Financial Affairs

Hiltzik: Why canceling student debt is a good thing

The question of whether the government should cancel the $ 1.6 trillion student debt held by 43 million American adults left the political debate after the most ardent supporters of the idea, the senses Elizabeth Warren and Bernie Sanders , have left the race for the presidential nomination.

He is back. That’s because President-elect Joe Biden approved the cancellation of at least $ 10,000 in federally-held loans per borrower as a COVID-19 relief measure (Democrats in Congress want to increase figure at $ 50,000).

Biden is also proposing to ease payment terms for most borrowers and take other steps to reduce the financial burden on low-income students.

The relative burden of student debt has long been higher for families with lower net worth, and … this disparity has grown significantly over the past two decades.

Janet Yellen, then chairman of the Federal Reserve, in 2014

Biden’s proposal has also rekindled arguments against student debt cancellation, which tend to revolve around issues of fairness. Accordingly, it is worth taking a look at the pros and cons. Spoiler alert: The cancellation of student debt will bring huge benefits for individual borrowers and for the economy in general, and the more the better.

In fact, most student debt is meant to be written off eventually, observes Marshal Steinbaum, an economist at the University of Utah and a senior researcher at the Jain Family Institute, a social science research organization.

It’s the harvest of the growing popularity of income-driven repayment programs, which cap annual repayments at a percentage of a borrower’s income and forgo any remaining balances after a set period – 20 years for prime loans. cycle and 25 for higher or professional studies.

“Cancellation is the thing that everyone expects,” Steinbaum told me. “So why are we making them wait?” Why not just recognize that these are bad debts and eat them now? ”

Let’s get rid of the two most common objections to student debt cancellation. The first is that canceling existing debt would be unfair to the millions of borrowers who have fulfilled their obligations and now have to sit idly by and watch bad payers receive a windfall.

As I have observed in the past, it is difficult to imagine a weaker objection or a coarser formula for government paralysis. By its logic, we would not have social security or health insurance today. The argument would be, “My great-grandparents starved to death in old age and died on the streets because they couldn’t get health care, so why should yours have a break?

In truth, the sacrifices made by some families to shoulder the burden of their debt underscore the folly of forcing families to become poorer in order to access higher education. Why should we want to ignore the lesson?

The second oft-heard objection is that debt cancellation would be a gift for relatively well-off households and for law, business and medical school graduates, who finish their studies with large debts but enter fields. well paid.

True, but not particularly relevant to the problem. Vocational school graduates account for nearly 12% of total outstanding debt but only about 4% of borrowers. What is important is the debt burden of the majority of borrowers, who are working class and low income.

According to an analysis by the Washington Center for Equitable Growth, a progressive think tank, the debt-to-income ratio among households in the bottom 50% of the income scale that hold student debt is about 1 to 1, that is, the their loan balance is roughly the same as their income.

What is particularly worrying is that the ratio has only doubled since 2001. The ratios for high-income households have also increased, but remain below 0.25. (In other words, their balances are less than 25% of annual income.)

Black borrowers are particularly disadvantaged in this calculation – around 30% of them have a debt-to-income ratio above 0.5. Less than 20% of white borrowers have the same burden.

This argues against a cap on debt cancellation, says Steinbaum. Minority borrowers tend to take on more debt because their families are less able to support them in college and because they generally need to earn more advanced degrees to keep pace with the labor market. white graduates.

“A policy that has a debt ceiling can always be made more racially egalitarian by increasing that ceiling,” Steinbaum said.

The economic establishment seems to believe that canceling student debt is a macroeconomic loser.

Among the more than 40 American university economists recently interviewed on the subject by the Booth School of Business at the University of Chicago – as a solid picture of academic thought across the whole ideological spectrum that one might hope for – 60% agreed that “for the government to issue additional debt to pay off all outstanding student loans would be net regressive ”. (That is, they thought it would benefit the wealthier households the most.)

None disagreed with the statement, although 15 of the respondents, or 35%, were unsure.

Many of the economists’ responses sounded as if their views were influenced by their own environment (economics departments in elite institutions, some in business schools) and their rank in (wealthy) life.

David Autor of MIT, for example, joined the “I paid, why not everyone? Camp: “In addition to my children’s student loans, I would like the government to pay off my mortgage.” If this last idea shocks you, the first should be too, ”he said in a comment appended to his vote.

Autor’s colleague at MIT, Daron Acemoglu, noted that the “risk of donating to yuppies is there” because there is “a lot of student debt among those who earn more than 100,000 a year.”

In the broader world of policy making, however, there is more agreement that the tide of student debt is dragging the economy down, suggesting that relief is gradual, not regressive, and that it contributes to a racial divide in economic opportunity.

“Tuition fees have grown much faster than incomes for the vast majority of households since 2001 and have become particularly burdensome for households in the lower half of the income distribution,” Janet Yellen, President-elect Biden’s choice for the Secretary of the Treasury, said in 2014 when she was chairman of the Federal Reserve.

“The relative education debt burden has long been higher for families with lower net worth, and (…) this disparity has grown significantly over the past two decades,” Yellen said .

Households with high student debt are less likely to buy a home, start a business, or support themselves during an economic downturn, Steinbaum, economist Stephanie Kelton and colleagues reported. in 2018. They have less disposable income, another drag on general economic growth.

The authors of this report argued that the opposition to student debt cancellation based on the ability of most borrowers to repay their debt over time was wrong. This is because even though “the median debt burden hasn’t changed much … the median borrower changed a lot.

In the past, borrowers “were likely to come from the ranks of ‘traditional students’, that is, those who attended either higher education institutions or private four-year institutions immediately after high school, often with family history of higher education and with family wealth to accompany it, ”they observed.

More recently, however, borrowers are “much more likely to be non-traditional students, often starting later in life and without a family history of university attendance.”

Indeed, they were students targeted by for-profit higher education institutions. These schools tend to have high tuition fees, especially in relation to the employment opportunities of their graduates.

The Obama administration cracked down on the for-profit sector and offered loan forgiveness to defrauded students, but both policies were reversed by President Trump’s Education Secretary, the majestically useless Betsy DeVos.

Unsurprisingly, DeVos has become one of the top critics of student debt cancellation. “We have heard shrill calls to cancel, forgive, make it all free” DeVos said at a Department of Education function this week. “Any harmless label cannot mask what it really is: a mistake. ”

DeVos, who is linked by alliance with the Amway multilevel marketing empire and sister of Erik Prince, founder of the mercenary military company Blackwater, also condemned Biden’s proposal for a tuition-free college as “a socialist takeover of higher education “.

Of course, this overlooks the tradition of free public college education that was once exemplified by the University of California, which was once guaranteed tuition-free by the state constitution.

This tradition is relevant to the student debt debate, as one of the factors behind the debt explosion is the withdrawal of government support for public higher education.

“States have withdrawn funding for public higher education, tuition fees have increased, and the whole premise of higher education has shifted from public good to private good,” Steinbaum told me. “The federal student loan system is supposed to be the way individuals finance their education, and the reason they would do that is because it results in higher salaries that allow them to pay off their debts. “

But this assumption turned out to be wrong. The rise in tuition fees is out of control and the realities of the modern labor market undermine the old truism that income increases with the accumulation of degrees.

Income-driven repayment programs only mask the loophole, creating “an extremely long shift of responsibility” to bail out borrowers, Steinbaum argues.

He is right. Biting the bullet now means recognizing that the privatization of higher education has failed. The proof of the failure is evident in the debt tide itself.

America is a land that never stops pretending to praise the value of education and hardly ever manages to back up its sweet words with the resources to make them true.

“Higher education has been and remains a powerful source of economic opportunity in America,” Yellen said in this 2014 speech, “but I’m concerned that the large and growing burden of paying for it will make it harder for many to pay for it. young people to take advantage of the opportunity offered by higher education.

Assuming she is confirmed as Secretary of the Treasury, she and her colleagues in the Biden administration will be able to do something about it. The cancellation of student debt shouldn’t even be a topic of debate.