President Joe Biden is considering a student loan forgiveness plan which would forgive $10,000 per borrower for individuals making less than $150,000 per year ($300,000 for a family).
Without the income cap, this would cost $380.2 billion. It would wipe out the entire debt of those with a balance of $10,000 or less (15.2 million borrowers) and would reduce everyone else’s balance by $10,000. The income cap will reduce these figures, but not by much. 96% of households have an income of less than $300,000.
Before explaining why this would be a mistake, I first want to emphasize how bizarre it is that Biden is even considering this. The vast majority of higher education analysts have been loudly opposing broad forgiveness for years. Indeed, scholars from across the ideological spectrum have been near unanimous in opposition. In all my time following higher education policy debates, I can’t think of another policy that has been opposed by scholars from the American Enterprise Institute, the Urban Institute, the Brookings Institution, New America, the Committee for a Responsible Federal Budget, Third Way, and the Texas Public Policy Foundation. Opposition was so widespread that even the New York Times editorial board approvingly links to National Review and the Heritage Foundation on the topic. Granted, some of this opposition was aimed at earlier discussion of forgiving all student loans, so I wouldn’t be surprised to see some support for forgiveness capped at $10,000. Nevertheless, I haven’t seen any of these organizations arguing that $10,000 forgiveness for families earning under $300,000 is the ideal policy.
Due to strategic foresight and timing (i.e., dumb luck), I have just released a research paper documenting the arguments against student loan forgiveness. Minding the Campus was kind enough to serialize much of the paper, which grouped the problems with forgiveness into six buckets: logical and rhetorical, educational, economic, moral, political, and legal. While the paper aimed to be comprehensive, I want to highlight the three biggest problems here.
The biggest problem is that student loan forgiveness is a solution to a problem that has already been solved. Over the past several decades, income driven repayment plans have allowed students to use their actual income to determine their monthly payment, ensuring that payments are always affordable. If students are struggling with their payments, the solution is to automatically enroll them in one of the already-existing income driven repayment plans. Problem solved. Moreover, these plans forgive any remaining debt after 10-25 years of payments, which helps ensure that taxpayers are only forgiving the debt of those who truly need help.
The second biggest problem is the regressive nature of forgiveness, which benefits the rich more than the poor. Sylvain Catherine and Constantine Yannelis analyzed the distributional effects of forgiving $10,000 and found “much greater levels of loan forgiveness for higher income households relative to lower income households. With a $10,000 cap, the ratio of average present value forgiveness between the top and the bottom deciles is 3.6.” In other words, for every $1 the poorest 10% receive, the richest 10% receive $3.60.
The third biggest problem is the high cost of forgiveness. What else could be done with such massive sums? For $380 billion you could double Pell grants, allow year-round grants, and expand them to vocational and short-term programs. And you could do all that for a decade. Or you could give $10,000 gifts to dentists, doctors, and lawyers like Biden is planning to do.
Fortunately, President Biden has not announced a plan yet, and if he does, it is likely to be challenged in court and to be found illegal. But even if the courts save the country from such a disastrous policy, this whole experience will be one more argument to get the government out of the student lending business and transition to market-based student loans instead.