Why President Biden Hasn’t Canceled Student Loan Debt Yet — But Probably Will
President Biden has been hinting at it for a while now. Federal student loan forgiveness. Any day now, we’re told. Why? And why now? Well, it would fulfill a campaign promise. One that’s been sitting on the backburner, and for good reason.
President Trump implemented student loan relief on March 13, 2020. Payments were suspended. No interest would accrue. By one estimate, each borrower has already saved $5,500 just in interest that wasn’t collected. Of course, it was supposed to be temporary. But it’s now been extended 7 times. Most recently from May 1 to August 31 of this year. Even though the job market is red hot and the country has mostly lifted all COVID restrictions.
The unemployment rate is 3.6% — about as low as it’s been in 50 years. But nonfarm productivity, a measure of hourly output per worker, plunged at a 7.5% annualized rate last quarter. And there were a record 11.5 million job openings in March. That’s two job openings for every unemployed person! (Remember, though, you don’t count as unemployed unless you’re looking for work.)
So why talk about student debt relief in the middle of a strong job market? Shouldn’t debt holders be working and paying back their loans? The clamoring for student debt relief comes despite a tidal wave of pushback not just from the right, but even from would-be Biden allies. Because it’s a bad idea. Morally, economically and politically. It just makes no sense.
Debt Forgiveness Punishes Responsibility
Most obviously, forgiving student debt punishes responsible Americans who have played by the rules. They become suckers to the tune of $10k or whatever amount ends up getting forgiven.
It reminds me of when I went to use the subway with my family in New York City last summer. We were trying to figure out how to pay when a homeless man held open the gate. He was yelling, “Come on in, man. My treat.” The man continued to call out to me, “Just come in like I did. You don’t have to pay.” There was a guard right there. But this form of petty theft wasn’t being enforced. When we had paid and entered, he told my kids, “Your dad is stupid beyond comprehension.”
With God’s help, I said nothing in response. It led to a nice conversation with my kids about doing our duty, and about the fact that God is always our witness. But this homeless man was getting at something profound: Why pay for something when you don’t have to?
Debt Forgiveness is Bad Economics
If President Biden waves a magic wand and forgives student debt, the amount forgiven simply gets tacked on to the government’s already gargantuan debt. Not only that, but it does nothing to control the future costs of higher education. On the contrary, if Uncle Sam does this once, people will expect that he’ll do it again. So they’ll borrow with even less regard for the consequences.
Let’s remember that students with debt are not incapable of earning money. They went to college to raise their earnings prospects. And if they graduated, they likely did just that: Gained access to jobs which require a credential. We joke about graduates moving back in with Mom and Dad. But in a hot market, they’re capable of finding good work, even if they live at home to save money.
If a traditional 10-year repayment plan is too much, we have income-based repayment plans. These cap repayment at about 10% of a person’s discretionary income. That’s defined as 150% of the poverty guideline.
Let’s say you’re single and live in one of the lower 48 states. The poverty guideline for 2022 is $13,590. Multiply by 1.5 and get $20,385. If you earn $50,000, that’s $29,615 in discretionary income. You’d pay just under $250 per month. On a gross salary of just under $4,200 per month. Not a huge payment relative to your wages.
There’s also the issue of inflation. If we define inflation as too much money chasing too few goods, any loan forgiveness puts (or leaves) more money in people’s wallets and is therefore inflationary.
We’re hearing that the President is considering an income cap on eligibility. That’s better — but the number being floated is $125k. That’s far too high. We’re talking 10 times the poverty line. And is that for single adults? The limit for receiving the increased child tax credit payments last year was double for couples. A $250k cap for couples would be an income cap in name only. Because almost nobody would be excluded.
Which brings me to the last point.
Debt Forgiveness is Bad Politics
Only 13% of Americans have any federal student loan debt. But even those in this minority group aren’t too concerned. As the Atlantic’s Jerusalem Demsas reports, based on Gallup polling on Americans’ most pressing concerns, the percentage of the population who rate student debt as a top concern is too small to even measure.
A Fall 2020 study from the Brookings Institute concluded that most student loan debt is held in households that have higher earnings and a graduate degree. Forgiving even some of this debt would transfer money from all Americans to higher earning Americans. That’s regressive, not progressive!
The data leads David Frum to conclude, rightly, that student loan forgiveness offers little political benefit to President Biden.
Why It Will Probably Happen Anyway
But it will probably happen anyway. Why?
The President needs to fire up his base for the midterm elections in November. First term Presidents generally lose seats in the mid-term election, but voter excitement can make a difference in these lower turnout contests. Build Back Better — that huge spending monstrosity — never passed. The progressive base is also fuming about the possibility that Roe v. Wade may be overturned. They’re agitating for a win. Something.
As Jim Geraghty explained, consistent with the Brookings data mentioned above: Those who would gain the most from student debt forgiveness are white Americans under 40 with graduate degrees living in high-income, majority-white neighborhoods. Folks who lean, surprise, surprise, Democrat. Pew Research found that “voters who identify with the Democratic Party or lean toward it are much more likely than their Republican counterparts to have a college degree (41% vs. 30%).”
So that’s where we are. A student loan forgiveness package would throw progressives a bone. Let’s say they get pounded in November anyway. Well, at least they’d have helped themselves while they still could.
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).