Key Democrats in Congress are urging the federal government to “forgive” $50,000 in student loan debt per borrower, canceling that amount from the balances borrowers are due to repay. For his part, President Joe Biden said he is amenable to forgiving $10,000 in student loan debt.
Canceling student debt requires individuals at the lower end of the income spectrum to pay off the debt of college graduates who, statistically, are likely to out-earn them.
While that can sound like a great deal for the millions of young adults carrying around debt from college, student loan forgiveness isn’t free — for them, or the rest of the country. In fact, it comes with a tremendous price tag and significant moral hazard.
Forgiveness proposals would unfairly foist a borrower’s debt onto strangers, including those who made a conscious decision not to attend college to avoid debt or to go to a school they otherwise wouldn’t have because it was less expensive. At the same time, it would almost certainly lead to the cost of college increasing for future students.
Canceling student debt requires individuals at the lower end of the income spectrum to pay off the debt of college graduates who, statistically, are likely to out-earn them. Nearly two-thirds of adults do not hold bachelor’s degrees today. A bachelor’s degree is worth $2.8 million on average over the course of a lifetime, with degree holders earning 74 percent more than individuals with just a high school diploma, according to research by Georgetown University. Those earning professional degrees (for attending law school or medical school, say) are likely to benefit even more, earning 61 percent more on average than someone with a bachelor’s degree over their working lifetime.
Forgiveness would also punish responsible borrowers who worked carefully to pay off their debts, sacrificing dinners out or living in modest apartments to make good on their loans. As Carlo Salerno of CampusLogic points out, it would reward the person who “borrows to get a Ferrari over the one who got a Kia.”
Worse — in an ironic twist — loan cancellation would create tremendous inflationary pressure to raise tuition prices higher. There is evidence to support the theory that federal subsidies — which include loan forgiveness and subsidized student loans — increase the cost of college.
In the last 20 years, the federal government’s total inflation-adjusted spending on student loans has skyrocketed, from $50 billion in the 1999-2000 school year to $87 billion in 2019-2020. Concurrently, in-state tuition at public universities increased by 120 percent in real terms over the same time period.
According to the economic theory developed by former Reagan administration Education Secretary William Bennett, increases in federal student aid enable colleges to raise tuition prices since students have more access to financing. Researchers Grey Gordon and Aaron Hedlund backed this theory up with quantitative models finding that raising subsidized loan limits led to a 102 percent increase in tuition between 1987 and 2010. Without those additional federal subsidies, the authors estimate tuition would have only gone up by 16 percent on net.
Similarly, a study by the Federal Reserve Bank of New York found that increasing subsidized federal student loans leads to a tuition increase of 60 cents for every additional dollar of subsidized federal loans. That is, for every extra dollar Washington spends on federally subsidized student loans, colleges are estimated to raise tuition 60 cents to take advantage of students whose spending abilities have increased because of the new federal subsidies.
At the same time, it’s important to keep in mind that for most borrowers, student loan payments are a manageable portion of their income (the median monthly student loan payment is $222). Furthermore, income-based repayment plans already exist for borrowers who need help making their payments. Large debt balances are typically the domain of graduate students and students pursuing professional degrees— those most likely to earn high incomes in the future.
These future higher-income students are the ones who would benefit most from waiving their student loans. A recent study modeling the distributional effects of loan forgiveness found that the average person in the top income decile would get over five times more in forgiveness than the typical borrower in the bottom income decile.
There’s also a question about whether loan forgiveness would actually help borrowers who are struggling with debt. Those in lower-income brackets currently have their monthly payments capped at 10 percent of their discretionary income through the federal income-driven repayment (IDR) program. In fact, because of this existing policy, the economist Sylvain Catherine finds that for some borrowers, $10,000 in debt cancellation would have zero impact on their monthly student loan payments, as it would forgive debt that would not ever have had to be repaid.
Of course, all of these issues could become worse if this forgiveness — whether for $10,000 or $50,000 — isn’t a one-time thing. Future students could reasonably expect their debts to be forgiven, which could inflate college costs even further. Students would likely be inclined to borrow more for college, assuming it will later be written off, enabling universities to further raise prices.
Yet, forgiving debt of current borrowers seems unfair to students who need to borrow in the future, not to mention to those students who already worked their way through college, as well as the many Americans who didn’t attend. And what about those who have already dutifully repaid their loans? Could they expect some sort of recompense?
When borrowers take out federal student loans, they’ve signed a contract with the American taxpayer saying they will repay their debts. Borrowers have an obligation to keep that promise. If Congress and the Biden administration want to help, they should pursue policies that actually drive down the cost of tuition rather than shifting debt payments onto taxpayers.
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