Deep Dive: Student Loan Forgiveness Part II

Why Biden's student debt plan is bad policy - ethical and efficacy concerns

Photo by Jp Valery on Unsplash

Bias disclosure: I am currently part of a household with six figures of student debt and I work at a university that is the recipient of millions of dollars’ worth of federally-backed student loans each year.

This is Part II of my piece on student debt. Part I included a background and covered economic issues. Part II will cover ethical and efficacy concerns. Find Part I here.

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Ethical Concerns

First, there is the issue of the US government voiding millions of contracts it engaged in with private citizens. People make decisions based on the idea that government will follow the rules that it lays out. We trust that if we buy a used car and properly transfer the title, if another party claims ownership the legal system will quickly sort things out. There’s an argument to be made that since this helps individuals it’s ok for the government to renege on the deal, but that argument quickly loses support when applying it to other issues. I pay parking meters because I expect that not doing so will lead to parking tickets and eventually a boot on my car. By charging money for parking, cities ensure that a limited resource, parking spaces, aren’t wasted by local residents parking their cars on the street all day and making commercial properties less accessible. If the city government were to suddenly forgive all parking tickets, I would expect all parking spaces to quickly be occupied by drivers who know they can park where ever they want without penalty. Similarly, I don’t want the IRS to suddenly forgive delinquent tax debt. When the government arbitrarily changes those rules ex post it removes confidence in the entire system.

A second concern is one of fairness. As discussed above, the program is regressive. Beyond that, however, there is an additional fairness concern of who benefits from this program and who gets left out in the cold. Millions of Americans have completely paid of their student loans in the expectation that they had to do so. Paying off these loans meant sacrificing elsewhere, whether that be driving a cheaper car or renting a smaller apartment or not going out to dinner as often. Millions of other Americans have not paid off their student loans yet, either because they chose not to or have not earned the income to do so. To take the latter group and forgive their debt, but not reimburse the former group is completely arbitrary. Both groups have equal claim to the same injustices or issues supposedly being addressed by the student loan program, so if the program is justifiable both should be given relief. To tell one individual who sacrificed much to pay off their loans that they will receive nothing, but to tell another who will have to sacrifice much that they now don’t have to is nonsensical. It’s the government randomly picking winners and losers without any rational.

Another ethics concern is the true reason for this program. When President Biden announced in April 2022 that student loan repayment would be delayed until September 2022, my immediate thought was, “And then it will be delayed until December 2022.” There was not possible way that the Democrats were going to reinstate payments to the government two months before the midterm elections. This, despite the fact that the student loan payment freeze was started because of Covid, and even President Biden agrees that the pandemic is over.

Politicians will always direct money to their constituents. That said, the extension of student loan debt all the way until February 2023 accompanied by the student loan forgiveness is a blatant vote-buying program, the likes of which are generally reserved for less developed countries and more corrupt regimes. You expect to see politicians in South America announce massive new spending programs in the lead-up to an election, but not in the United States. One could argue that there are other instances of this in the US, but I’d challenge you to find another example of a president unilaterally giving a direct pecuniary benefit to millions of Americans right before an election.

A common rebuttal to these arguments is a statement along the lines of “You shouldn’t want other people to have to go through something bad just because you went through something bad.” I’m sympathetic to this argument, as when it’s applied to bad things, it makes a lot of sense. For example, if you’re a senior in high school and you were hazed as a freshman, wanting freshman hazing to continue just because you went through it is not healthy. But this argument doesn’t work when considering student debt. Forcing someone to pay back a loan that they took out isn’t a bad thing. It’s not taking advantage of someone or a punishment. When someone borrows money, they do so under the agreement that they will pay it back. A borrower was lent money under conditions that they agreed to, they spent that money on a service to better themselves, and now they must fulfill their end of the agreement. Additionally, this money isn’t just coming out of thin air. If the government forgives billions of dollars of debt, that money is ultimately coming from taxpayers.

The best analogy here is the housing market. A lot of the same arguments people use to defend student debt forgiveness could be used to defend mortgage forgiveness. Just like college debt, young people are urged to go into debt to buy homes. Just like college debt, government aid has partly contributed to a massive rise in prices. Just like college debt, some people are taken advantage of and lied to when they take out their loan. Just like college debt, mortgage debt restricts the life choices that borrowers can make. And just like student debt, the government is backing trillions of dollars’ worth of mortgage debt. Should the government start forgiving mortgages, and give a bailout to homeowners, who are disproportionately wealthy? And if they did, should they treat primary residences (aka bachelor’s degrees) the same as vacation homes (aka graduate degrees)? Absolutely not. If you take out a mortgage, you need to pay it back. And people who paid off their mortgages are not being meanspirited by saying they expect current mortgage holders to pay off their debt just like they did.

Efficacy

One of the best, and surprisingly under the radar, reasons that student debt forgiveness is just a money grab is the total abandonment of the underlying problem: it costs the typical American years, if not decades, of future wages to obtain a college degree. The national student loan cumulative debt is the symptom of this problem, not cause. Student loan forgiveness does nothing to address the root issue, high tuition prices. No one even is even trying to argue that loan forgiveness will make colleges lower their prices.

In fact, it gets worse. Think tuition prices are high now? What colleges will do if their students no longer have to pay back their loans? The already conspicuous construction of spa-like health centers, luxury apartment dorms, and gourmet food on campuses will go into the stratosphere. Why attend a college that charges $40,000 per year when the $90,000 college down the street includes roundtrip first-class airfare to and from campus and a personal chef? After all, the government bailed out student debt once. They are sure to do it again.

There is a direct parallel to this and the bankruptcy that Detroit went through several years ago. The Motor City was in a sorry state in the wake of the great recession. As of 2014, 30% of the city’s buildings were vacant or only partially occupied. A depressing 40% of the city’s street lights didn’t work. The population had fallen from 1.8 million in 1950 to under 700,000. With a population of under a million, the city was an unthinkable $20 billion in debt. The city declared bankruptcy.

It wasn’t long before creditors realized that the most valuable asset in the city was the Detroit Institute of Arts (DIA), whose collection was valued at $8.5 billion. It’s one of America’s premier art museums. Some argued that the art collection represented a great opportunity to rescue the city. Why keep a single painting worth over $100 million, when that money could pay the water bill for the entire city? Others were horrified that the city would sell off its most valuable asset. Fortunately for art lovers, in a fantastic display of public-private fundraising, hundreds of millions of dollars were raised, and the DIA ultimately went private and didn’t have to sell a single painting. Reason prevailed.

Why? Because selling artwork does nothing to solve the actual problem. In 2013, Detroit was a bankrupt city, going further into debt, with a billion-dollar art collection. If that art was sold to pay the bills but nothing else changed, within ten years it would be a bankrupt city, going further into debt, without a billion-dollar art collection. That’s not a solution. Would some Detroiters lives had been better if the city sold all the artwork and put them into social programs? Absolutely. But it doesn’t solve the underlying problem, and the long-term outcome is an even more dire situation.

Is this analogy perfect? No. Municipal bankruptcy and artwork are not the same as student loan debt and human capital. But the lack of attention paid to the cause of mountain of student debt, rather than the student debt itself, is so glaring that it must be deliberate. Whether or not the price of higher education in the United States is too high, and how much the state should subsidize it are important questions, and outside the scope of this article. The issue is that those that are saying that the price tag on a college degree is too expensive have proposed nothing to fix the underlying problem. To the contrary, loan forgiveness just incentivizes further reckless spending.

The Way Forward

So what’s to be done? This is where a lot of the answers depend on the goal. Do we as a society want college to be less of necessity, and return to a time where a high school diploma would qualify you for many different careers? Then we need college to be more expensive, only affordable to the select few. Markets would then have to adjust and offer jobs to those with less formal education. This, of course, would then make it much more difficult for low income Americans to obtain a university education.

Alternatively, do we want to return to a time where college is affordable? Then we need states to step back into the role they played until the end of the 20^th century, paying most of the budget of every state institution for higher learning. If state schools lower their costs to $5,000 per year for tuition, private schools will have to decrease their fees as well. This, of course, would then continue the degree inflation that’s already happened, where to get a start in almost any white-collar career you need an undergraduate degree.

In either case, there are advantages and drawbacks. The first would reduce the necessity of a college degree. The second would make college more affordable. Forgiving student debt, however, does not accomplish either.