Michael Hicks: Student loan forgiveness a policy mistake

There is precious little to like in President Biden’s announcement of student loan forgiveness. Indeed, the most charitable thing that could be said is that it could’ve been worse. It could’ve been more inflationary, a bigger addition to our debt, more distortionary in markets and less equitable. That is about all the faint praise it deserves.

The plan forgives either $10,000 or $20,000 in student loan to workers who earn less than $125,000 per year, or $250,000 per couple. If your parents were poor and you qualified for Pell grants, you get $20,000; if they weren’t, you get $10,000. Altogether, this debt relief amounts to about $350 billion. That adds about 1.2% to our federal debt.

This addition to the federal debt during this time risks worsening inflation. However, for it to actually add to current inflation, it would require those who received the debt relief to go out and spend extra money. Some will, but the effect of the debt forgiveness on additional consumption this year will be modest.

Based on outstanding student loan debt, Indiana’s share of debt relief amounts to about $1.6 billion. Ironically, that is almost precisely the amount of money the legislature is currently paying out in the Hoosier Stimulus. Yet, our stimulus money will be mostly spent right away, as cash transfers almost always are. This would yield a bigger inflationary effect here than loan relief. So, Hoosier GOP complaints about the inflationary effects of the student debt relief should be ruthlessly ridiculed.

Still, we all have many other grounds upon which to critique this policy. Equity is the most compelling criticism, and I think it is worth spelling out just exactly what that means in America today. I start by noting that Americans are generally very sympathetic towards debt relief and educational assistance. Our nation has provided 80 years of the GI Bill. Both my father and I finished doctoral degrees through access to the GI Bill. I am deeply thankful for this opportunity and wish it extended to others.

The federal government offers substantial student debt relief for public service. I have two cousins who discharged their student debt through military service. One saw extensive combat during her time in uniform. Such programs are common at the state level for teachers, public safety officers, social workers, librarians, and the like. These are generous programs that offer huge loan forgiveness options.

The U.S. has myriad needs-based loan programs for poor families seeking an education. We have federal grants, work-study programs and, in most schools, generous scholarships for the poor. Many businesses pay tuition for employees seeking further education. My church even has a generous annual scholarship endowment.

We could do a lot better with these types of programs, particularly aiming support to the poorest of students. But, these remain generous and thoughtful efforts supported not just by many Americans, but by nearly all of us. As a nation, we are eager to help educate people so they may pull themselves up by their bootstraps and are eager to reward those who serve the public. This debt relief honors none of that admirable spirit.

The greatest problem with the debt relief is that it primarily targets affluent households for what they have done, not what they are going to do. This makes the debt relief terribly inequitable, and thus more corrosive to our nation than whatever short-term benefits we receive.

Most of the student debt now accrued came as a result of graduate education, mostly in professional schools. Think pharmacists, lawyers, physicians, dentists, MBAs and the like. It should be immediately apparent that people in these professions should not be good candidates for debt relief. These are all people destined to be among the very highest income recipients.

That is obviously not true for all student loan borrowers with outstanding debt. The most common student debt value is zero debt. The average or mean is just over $26,000. The average debt for a pharmacy graduate is over $250,000. There are reasons to be thoughtful about very low debt held by someone who is still a low-income earner. This would be true of any type of debt, held by any type of institution.

I am sympathetic to debt relief for victims of some scam private colleges. We’ve already absolved that debt. I would also be sympathetic to debt relief for people who are low-income, and have paid for a long period. We’ve already done that as well. But, debt relief for someone who accrued a quarter-million-dollar debt so they can earn a quarter-million-dollar-per-year salary for the next 40 years, strikes me as deeply unfair. This is especially true when you consider who will ultimately pay for this debt relief.

This debt relief will be paid off through tax dollars or inflation. Either way, the people paying will be poorer on average than the ones receiving the relief. This is true even though we have a very progressive income tax system, and many of the beneficiaries of this relief did not graduate from college.

Viewed through a prism of equity, this is a very poor public policy. Many supporters of the relief have argued that other policies are likewise simply transfers from the poor to the wealthy. They are right, but the moral weakness of that argument reflects just how bad this debt relief is. The only benefit of this argument is to highlight the hypocrisy of the many who tout tax incentives, mortgage tax credits and other transfers from the poor to the rich that color our tax systems.

Concerns for equity are not idle. Collectively, Americans are a generous people, in spirit and acts. That generosity, in both public and private support depends upon a sense of fairness. That is why almost no member of Congress opposed debt relief for those who enrolled in predatory colleges, or those who chose to serve the nation. This policy further erodes the sense that we are embarked on a long, shared experiment in democracy.

In the end, the student debt relief is just pandering to a Democratic-leaning constituency. Within the overall scope of pandering with bad economic policy, it is modest. Still, it richly deserves the criticism it receives. It is inequitable, inflationary and drives us further away from principled compromise on problems with education nationally. These are all factors to weigh next time the issue comes before voters.

Michael J. Hicks is the director of the Center for Business and Economic Research and the George and Frances Ball Distinguished Professor of Economics in the Miller College of Business at Ball State University. Send comments to [email protected].