A person I trust and admire contacted me to ask about President Biden’s tuition forgiveness initiative that forgives $10,000 or $20,000 in student loans per person.
He initially made five points and then followed up with a sixth:
- Why should a student that borrowed money to go to school get money when I paid cash for my son’s education? Wouldn’t it be fair to give us both the money?
- Why should a worker that never went to college have their tax dollars go to either of the groups above?
- Does not debt forgiveness foster moral hazard?
- Isn’t this an expenditure of the Treasury and shouldn’t it be the province of the legislature to allocate these funds?
- This is bad politics as it is a tax on blue collar workers (whom Democrats traditionally favored) that benefits white collar workers. It furthers the divide in the country that I fear.
- How is Biden proposing to pay for this? That’s important. If it is Treasury borrowing then the poor are paying. I don’t see how high school educated people (working poor) benefit more than college educated students.
Since I developed and teach a course in Sensemaking and Mindshifting, I thought I’d take a stab.
The big picture
First, on a high level basis, I think most of us agree that having substantial portions of young adults in debt for trying to get educated in the ways that the education system, society, and most of their trusted advisors have indicated, is suboptimal.
Our systems generally nudge students toward education after high school. Forty years ago, when high school graduates attended a state university, the family paid about 30% and the state paid about 70%. Now with costs significantly higher, the family is expected to pay about 75% and the state somewhat over 20%. And this doesn’t even account for graduate studies which are necessary for many professions.
The problem we should be trying to solve, instead of just the student debt piece, is how do we prepare each new generation for adulthood. That discussion, though, is not even on the table in Washington, or in state governments, or in districts, or even in schools.
What we are left with is, do we do or do we don’t reduce student debt for about 20 million people?
Why should a student that borrowed money to go to school get money when I paid cash for my son’s education? Wouldn’t it be fair to give us both the money?
What would be fairer is if we had a reasonable way, at least going forward, so that young people could be prepared for adulthood, work, and life without going into debt, and if that included all children, yours included.
I’m glad that neither you nor your son owe money for his education. But no, the question is not should everyone with kids get $10,000 or $20,000, it’s will the reduction of student loans be a net benefit or a net hindrance for the economy. I’m inclined to think it is a net benefit.
Why should a worker that never went to college have their tax dollars go to either of the groups above?
Over 70% of income tax dollars are paid by the top 10%. The bottom 50% of taxpayers in aggregate paid about 3%. So this is not a tax on workers who never went to college.
Does not debt forgiveness foster moral hazard?
There are a lot of moral hazards. Larry Summers earns a bunch of income from the groups who have and are making money from student debts, and he is against forgiveness. I don’t think Larry Summers is making his decisions based on that, although it would be better if everyone were like the expectations made of poor Pompeia, Caesar’s wife must be above all suspicion.
Most of the people with student debt were following the broad principles of our society, that they pursue a college degree and it would be a ticket to a better life. For many, they didn’t even receive the degree or certificate, and for many others it turned out not to be such a winning ticket.
I personally believe that many of those making this point actually have their own moral hazards.
Isn’t this an expenditure of the Treasury and shouldn’t it be the province of the legislature to allocate these funds?
We’ve all learned that the legal system and courts are political. The eventual court decision on this will be political as well. The court will eventually give some logical and precedential basis for their decision, but it will be based on their assessment of how it benefits Biden, Democrats, the wealthy, and Republicans rather than strictly a reading of statute.
We will find out more later.
This is bad politics as it is a tax on blue collar workers (whom Democrats traditionally favored) that benefits white collar workers. It furthers the divide in the country that I fear.
Blue collar workers pay about 3% of income taxes. I don’t see how this is a tax on them.
How is Biden proposing to pay for this? That’s important. If it is Treasury borrowing then the poor are paying. I don’t see how high school educated people (working poor) benefit more than college educated students.
There are many who say that the last few bills pushed the US into inflation. On the other hand, the whole world seems to be experiencing inflation, and many countries did not have those initiatives.
I’ve seen the cost of tuition forgiveness as $300 billion. Even if that is all paid back in one year, that’s only a half percent of the economy. If this became US debt to be paid back over five years, it’s 3% of income tax receipts each year.
This does not benefit high school educated people who do not owe student debt. This proposal is not even forward looking, so it doesn’t benefit them in future years, and it doesn’t benefit their children. Wouldn’t it have been great if we could have structured something that benefited them and their children?
Wh didn’t, but for people in the bottom 50% in the US, based on a 3% increase in taxes, the annual cost is about $20. Those are not the people who would be paying.
If this turns out to be inflationary, as Larry Summers predicts, then traditionally, the losers during inflation are retirees on largely fixed nominal incomes, bond holders (whose financial income is largely fixed), those whose compensation is relatively fixed in nominal terms, and employees who do not see wage increases to match inflation.
If labor continues to be tight, we can hope that workers will be able to see their wages increase. There is definitely uncertainty about a) the extent that this policy is inflationary, and b) whether wages will be able to keep up.
Is student debt forgiveness a good policy?
In my opinion, it’s not a great one. A great one would have looked at the whole issue of society’s role in preparing generations for adulthood.
It’s fulfilling a campaign promise, so it does show some integrity which has been lacking in politics. It’s questionable whether it will hurt the economy or significantly harm people in need. It is likely to benefit about 20 million people.