Like many other followers of the higher education scene, I weighed in on the Biden administration’s student loan forgiveness program last week, concluding that it was bad for America. In one iteration, I listed seven words beginning with the letter “I” to describe the policy action: illegal, inflationary, immoral, inequitable, irresponsible, irrational, and idiotic. This proposal is the most important higher education policy move this year, so it deserves further thought and analysis.
The Biden Loan Forgiveness Is Worse Than Initially Portrayed
A provision of the Biden proposal that received almost no initial comment is, I think, probably the most important: those with loans are being told that they need only to pay five percent of their so-called disposable income each year in loan repayment, rather than being incentivized to aggressively eliminate loan balances.
Take a relatively recent college graduate who is among the one-third who are “underemployed,” doing jobs typically held by high school graduates, perhaps serving as a barista in a coffee shop or as a cashier at a large retail store. Suppose that person has $35,000 in student loan debt (slightly below the average) while earning $30,000 a year in relatively low-skilled work. Since basic subsistence living expenses might be determined by the Department of Education to be $20,000 annually, the individual would be determined to have only $10,000 in “disposable” income. Under the new rules, the individual would be expected to pay $500 a year, five percent of disposable income, far less than the interest on the debt. Therefore, the debt would actually grow, would likely never be repaid, and would eventually be fully forgiven.
[Related: “Biden’s Student Loan Write-off Plan Will Cost Over a Trillion Dollars, Not $300 Billion”]
By contrast, the newly minted electrical engineer or finance major making $70,000 a year would under the repayment rules have a disposable income of $50,000, and would have to pay $2,500 annually in repayments, enough to cover interest payments and a bit of the principal. There is a decent chance that under the liberal Biden formula, he would within 15 or 20 years repay the debt in full.
Here’s the bottom line: students taking jobs that society views as valuable would be required to repay their loan, while those with low-paying majors like gender studies, anthropology, or theater will essentially largely be excused from repaying. We are encouraging the lower-paying majors that society, via the marketplace, values less. Implicitly we are taxing engineers, scientists, and future business gurus in order to subsidize those whose training is not highly valued in the real-world economy.
Where Are Our State Attorneys General When We Need Them?
Analyses of this issue by respected lawyers suggest that the legal basis for the Biden decision is extremely questionable. But in order to challenge the Biden fatwa, one needs legal “standing.” Apparently, being a taxpaying American citizen is almost certainly not enough to meet the criteria that the new rules provide significant harm to the plaintiff. However, it would seem that state attorneys general, representing a large group of citizens, could plausibly claim that they represent a body of citizens, get standing, and challenge the Biden loan forgiveness program on constitutional and possibly statutory grounds.
[Related: “Five Problems with Biden’s Student Loan Forgiveness Plan (And What To Do About Them)”]
Colleges Should Have “Skin in the Game”
Colleges are responsible for at least part of the student loan crisis, often luring students to campus with rosy assertions about the gains from school, when they knew full well that many of them were at high risk of dropping out, creating loan defaults. Why not make the colleges cosigners on federal student loans, sharing in the burden if the student defaults? That would not only directly reduce the taxpayer’s burden in the case of loan defaults, but it would also probably lead to reduced defaults arising from improved average student performance with higher admission standards. Might that lead to lower college enrollments as schools stop recruiting marginal students? Yes! But that is good. We have far too many marginal students attending college now, and this could lead to qualitatively better educational experiences for those attending, along with reduced taxpayer burden.
Reassessing the Political Gains
The administration’s proponents of loan forgiveness probably correctly noted that young Americans are not heavy voters in non-presidential elections, but large-scale loan forgiveness would lure more to the polls, where they would largely vote Democratic. But the post-announcement discussion shows that the countervailing argument is pretty strong: lots of Americans who either did not go to college or who went and repaid their loans are resentful of this giveaway. Interestingly, a number of Democrat candidates in swing areas have shown their coolness to this proposal, including, for example, Rep. Tim Ryan, running in a tight race for the Senate in Ohio.
Why Are We Giving Huge Loans to Graduate and Professional Students?
A large portion of student loans go to college graduates—those getting relatively high-paying professional degrees or low-paying academic jobs that are unneeded in a saturated academic job market. Should we reassess the desirability of making such loans given their high costs? I think so.
Image: alexkich, Adobe Stock
What would a commercial lender do differently than a government lender? Assess the ability to repay. Is the borrower’s time and capital spent worth the benefit gained? That’s called Return on Investment. Apparently some students aren’t getting sufficient returns on their investment. Either they paid too much, didn’t choose a discipline of study that led to a sufficiently remunerative career, or they didn’t study enough. The issue is an education yielding sufficient skills to get work that makes that education financially worthwhile. Going to college does not guarantee an education, nor guarantee an appropriate education. Two suggestions; 1) If students took a qualifying test to prove they understood debt and related repayment, that would help. 2) If schools were held partially responsible for the delinquent and defaulted loans, they would tighten admissions to those that were academically capable (currently 25% first year dropout rate), and help direct students to studies that are value-added career enhancements.
The federal student loan program is fatally flawed, easy credit to unqualified and/or misguided students will of course have high loses. Today’s loan forgiveness program doesn’t address the root causes. Loan forgiveness will repeat endlessly until better credit and educational processes are in place.
“A large portion of student loans go to college graduates—those getting relatively high-paying professional degrees or low-paying academic jobs that are unneeded in a saturated academic job market. Should we reassess the desirability of making such loans given their high costs? I think so.”
This makes no sense at least when it comes to the “high-paying professional degrees.” Where does Vedder think we are going to get the doctors that we need? As it is, there’s a crisis brewing of insufficient physicians. Does he think the medical schools are just going to lower their tuition? Or perhaps he has in mind that they will front the loans themselves? Maybe, but I wouldn’t count on it.
As for the colleges putting “skin in the game” for undergraduates? Maybe it will happen, but again, I wouldn’t count on it. Perhaps college will become “cash on the barrelhead” as people used to say. And those who can’t pony up will just be locked out.
Are we expected to believe that without the student loan programs—especially as currently implemented—nobody would attend medical school? How absurd.
And sorry, but I don’t believe a large portion of the debt is held by high-paying professional degree recipients. No sale. Maybe in terms of individual loan amounts, but not in terms of total loan debt. There are far, far more people majoring in theater, gender studies, ethnic studies, anthropology , communications, art history, philosophy, psychology and sociology racking up student loan debt than medical school, engineering or math majors.
The payoff is to the colleges — not to the graduates with debt.
We have something like 5% fewer college students this fall — and the demographic cliff is 2016.
Biden is doing what 0bama did with “cash for clunkers” — saving jobs in the education industry — without loan forgiveness, students might think twice about enrolling to major in underwater basketweaving….