A Guide to the Student Debt Debate - Vested UK

President Biden has ordered the Education Department to pursue a plan of massive debt relief for former and existing college students.  The White House has yet to offer a full accounting of how much this forgiveness will deny federal coffers, but budget experts – both those for and against the order – put the cost at hundreds of billions of dollars, ranging from about $450 billion up to $1.0 trillion.  The order faces legal challenges that question whether the president has the authority to make such a financial commitment.  Even if the White House were to prevail over these challenges, the arguments pro and con will still matter, especially as the nation approaches this year’s mid-term elections and the 2024 presidential contest.

Here is what the White House plans: In the first place, the order extends to December 31 the pause in student debt payments instituted in 2020 under the previous administration.  It will extend up to $20,000 of debt forgiveness to all Pell Grant participants.  It will extend up to $10,000 in forgiveness to individuals with incomes up to $125,000 a year and couples with incomes up to $250,000 a year.  Debtors who work for certain non-profits, are in the military, or who work for federal, state, tribal, or local governments can have their student debt forgiven entirely through the Public Service Loan Forgiveness (PSLF) program.  As with everything touched by the federal government, matters are much more complicated with more elaborate conditions than a short summary can capture, but these elements give an idea of the plan’s scope and why it will cost the federal government considerable amounts in forgone revenue.

While the lawyers argue about President Biden’s authority, the chief argument in favor of the action is the relief it extends to a still young generation, so burdened by financial obligations that many of its members cannot engage fully in economic and social life – starting a family, for instance, buying a house, in some cases moving out of their childhood room in their parent’s home.  The official White House fact sheet argues the positive aspects of the order this way:

Claiming that a college degree is the “ticket to a middle-class life,” it notes how rapidly college costs have outrun the financial wherewithal of increasing numbers of Americans.  The White House messaging notes, for instance, that Pell Grants once covered 80 percent of the cost of a degree but now cover barely one-third.  It is these outsized costs, the official messaging explains, that have impelled a greater reliance on debt.  The outstanding amount, according to the White House, verges on $1.6 trillion spread over 45 million borrowers.  One third of these debtors have failed to complete their degrees, in large part, the White House claims, because of financial burdens.  To bring the extent of hardship home, the White House notes that the average graduate now carries $25,000 in debt and that the typical African American borrower who received a degree 20 years ago still owes 95 percent of the original amount.

These are compelling claims on behalf of millions of Americans.  Against this widespread need, contrary arguments come in three areas: 1) the value of pushing so many into college, 2) matters of equity, and 3) whether this approach gets to the root of the problem.

The first of these objections effectively takes exception to the White House assertion that college is a “ticket to middle-class life.”  It was indeed such a “ticket” when a relatively small part of the population had a degree or some college.  Then, almost any degree or credits from most any accredited institution made an individual stand out and able to command better pay.  But that is no longer the case.  Much research shows how many younger Americans with degrees have had to take jobs that pay considerably less than a middle-class salary.  It is, of course, the failure of this “ticket” to take the degree holder to middle-class pay that accounts for why the debt is so burdensome to so many.  Such conditions have prompted many to question the value of a degree and to argue that the nation and many who now go to college might not be better off if instead of college they learned a trade — in a trade school or through an apprenticeship program.  From this perspective, the debt forgiveness only encourages a dysfunctional pattern of incentives and behavior.

Then there are questions of equity.  One part of these objections considers those who saved for college or have already paid down a significant portion of their debt.  Forgiveness mocks their sacrifice.  From another perspective, equity asks why those who set themselves up in a business or a trade are receiving no help from Washington.  Nor does debt forgiveness consider future students. If the nation forgives the debt incurred by yesterday’s college students, what in fairness should it do for those in high school today or grade school?  To be sure, part of the White House order would limit the amount of debt service to 5 percent of a debtor’s discretionary income and ensure that debt could not grow as a portion of the borrower’s income.  But these provisions fall far short of what is being offered to existing debtors.

A full consideration of equity would also have to go beyond the apportion of benefits and consider who pays.  Because the debt is owed the government, forgiveness would deny the budget a source of revenue.  Debt relief then would burden all taxpayers.  Those who have already paid down their debt would not only miss the benefit, but they would also see a federal budget much less able to provide other services that they might need.  Such a constrained budget would make it hard for others still less fortunate to argue for the services they need, many of them low-income people who never even considered college, perhaps for financial reasons.  A single mother supporting her family off a meager paycheck might prefer that Washington extend food stamp subsidies rather than give up revenue for the sake of credentialed college graduates.  None of these alternatives are necessarily more worthy than helping indebted students, but a consideration of fairness surely demands that people answer such questions.

The final set of objections takes up the root of the problem, which as the White House material itself pointed out is the rapidly rising cost of college.  Many, though not the White House, have argued that the easy terms of student lending have facilitated price increases at private and public educational institutions.  In this, the debt has benefitted college administrations and faculties more than anyone.  This presidential order would shift part of the burden of those benefits from the students to taxpayers, but the support for college cost increases would remain.

It is easy to feel sorry for young people struggling with their finances and want to help them, especially because many were duped into believing that their course of study would enable them to discharge the debt more easily than it has.  This order, however well-intentioned, also has drawbacks, as is almost always the case with public policy matters.  The questions surrounding them are legitimate and need to be aired even if in the end, the order proceeds and the voters decide to accept the bad with the good.

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