Nivarthy: Don’t Cancel Student Debt

The regressive policy overwhelmingly benefits the highest earners and serves as no stimulus for those most in need.

by Kavya Nivarthy | 5/12/22 4:00am

As the cost of higher education remains an economic burden on young Americans and their families, progressive Democrats are ramping up calls for various levels of loan forgiveness. One of the most comprehensive proposals is that of Senator Elizabeth Warren, D-Mass., who, along with Senate Minority Leader Chuck Schumer, D-N.Y., has called for up to $50,000 in loan forgiveness, in addition to making public college free of cost. Though President Joe Biden has so far only endorsed up to $10,000 in loan cancellation, concerns about waning support among young voters have increased his attentiveness towards more expansive relief.

At first glance, these policies sound great — relieving low-income graduates of tens of thousands of dollars in debt so they can make basic living expenditures and become more economically productive is a good thing, right? Well, this is only how student loan cancellation pans out in theory.

Several often ignored facts highlight that student loan cancellation and partial forgiveness are regressive policies because they provide the greatest benefits to the highest earners. The policy also ignores two key groups: those who choose not to go to college and those who have “saved and sacrificed” in order to pay their loans. Senators Warren, Schumer and other proponents of expansive loan forgiveness programs have no answer for either of these groups.

Many forget that the former group is actually a majority of Americans. Just under 40% of Americans above the age of 25 hold a bachelor’s degree. The remaining 60% cite lack of affordability, the need to work immediately to support their family and not needing it for their career as some of their top reasons for choosing not to pursue a degree. (Free college, as I will explain, is regressive, like loan cancellation, and also crowds out economical alternatives like trade school.) Loan forgiveness, then, seems like a punishment for those who were discouraged from attending for reasons of affordability and economic hardship — it subsidizes individuals for making a costly decision and ignores those who were discouraged by the high cost to begin with. Moreover, by looking through a breakdown of the socioeconomic conditions of those who would receive relief under current proposals, loan forgiveness is revealed to be even more of a subsidy for some of the wealthiest Americans. 

Brookings economist Adam Looney ’99 found that the top 20% of earners nationally would gain over a quarter of the relief distributed in Senator Warren’s plan, and just 4% of the relief would go to the bottom 20% of earners. This stems from the fact that those who choose to attend college are already relatively well-off. In fact, the largest share — 48% — of all student debt is owed by those with graduate degrees. Understanding the economic status of degree-less Americans explains why free public college is also a regressive policy. Looney also points out that 35% of students at public universities are from households in the top quintile of income. 

Many progressives would respond to this analysis by pushing for a wealth-based, rather than income-based reasoning. When you consider individual wealth, they would argue, the correlation flips, and those in the lowest quintile of wealth have the greatest debt burden. Indeed, one analysis from Matt Bruenig reflects this trend, where a wealth-based consideration shows that the poorest may receive the most benefits of loan forgiveness. But as Looney points out, these measurements of wealth ignore a consideration of human capital. 

Consider this example. The median debt owed among graduates of medical school is $171,000, of a masters in business administration is $46,000, of a bachelor of arts in business is $25,000 and of an associates degree is $18,000. On a measure of wealth, the highly indebted doctor seems the worst off. But what about their return on investment? Degrees should be considered as assets themselves because graduates gain highly valuable human capital. Looney compares this situation to individuals with mortgages, who “aren’t poor because the mortgage is used to purchase a valuable asset (a home).” Similarly, not all of those with student debt — especially doctors and lawyers — are “poor,” because their degree holds economic value. 

With this consideration, the trend of relief being assigned to those in the highest socioeconomic bracket persists, regardless of whether you approach it through income or wealth. 

It is important to add that loan forgiveness does not act as an economic stimulus; it quite literally transfers taxpayer dollars directly to creditors, without giving Americans more economic agency or stimulating the economy. Bruenig, of the left-leaning People’s Policy Project, acknowledges this. Unlike normal stimulus, which puts “money in people’s pockets so that they can spend it,” Bruenig notes that student debt forgiveness leaves behind “households with no extra liquid cash to spend.” The policy, in effect, transfers wealth from the lowest-earning taxpayers, who choose not to attend college, to college-educated Americans in higher income brackets. 

A final, key aspect of our current politics that the push for student loan forgiveness ignores is its cultural implications. Already, the suburbanization of the Democratic Party, and the increasing shift of its base to the college-educated upper-middle class, is fueling a growing working class resentment. Should the Democratic Party back policies veiled in progressive relief that really leave the working class behind, it will only continue to alienate an already ignored group of Americans, and deepen class tensions. 

Policies more nuanced than blanket forgiveness can better address the student debt crisis. Primarily, the cost of college must be addressed. Federal attempts to wipe out student loans artificially inflate Americans’ abilities to pay for college, and if anything, contribute to the rising cost of college. Non-ideological institutions like the Federal Reserve Bank of New York have empirically demonstrated this trend, finding that expansive federal loan programs do contribute to an increase in tuition. Instead of these policies, a borrowing limit for students would actually prevent colleges from continuing to increase tuition in an unchecked manner. Generally, more financial responsibility should be put on colleges and universities themselves. As I argued in a previous column, this might begin with demanding that colleges use their substantial endowments to help students repay loans. The overvaluation of college degrees, often called the “golden ticket fallacy,” can be combated through federal subsidy of more economical alternative options like trade school and increased state funding for higher education.