Forgiving Loans Is A First Good Step
President Joe Biden has honored his word. He has delivered on his promise to wipe out college loan debt for students from low-income families. Specifically, Biden’s proposal will provide up to $20,000 in debt cancellation to Pell Grant recipients with loans held by the US Department of Education (USDOE) and up to $10,000 in debt cancellation to non-Pell Grant recipients if their individual income is less than $125,000 ($250,000 for married couples).
It was obviously an agonizing decision for the president. Biden knew he would face hostility from some quarters, even from within his own party, but he decided the problem has festered long enough.
Some of the criticisms have a modicum of reasonableness.
There are questions about whether or not his plan exceeds his authority. Biden himself had expressed some doubts earlier, but with congress unwilling to act, he has accepted his mandate as president to lead. His action may be challenged in court, but there is some question as to who might have standing to pursue a legal challenge.
Biden’s proposal has also been criticized because it does not address the basic problem---the runaway inflation in the cost of higher education in America, and in fact, his reduction of payments under the new income-driven repayment plan may feed future tuition increases. No question the cost of higher education has gotten completely out of hand. Between 1980 and 2021 the average cost at a public four-year institution jumped nearly 200 percent, from $7,889 to $21,337.
But the states are the primary providers of higher education in the United States, and there are significant differences in how well states fund higher education. For example, South Carolina’s average public appropriation for higher education in FY2021 per FTE was $7,624, almost $2,000 less than the national average of $9,327. Even though North Carolina has slipped in average FTE appropriation for higher education in recent years, its FY2021 per FTE appropriation was $11,090. No surprise, average tuition and fees at South Carolina’s public colleges and universities is approximately twice that of North Carolina’s.
Unfortunately, the president has limited tools for changing the behavior of states. Congress has far greater leverage, but Republicans in the US Senate have shown no interest in addressing the loan problem or the cost issue.
Some critics have raised the fairness issue:
· Are not students from wealthy families or with well-paying jobs going to take advantage of this proposal?
· Is Biden’s plan fair to earlier students who have repaid their debts in full?
· Is it fair to make such an investment in helping people who have had a chance to go to college when there are millions of Americans who have never been to college nor want to go?
As for the first question, according to USDOE data, nearly 90 percent of relief dollars will go to those earning less than $75,000 a year. Of the 43 million current borrowers, roughly 20 million will have their full remaining balance cancelled. Furthermore, the expectation is that no one making more than $125,000 or in a household making more than $250,000 will receive any relief under Biden’s proposal.
The second and third are a bit more difficult to address because they raise the perpetual dilemma of government expenditures: few programs provide direct benefits for everyone. There is always someone left out. In this case, lifting the debt burden from nearly half of those suffering and reducing the burden for others to some extent, will likely allow those affected to be more productive economically. That should benefit those who have already repaid their debts as well as those who have never been to college.
Perhaps most surprising is the sharp criticism that has come from some liberal economists who were part of the Obama administration. During the Obama years some efforts were made to address the student loan debt issue, but between 2009 and 2017 student loan debt grew from $772 billion to nearly $1.6 trillion, more than double.
Still, Larry Summers, who served as Director of the National Economic Council (NEC) under Obama and had been Secretary of the Treasury under Clinton, was harsh in his denunciation of Biden’s proposal:
“Student loan debt relief is spending that raises demand and increases inflation. It consumes resources that could be better used helping those who did not, for whatever reason, have the chance to attend college.”
Jason Furman, who served as Summers’ deputy at the NEC before becoming Chair of Obama’s Council of Economic Advisers (CEA) in 2013, was even more caustic:
“Pouring roughly half trillion dollars of gasoline on the inflationary fire that is already burning is reckless.”
Other economists have countered. Mark Zandi, chief economist at Moody’s Analytics, told CNN: “The end of the moratorium will weigh on growth and inflation, while the debt forgiveness will support growth and inflation. The net of these cross-currents is largely a wash.”
Economists at Goldman Sachs, one of the country’s largest investment banks, agree. They emphasize that people who owed more than the Biden plan could forgive, or who earned too much to qualify for relief, will have to resume making payments after two years of not doing so, which will reduce the money they may spend on everything else.
A well-documented analysis of the issue comes from Harvard Prof. Susan Dynarski, who earlier this year had expressed skepticism about student debt relief. Writing in the New York Times, “Why I Changed My Mind on Student Debt Forgiveness,” she notes that many of those who borrowed for college did not earn a degree. College attendance has provided them little if any benefit, but their financial security is at risk.
Dynarski points out that defaults and delinquencies generally occur with regards to relatively small debts, $8,000 or below, and often from for-profit colleges. Collecting these loans is expensive and frequently harmful to the borrower. She might have added that while Donald Trump’s many bankruptcies have allowed him to walk away from his mistakes, student loan debts cannot be cancelled through bankruptcy.
Condemning this country’s dysfunctional system for college funding and student loan repayment, Dynarski blames it for “an unending increase in tuition prices and student borrowing.” She is especially disdainful of USDOE’s practice of servicing student loans through private companies.
“These companies are the face of student loans for tens of millions of borrowers---and often the source of enormous frustration.”
In Dynarski’s view, “targeted debt cancellation is the best way to undo the damage done to millions of borrowers.” As for the inflation issue, she agrees with Zandi and the Goldman Sachs economists, but adds an important truism for a democratic society:
“I am not in favor of framing student-loan policy as a lever for managing inflation. Eliminating food subsidies for poor families---SNAP, as the food stamp program is known today---would definitely slow the economy, but that doesn’t mean we should do it.”
Clearly, Biden’s proposal for student debt relief does not address the core problems facing American higher education today. Given our federal system, significant reforms will require a change in attitude on the part of many state governments. In the decade between 2008 and 2018 state funding for higher education adjusted for inflation suffered:
· 41 states spent less per student
· On average, states spent 13 percent less per student
· Per-FTE funding fell by more than 30 percent in six states; 29.8 percent in South Carolina and 17.3 percent in North Carolina.
State legislators need to recognize that postsecondary education is a “public good” even if it also benefits the individual. Because of the transfer of educational costs to the individual, many societal needs are not being met. There are serious shortages in school teachers, health care providers, social workers, mental health workers, etc.
Even with more funding, public colleges and universities will need to examine their own priorities to insure they are in accord with their educational mission. Forcing students to pay for programs and activities outside the normal purpose for which colleges and universities exist is unfair to students and detrimental to the public interest. But that sounds like the subject of another post.
https://www.vox.com/policy-and-politics/23322129/student-loan-forgiveness-fair-inflation
https://shef.sheeo.org/report/?report_page=state-funding-and-enrollment