Is Student Loan Forgiveness a Good Idea?

Throughout the 2020 presidential campaign, Joe Biden frequently mentioned canceling student loan debt as a way to stimulate the economy and help Americans during a pandemic and beyond. Today, more than a year into Biden’s presidency, widespread loan cancellation has yet to occur.

The latest news suggests a decision may soon be forthcoming. But the question remains: Is canceling student loan debt even a good idea?

Student loan debt has become a national crisis. As of April 2022, Americans collectively owed a staggering $1.75 trillion. According to Nerd Wallet, in 2021, households with student debt owed an average of $59,042.

Young people in particular are affected by student loan debt. Those in the 25-34 age range are most likely to have loans, right when they’re often trying to make career choices, get married, purchase a home, and start a family. Crushing loan debt can impact these life decisions.

On the campaign trail, Biden tweeted, “We should forgive a minimum of $10,000/person of federal student loans…. Young people and other student debt holders bore the brunt of the last crisis. It shouldn’t happen again.”

Fellow Democrats agree. Senate Majority Leader Chuck Schumer (NY), Sen. Elizabeth Warren (MA), and Rep. Ayanna Pressley (MA) sent President Biden a letter asking him to cancel up to $50,000 of debt per person.

Sen. Bernie Sanders (I-VT) advocates wiping the entire $1.75 trillion bogey off the books.

Republicans, on the other hand, aren’t so convinced. They call student loan forgiveness “reckless,” preferring to address higher education costs rather than offering a one-time cancellation. Not surprisingly, though, 56% of Republican voters under the age of 34 support some form of loan forgiveness.

To be fair, the Biden administration has, in fact, canceled some student debt — more than $17 billion held by over 700,000 borrowers, including $6.8 billion through the Public Service Loan Forgiveness program. Other beneficiaries include those with disabilities and students duped by predatory for-profit colleges.

What’s more, the Biden administration has extended the moratorium on loan repayments, started in March 2020 under the Trump administration, through August 31, saving Americans about $5 billion per month in deferred payments and interest accruals.

The latest rumblings, as of late May, suggest the White House plans to cancel $10,000 in debt per borrower, with an income cap of $150,000 for individuals and $300,000 for married couples. That scenario would cost taxpayers roughly $230 billion says the Committee for a Responsible Federal Budget.

Public opinion on student loan forgiveness is mixed. A 2021 Morning Consult survey revealed only 1 in 5 voters supports complete loan forgiveness. And 30% said no amount of loan debt should be forgiven.

Among Democrats, 46% favor full or partial loan forgiveness, while only 25% of Republicans do. Almost half (48%) of Republicans don’t want any debt forgiven.

Opinions also split along generational lines — 49% of millennials want all or some debt erased, while only 25% of baby boomers hold that opinion. Similarly, according to a Student Borrow Protection Center poll, 71% of likely voters ages 18-34 support some level of loan cancelation.

That’s not surprising given that 1 in 3 adults under 30 owe 34% of all student loan debt, totaling some $578 billion. Most boomers, one would imagine, have long since repaid their loans, assuming they had any to begin with.

Proponents of loan forgiveness claim it will help narrow America’s racial wealth gap. On average, Black college graduates owe $25,000 more in loan debt than their white peers. They constitute 16% of the U.S. population but account for 23% of the student debt.

At the same time, Black college graduates earn less than white and Asian graduates, making it even more difficult to repay loans. It’s even worse if they don’t graduate: College dropouts earn $21,000 less annually on average than degree-holders. And Black and Latino students are far less likely to graduate than their white counterparts.

In addition, Black and Latino students are more likely than whites to attend for-profit colleges, where graduation rates are low, debt loads are high, and students are more apt to default on their loans.

A 2020 Roosevelt Institute report concludes that “the substantial increase in Black net worth is a very significant positive contribution of student debt cancellation, one with potentially transformative positive impacts for Black families overall.”

Student debt isn’t just a symptom of the racial divide. It’s also a class issue. Matt Bruenig of the People’s Policy Project notes student debt is concentrated at the bottom of the wealth distribution, though the situation is certainly more dire for Blacks and Latinos than for whites. While the bottom quintile of white families holds 52% of white student debt, Bruenig writes, for Blacks and Latinos that figure is 61% and 71%, respectively.

“Canceling student debt is one of the most powerful ways to address racial and economic equity issues,” wrote several Democrats in a letter to President Biden. “The student loan system mirrors many of the inequalities that plague American society and widens the racial wealth gap.”

Beyond potentially addressing the racial wealth gap, loan forgiveness could boost the economy, said U.S. Treasury Secretary Janet Yellen, helping struggling families to purchase a home or a car, or entrepreneurs to start a business. One estimate suggests that between 2005 and 2015, student loan debt prevented 400,000 people from buying homes, accounting for a 25% decrease in home ownership.

Additional benefits include enabling graduates to make career choices predicated less on income, to marry earlier and start a family, and to begin saving for retirement.

As the opinion polls suggest, not everyone believes student loan forgiveness makes good sense. But the reasons for opposition differ.

One primary complaint is that forgiving student loans is regressive, benefiting people who least need help. As the argument goes, some individuals with considerable loan debt, such as graduates of law and medical schools, have correspondingly high salaries and net worth and shouldn’t warrant financial assistance.

Adam Looney of the Brookings Institution points out measures of wealth should include the value of the education, an investment that frequently increases lifetime earnings. Ignoring this asset, he writes, is akin to “assessing a homeowner’s wealth by counting their mortgage balance but not the value of their home.”

Adding the “value” of the education, however measured, changes the debt calculus. Preston Cooper explains in Forbes that people can appear poor on paper when only their liability, loan debt, and not their asset, the education itself, is counted. Before the educational value is considered, 53% of student debt is concentrated in the bottom quintile of wealth. Properly accounted for, the share of debt among the poorest segment decreases to 8%.

“Households above the median wealth,” Cooper writes, “owe the vast majority of student debt.”

Given this analysis, Looney concludes that “across-the-board forgiveness is therefore a costly and ineffective way to reduce economic gaps by race or socioeconomic status” and that “only targeted policies can address the inequities caused by federal student lending programs.”

Not everyone buys Looney’s argument — not even his Brookings colleagues. A 2021 Brookings report aims to debunk the regressive theory as so much economic prestidigitation. Like Bernie Sanders, the authors advocate canceling all student debt, which they claim will allow Black borrowers “stronger participation in the economy.”

The authors also mention Parent PLUS loans as an example of individuals holding debt but not benefitting from the educational asset. Curiously, the Biden administration has remained mum on the topic of PLUS loans. A Century Foundation study found that PLUS borrowers owe an average of $29,600 and determined that Black and Latino families suffer the “worst outcomes” resulting from these loans.

Opponents of student debt cancelation — in one form or another — cite additional reasons for believing these measures are misguided. One argument is that loan forgiveness isn’t fair to graduates who incurred student debt and paid off their loans.

“Taking out a loan is a choice, and personal responsibility shouldn’t be supplanted by taxpayer bailouts,” writes Matthew Noyes of the Foundation for Economic Education. “‘Canceling’ student loans means penalizing people like me for honoring my word and repaying the debt I chose to accept.”

Another rationale suggests debt cancellation might actually boost inflation. Borrowers suddenly free of some or all debt might increase personal consumption, driving up prices even higher than they are now.

Then there are those who believe debt cancellation ignores the main problem: rising tuition costs.

“To ignore root causes is like cleaning up a polluted beach downstream, while leaving the factory upstream pumping ever more contaminants into the water,” writes Sen. Ben Sasse (R-NE), a former college president, in The Atlantic. “We need to be talking about institutional reform.”

Finally, a bailout of this sort might suggest another is forthcoming in the future. As such, might students be more willing to take on massive debt under the assumption that some or all of it will be forgiven? And might universities therefore continue raising tuition and fees knowing students will blithely rack up more and more loans?

“President Joe Biden,” says Katie Lobosco of CNN, “has a student loan debt forgiveness problem.” That’s because any decision on student loans is bound to ignite critics.

Many Republicans and older Americans want no debt relief. Sanders and some fellow Democrats and left-leaning policy analysts want all student debt erased. Other liberals, such as Looney at Brookings, want a targeted approach that eliminates wealthy and potentially wealthy loan holders. And some, like Majority Leader Chuck Schumer, advocate for canceling $50,000 per borrower, not the $10,000 Biden has seemingly settled on.

“With the flick of a pen,” Schumer said, “President Biden could provide millions upon millions of student loan borrowers a new lease on life.”

But can he?

Biden has questioned his authority to erase student debt through executive action, and he’s directed lawyers to clarify this particular use of power. A 2020 memo from Harvard Law School concludes the president can, in fact, direct the secretary of education “to create and to cancel or modify debt owed under federal student loan programs.”

So is canceling student loan debt a good idea? The answer depends on who’s fielding the question. Those with $10,000 in debt who fall below the $150,000 threshold probably think it’s a good idea. Those with $100,000 of debt won’t experience much relief. Students starting college this fall might feel slighted.

Assuming Biden moves ahead with his plans, we’ll soon see just what kinds of results and responses this effort generates.