Is Student Loan Forgiveness a Progressive Idea?
House Democrats will soon have the votes to pass at least some of the bills on their wish list. One idea that’s gaining traction is the cancellation of all student debt. Representative Jared Polis, D-Colo., has introduced the Students Over Special Interests Act. It would wipe out the $1.5 trillion in student loan debt nationwide. The bill has 19 cosponsors, including Maxine Waters, D-Calif., perhaps the soon-to-be Chair of the Financial Services Committee. And not including the newly elected Alexandria Ocasio-Cortez, D-N.Y., whose past statements suggest she’s supportive.
But is student debt cancellation really a progressive idea? Who would it help?
An op-ed in the New York Times this week by David Leonhardt takes a look at that question.
Universal Student-Debt Cancellation Would Mostly Benefit the Upper Middle Class
Leonhardt quotes from Sandy Baum and Victoria Lee, both of the Urban Institute. Baum and Lee have written that “education debt is disproportionately concentrated among the well-off.” How much?
As of 2016:
- The top 10% of households (incomes of $144,720 or higher) hold 24% of all outstanding student debt.
- The top 25% of households hold 49% of the debt.
- The bottom 25% of households have only 10% of the debt.
This happens because more education usually means more debt and more earnings. Both. Especially for those with graduate degrees in law, medicine or business. Forgiving all student debt would benefit the rich far more than the poor.
What about undergraduates who borrowed a fortune while earning their BA degrees and then struggled to find work? As Leonhardt notes, they are the rare exceptions. The default rate for borrowers with a bachelor’s degree is less than 8%. But the struggle is real is among those who borrowed for college but never earned a degree. Their default rate is a monstrous 40%. Leonhardt writes, “People whose income is below a certain threshold should have some of their debt forgiven (expanding the income-based repayment programs that already exist).”
But should income-based repayment programs be made more generous?
Income-Based Repayment is Already Generous
In a piece last month in the National Review, Jason Delisle and Cody Christensen critique the Aim Higher Act, a proposal from the ranking House Democrat on the Education Committee. Jeff Merkley, D-Ore., and seven other Democratic Senators have introduced a similar proposal in that chamber.
Currently, Income-Based Repayment (IBR) allows borrowers to cap their payments at 10% of income above a threshold — 150% of the poverty line. Both Democratic proposals would increase this exemption to 250% of the poverty line. As with the current plan, any remaining federal debt would be forgiven after 20 years.
Delisle and Christensen explain that under current rules, a typical IBR borrower, over 20 years, ends up repaying the typical loan balance of someone who completes a bachelor’s degree (~$30K). But under the proposed rules, they would barely cover the interest on a $30K loan. Meaning that all of the original principal would end up being forgiven after 20 years.
Borrowers need to have some skin in the game. Most borrowing today is for graduate school. Unlike undergraduates, graduate and professional students can access unlimited federal loans for tuition and living expenses. If the Democratic proposals were enacted, these students would have an incentive to max out their borrowing — knowing that — assuming their future earning is unchanged — the cost, to them, is the same. Who cares if I borrow $150K instead of $50K? It’s the taxpayer who picks up the tab in the form of extra loan forgiveness. This is a recipe for credential inflation and a disincentive for universities to keep costs under control.
With the federal student loan program already costing taxpayers far more than was anticipated — largely due to the generosity of the current IBR program — increased generosity may help some, but it’s hardily in the interest of the greater good. If the Democratic proposals were to be enacted, even greater losses would come from raising the income threshold on the Public Service Loan Forgiveness (PSLF) program.
Public Service Loan Forgiveness is Even More Generous
With PSLF, debts are cancelled after just 10 years of repayment. We’re not just talking about a very small sector of jobs, like teaching in an inner city public school. As Delisle has explained elsewhere, the definition of “public service” extends to any 501(c)(3) nonprofit organization and many other nonprofits. It’s a broad enough definition to cover 25 percent of the workforce (see PPT #22).
What is PSLF going to cost? Hard to say. The CBO has revised up their estimates several times already. So far, less than 2,000 borrowers have made the requisite 120 monthly payments. But over 200,000 borrowers have made at least two years of payments. As with IBR, initial costs appear to be far lower than future costs.
Two hundred and fifty percent (250%) of the poverty line is $62,750 for a family of four. That’s more than the median household income in 2017 ($61,372). Unless we want to classify half the country as in need of taxpayer-funded relief, the current IBR/PSLF income threshold seems adequate.
Dr. Alex Chediak (Ph.D., U.C. Berkeley) is a professor and the author of Thriving at College (Tyndale House, 2011), a roadmap for how students can best navigate the challenges of their college years. His latest book is Beating the College Debt Trap. Learn more about him at alexchediak.com or follow him on Twitter (@chediak).