bailouts to which several have referred were not gifts. They were interest-bearing loans and most have been repaid.

    For example, the student loan management outfit, SallieMae, became insolvent. The feds advanced them operating funds, but in exchange for a deal where the feds would get all profits until the bailout, with interest, was repaid.

  2. I voted for Trump for his 1st 4 years and I was glad I did. I am a die hard Republican but Bernie is right about Student loans they are a burden and a scam. How can you charge for a degree no employers ever look at? I haven’t once ever had an employer verify my education. In all my 13 years of working outside of college not 1 employer cared to know about my education. I could have put anything on my resume for all they care. So what good is an education that nobody knows I even have? Let me ask you this in all 4-8 years of college did you ever use any of the information you were taught outside of the college walls? I can guarantee you 95%+ dont even remember nor do they use any of the education they were taught? So what value does an education bring? It’s all a bunch of theory and history just like High School. Your real education is on the job training that you get hired for. College education holds no value all of it is forgotten. Experience is your best education not a degree that collects dust on your wall that nobody ever sees! So why should college cost money if cannot guarantee you any kind of benefit or ROI? It’s a scam! It should be wiped clean and should be free from now on. So I’m sorry Trump your a great President, but if I have to put up with Bernie for 4 years to get my college debt wiped clean so be it!

    1. Sad! I’m willing to return my degree for PEACE OF MIND in exchange to be release of my debt. Have a Master degree for 5 years and not able to find a job in the field I graduated.

  3. Other, more successful countries that invest in their citizens instead of taking what they can – “Here’s universal healthcare, other projects widely available, and income that WE give to YOU for your getting your college degree.

    USA – “How can we take more money from students and keep them in debt for at least 20 years, encourage pharmaceutical companies and hospitals that grossly overcharge for everything, and call people entitled when they ask if we can model ourselves after the better countries out there that give a **** about their people.”

    1. All I hear is entitlement it is ridiculoust that you expect others to pay more taxes because they have more money than you. You decided to go to college and agreed to the loans now want someone else to pay bullshit. So sick of the give me generation. Higher education and health care are not for others to pay for you.

  4. The impact of student loan debt could be decreased by using the Pay as You Earn and Income Based Repayment payment as the basis for the debt to income ratios for a mortgage. Currently 1% of the balance is used to calculate home affordability. For some, this calculates as high as a $3000 per month required loan payment when the actual payment is only $100 per month. This prohibits many students and parents of students from purchasing a home or refinancing at lower rates. This penalty for higher education is both immoral and bad economic policy. Fannie Mae and Freddie Mac should use the reduced payments when calculating debt to income ratios to allow those with high student loan debt to purchase or refinance a home.

  5. Gen xer here. I won’t be salty if the mills have their student loans forgiven. Good for them. Here’s the real problem out here. $435.00 a credit hour. $625.00 a credit hour. $235.00 a credit hour. Now, you do have your 180.00 a credit hour schools here and there. Tell me, what in the holy hell are you teaching that should cost someone 435.00 a credit hr? Then some of the classes they shove you in..SMDH. Maybe if college was more affordable, people wouldn’t be ass deep in debt. What a concept.

    1. The prices are thus high because if all the easy debt. Remember debt is easy real cash is very difficult. Our system has gotten this way because of the massive glut of easy student loans. Supply is the education. Demand if expanded due to student loan programs.
      Our system is completely broken.

  6. Funny how the government can constantly take from the middle class. But then we when ask for, all the sudden it’s a problem.
    – coming from a DPT with a ton of student debt

  7. Bottom line is that the millennials want a bailout. I have 26k in debt I’ve carried for 11 years. I’m paying for it and struggled at first. Get on income based repayment, 25 years of on time payment and the loan is forgiven.
    Stop wanting government to pay for everything. Go out and earn it. You don’t need the latest and greatest iPhone for 1500 bucks. But a 50 dollar flip phone and deal with not making big money. Snowflakes are going to destroy this great country because they don’t want to be doing manual labor.

    You have to earn your money.

  8. The problem is the interest charged for the loans. Great Lakes, Nelnet, and others are making a killing off the interest. Politicians need to stop refocusing the public to the loan itself is the issue. It is not. It is the interest rate the companies are charging.

    1. Yes ok and your point if you signed the papers then you agreed to the contract. The middle class should not have to pay for your loan.

  9. So these people that have all these loans supposedly to go to school…..why are they buying new cars, going on cruises, spending 12 days in Europe?? We are rice and beans to pay cash for our kids college. It can be done.

    1. I don’t know who you’re talking about but i borrowed 9000.00 20 years ago and now owe 27000.00 on that loan. I’ve paid it at least 3 times over but because i was a widow and mother of 3 i had to defer on several occasions. The interest accrued was added to the principle and i ended up paying interest on interest. I drive a 2007 jeep. Never been to Europe or on a cruise. Dont pretend to know everyones situation

      1. Same boat here. I have been working hard, drive a 2008 stick shift striped down truck….no bells or whistles and no fancy vacations. Interest rates were raised, work required I go back to school for my master’s degree. Student loan payment is as much as my mortgage payment. I do not expect my student loan debt erased, but it would be nice to have the interest rates lowered.

    2. I think you take an inch and make a mile with your statement. What are the actual percentage of people with that kind of debt doing what you suggest? I you also act as if one shoe is the same size for everyone. Since you can do it every one can. If that the case everyone would in fact act and think the exact same. However we are idviduals with different circumstances leading down similar paths. Let’s us not make blanket statements that serve nothing but to sound harsh. It would be a kin to me calling you a name. I could but I have no proof you are this gruff outside of this statement. I’m sorry that you have to eat rice in beans to get your children through school. But you want to pay cash for it. I think the main difference here is how people view debt. Some view it as an evil. Some as just something that everyone has, therefore they are less worried about it until some one comes along and tells them its bad. Then it’s bad. While others choose to make it less of an issue and enjoy life while they are living. Blanket statements are just that something to hold on to and make you warm and fuzzy about your belief.

  10. There could be a substantial benefit to the federal fisc from Warren’s loan cancellation program. The amount of cancelled debt is taxable income to the debtor. If $1.5 trillion in debt is cancelled, that’s $1.5 trillion in taxable income. If the average tax rate is only 10%, that would be $150 billion in extra revenues for the federal government.

  11. This mess is a result of one of the many idiotic policy decisions during LBJ’s “Great Society” years — the subsidization of higher education through grants and loans. It may have seemed like a good idea at the time (but should have been stopped on constitutional grounds, as there is no constitutional authority for the federal government to do anything regarding education), but it has had enormous unanticipated consequences. Rather than forgiving student debts, the focus ought to be on ending federal financing of higher education altogether.

  12. How about the banks (lenders) take a big fat haircut, and we tax the universities as well. Both of these parties are very sophisticated and knew exactly what was going on, in a way that few 18-year olds understood when they signed the dotted line.

    As for Gen X being grumpy because they paid their loans, oh well. The tuition millennials are paying is double or triple what X’ers paid, adjusted for inflation. And X’s had a better job market (less competition from immigrants, less offshoring, less automation, fewer quotas and AA hiring decisions) and had lower overall cost of living. So it was easier for them to pay their loans.

    1. Boo boo you signed now you want others to pay or get shafted no one said college is a right you decided to go and you decided to sign the loan. Don’t give me the son story if how much more you pay vs others bottom line they paid. The entitled generation yes let’s take from others to pay for my loan.

  13. “there already exists an income-based repayment plan to help those struggling to earn enough to make ends meet.”

    It should be noted that these plans are relatively new, along with the related one benefiting those engaged in public sector employment. Only Millennials have been able to benefit — Gen Xers had to repay their loans…

    Most of the horror stories that people think of involve the loans of those who attended college in the 80’s, 90’s, & 00’s — their student loans will literally follow them to the grave as Social Security checks are already being seized to repay their loans. Even worse, most “owe” several multiples of the original loan amount (including the interest) because the amount due often arbitrarily doubled on multiple occasions by unscrupulous collection agencies in an attempt to bully payment from those without the means to do so.

    But as to the Millennial snowflakes, they only have to pay 10% of their disposable income and can be free of all obligations (with a good credit rating) in as few as 10 years. That’s a really sweet deal, as is only having to pay 3%-5% interest — Gen Xers paid 9% interest….

    Hence I don’t really see what the issue is, and were the student loans of the Millennials to be outright forgiven, it would provoke an incredible visceral backlash from Gen Xers who scrimped and saved to repay theirs — and a related “me too” demand for handouts as they (and the Baby Boomers) enter retirement. That could get ugly….

    1. It’s okay for the fed to bail out the banks who caused the “Great Resession” to the tune of 12 trillion dollars but not hard working Americans. And by the way, the banks caused the “Great Recession.” But it’s okay to bail them out. People are so ignorant!

    2. I would love to know where you get your information from? I would like to tell you our interest are 7%, on a $500,000 loan we pay over $3,000 a month for interests alone.
      I’m sure you are okay bailing out the banks and Wall Street every single week but you’re not okay with your neighbor getting help. We were promised good wages if we were good students and went to school. We were better off before getting degrees.

      1. Bullcrap you were not promised anything. What was and has always been said if you go to college you have another chance if earning more money than a high school grad. No one promised you entitled mills anything. If you signed a loan for 500k than you should have did your homework. Bringing up bank bailouts vs your debt is a stupid argument. The bank bail outs was a because people were going to lose everything through no fault of their own because of the banks mismanagement. They did not sign loans and said well now they are to much someone else needs to pay for my education.

    3. I like the way you compare the two. Very vaild points. (not often compliments are given on the internet either.) looking at facts and numbers sometimes helps us understand what fair is. That way it’s not based purely on emotion.

    4. Social security checks aren’t taken to pay school loans. The government doesn’t allow ss checks to be garnished and funds in a bank account made up of ss is not allowed to be garnished either.

      1. You cannot justify the pitfalls of forgiving student loans without justification of the Wall Street bank bailout.

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