[There are very good reasons the US government should forgive
student loan debt — not just for the debtors themselves, but for
working-class people without college degrees too. ]
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THE ARGUMENTS AGAINST STUDENT DEBT FORGIVENESS ARE ALL BUNK  
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Julian Jacobs
July 11, 2023
Jacobin
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_ There are very good reasons the US government should forgive
student loan debt — not just for the debtors themselves, but for
working-class people without college degrees too. _

Student loan borrowers and advocates gather for the People's Rally To
Cancel Student Debt During The Supreme Court Hearings On Student Debt
Relief on February 28, 2023 in Washington, DC., Jemal Countess / Getty
Images for People's Rally to Cancel Student Debt

 

The Supreme Court’s decision to strike down the Biden student debt
cancellation plan came at a bad time for American households and the
US economy more broadly.

President Joe Biden’s inability to pass a student debt cancellation
plan through Congress was yet another instance of fledgling
progressive economic policy being torpedoed by gridlock and corporate
subservience. Turning instead to an injunction from the Department of
Education, Biden’s plan would have slashed $430 billion in federal
student loans for roughly forty-three million borrowers. This amounted
to $10,000 a student (and $20,000 for recipients of Pell Grants),
which would have helped shrink the average federal student loan debt
balance of $37,717.

The Supreme Court majority opinion argued that the “statutory
permission to modify” (elucidated in the Health and Economic
Recovery Omnibus Emergency Solutions Act or HEROES legislation) does
not authorize “basic and fundamental changes in the scheme,” which
they argued debt cancellation would constitute. As a result, millions
of students will now need to begin servicing their federal loan
repayments, which were paused on account of the COVID-19 pandemic.

The resurgence of these payments comes at a time when signals of
economic hazard and struggle are mounting. The US economy is not
technically in a recession. But many mainstream indicators for labor
market robustness mask hidden frailties
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in the economy, in large part due to the distorting impact of high
inequality. In other words, people are _living the reality _of a
recession, even if the official numbers don’t necessarily show it.
As a result, 32 percent
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of American adults are falling behind on debt payments, while 25
percent
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of US parents have struggled to pay for food or housing in the last
year.

In the aftermath of the Supreme Court decision, harrowing stories are
emerging about already-struggling people who have little avenue to pay
for an incoming regime of debt repayments. This includes people like
Joanna Kearns, forty-two, who told
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_Financial Times_ that she is a full-time caregiver for a parent
receiving cancer treatment and is trapped by $60,000 of student debt
that she owes. Like other graduates, her debt was taken out while she
was a teenager.

The opposition to student debt forgiveness is easy to understand.
Millions of Americans are already struggling to make ends meet, and
most of them have never benefitted from the advantages of a higher
education degree. Why should taxpayers front a bill to pay for higher
education degrees they haven’t received or benefitted from?

Yet there are very good reasons the United States should forgive
student loan debt — not just for the debtors themselves, but for
everyone.

Many Democratic and Republican members of Congress have shown
indifference or callousness to the student debtors on precisely this
basis. Representative Virginia Foxx, a Republican from North Carolina
and chair of the House Committee on Education and the Workforce,
remarked that “there’s no such thing as forgiveness” and that
Biden’s plan transferred “debt from borrowers who willingly took
out student loans to hard-working taxpayers who did not.” Senator
Joe Manchin, a Democrat from West Virginia, similarly commented that
the plan “forces hard-working taxpayers who already paid off their
loans or did not go to college to shoulder the cost.”

These moralized arguments depend on two assumptions. The first is that
graduates can reasonably pay back the debt. The second is that
graduates in debt could have chosen to not go into debt. Yet neither
assumption is necessarily true. To reaffirm the case for student loan
forgiveness, it is worth taking each claim one by one, before also
discussing the broader macroeconomic implications of the student debt
crisis.

Prospects for Debt Repayment

On the first of these points, there is no question that higher
education is no longer sufficient to guarantee entrance into the
middle class — yet it is increasingly a requirement for it. For
starters, the differential between those with a college degree and
those without it has never been higher. According to data from the
Federal Reserve Bank of New York, the median annual wage for a
full-time worker with a high school diploma is $30,000. For a
full-time worker with a bachelor’s degree, it’s $52,000. This gap
of $22,000 is the highest on record.

The Federal Reserve Bank of New York’s data mirrors the findings of
a recent paper [[link removed]] by Lawrence Katz,
Claudia Goldin, and David Autor, which similarly uncovered an increase
in the college wage premium relative to high school diplomas. And much
of this shift has been driven by longer-term macroeconomic movements
— perhaps most notably digital technological change, which increased
returns in high wage occupations through “skill-biased” dynamics.

In more recent years, however, the returns from college seem to have
consolidated among a more rarefied group of institutions and
disciplines. This mirrors broader labor market trends, which have seen
growing wage inequality and middle-class erosion. Top universities and
degrees in high-demand fields are commanding huge labor market
returns, while a majority of institutions and degree-holders are left
behind.

Undergraduate degrees from top ranked colleges and universities —
Harvard, Stanford, MIT, for example — are vacuuming up forty-year
returns around $2 million across all disciplines. For the vast
majority of colleges and universities, these gains are not nearly as
high. In many cases, they fail to justify their costs; for example,
Emerson College’s rate of return after ten years is negative. And
for students who either don’t finish their degree or attend a
for-profit college, the return on their education is particularly bad.

Choosing a degree related to a growing field can bolster a student’s
post-graduate chances of success. Yet shifts in labor market demand
can be hard to anticipate, and teenagers often lack access to the
information that would help them make the most informed decision. It
is a cruel irony that in a country where it is generally illegal for
an eighteen- or nineteen-year-old to drink a beer, they are
nonetheless expected to make a complex decision about educational
returns, debt, and degree choice, with lifelong implications.
Meanwhile, tuition prices have increased by over 500 percent since the
1980s, significantly outpacing income growth.

For a majority of students, this increase in tuition has also outpaced
growth in their returns on college degrees. And this manifests in a
rising inability to pay off loans among each successive class of
students. The result is that too many students are currently paying
too much for programs that offer them far too little.

The Student Loan Choice

If millions of students cannot afford to pay off their student debt,
shouldn’t they have chosen not to go into that debt in the first
place?

This objection to student loan forgiveness is shortsighted. The total
tuition burden is far greater than available scholarship and grant
funding. So as a simple question of resources, it is impossible for
most students to avoid taking on debt when they attend college. The
most secure methods of avoiding debt involve two factors generally out
of student control: their family’s wealth and the possibility of
accessing cheaper in-state tuition.

Students frequently face a conundrum of two risky options. They can
take on debt for a college degree, which may not offer them a
significant enough financial return to pay off their loans. Or they
can choose not to get a four-year higher education degree altogether,
which brings with it limitations on economic mobility and access to
middle- and high-wage occupations.

Given the role of technological shocks in hastening the returns on
certain college degrees, all while wages for high school graduates
stagnate, the decision not to go to college is likely to be
increasingly limiting. This is to say nothing of the broader societal
and cultural social goods that arise from having a population able to
train, explore, and become better educated through a college degree.

The hike in tuition fees is particularly pronounced at top private
institutions, but it is happening across all of American higher
education. The continual growth of tuition — far outpacing inflation
— owes itself to a destructive amalgam of competition between
universities, cheap credit, and technological change. Since admissions
for top programs is more competitive than ever before, and demand is
less elastic, it has emboldened top colleges to increase tuition,
investing in more robust infrastructure, resources, departments, and
buildings. Lagging institutions, looking to compete with top colleges,
have similarly increased their tuition to catch up.

But bad policy is the chief reason for growing tuition fees. In the
1970s, the United States began to substitute welfare transfers for
access to cheap credit, which spurred exponential growth in the
economy’s leverage, driving low- and middle-income households into
debt. Given the high demand for admission to selective colleges and
universities, the access to cheap credit functioned to artificially
inflate students’ purchasing power, allowing them to pay higher
tuition fees through debt financing. So colleges and universities
continued to increase tuition, simply because they could. Furthermore,
unlike most other developed countries, there are no tuition increase
caps.

Other countries have approached higher education with much more
effectiveness. Many European countries have made colleges tuition
free. And even the United Kingdom — experiencing a regressive
economic and political backslide from over a decade of Conservative
Party rule — has implemented provisions to protect students from
unbridled debt. This includes tuition caps, which don’t go far
enough, but do offer some protection in keeping fees below $10,000
annually. The British approach to higher education also includes an
explicit debt forgiveness scheme, linked to earnings. And all British
citizens have their debt wiped after thirty years.

Whose Responsibility?

A common retort by some lawmakers is to point out that, although these
US policy failures have been damaging, it is not the taxpayers’
responsibility to clean up the mess. Once again, this is a claim that
we should dismiss for three reasons.

First, and most obviously, the argument is hypocritical. Under
President Donald Trump, Congress passed a $1.9 trillion tax cut,
disproportionately benefitting the wealthiest Americans and
corporations. These cuts did not benefit the broader economy enough to
counteract the loss of federal revenue and the growth in the national
debt. On average the United States spends $826 billion on its military
each year, exceeding the next ten countries’ defense budgets
combined. Fifty-six percent of US adults support cutting this budget,
which includes $422 billion spent each year on private defense
contractors.

While figures capturing military waste are hard to solidify, the
Pentagon’s own report found that it could save $125 billion a year
by reducing staffing, through retirements and attrition. And by
reigning in foreign tax havens for the rich and corporations, the
United States could bring in well over $10 trillion in unpaid taxes
over ten years. To reduce the federal deficit and cut the burden for
middle- and low-income taxpayers, these are better places to start
than preserving student debt.

Second, the securitization of student loan debt — little reported in
the media — has been a source of profit for investors. Student loan
asset-backed securities (SLABS) have been around since 1992, totaling
an issuance of $600 billion of securities, with $170 billion worth
still outstanding. Most of the securitized debt is made up of private
loans. It is an effective example of how the financialization of
student debt — through credit extension — created a higher
education market built upon the exploitation of middle- and
lower-income students.

Third, and of most concern for everyone regardless of circumstance,
the student debt crisis is an economic albatross that limits economic
growth in the short run while putting it at risk in the longer run.
Mainstream economic research suggests that the student debt burden
likely plays a role in widening economic inequality, stunting economic
growth, making recessions deeper and longer lasting, and generally
increasing America’s vulnerability to unexpected economic shocks.
And when such shocks do occur, the glut of private debt often gets
transferred into public debt in the form of a bailout, which is
fronted by taxpayers.

In this regard, debt forgiveness is nothing new. America wiped clean
the debt and faulty balance sheets of major banks and financial
institutions in 2008, staving off an even deeper crash. In response to
the COVID pandemic, the United States offered a pause on debt
repayments in addition to direct welfare transfers. These didn’t go
far enough in the form of a bailout for students, but they showed an
understanding that eliminating student debt helps the overall economy.

Biden’s debt forgiveness plan was far from perfect. A better
approach would offer a progressive forgiveness regime, tied to student
earnings in addition to family income, and do more to stunt future
credit-backed tuition hikes. Nevertheless, it was a start.

In the aftermath of the Supreme Court’s June 30 decision, the
student debt crisis is as entrenched as it has ever been. There is
little hope of Congress taking the burden off of vulnerable students,
even in the form of deferred repayments, despite the signals of
economic distress in the economy. And the abject failure of lawmakers
serves as yet another example of American federal subservience to
corporations and the financial system at large.

Make no mistake. American politicians have few scruples about wiping
away debt, even in large quantities. It’s simply a matter of who
owes the debt and whether they have perceived political and economic
importance.

As David Graeber put it, “As it turns out, we don’t ‘all’ have
to pay our debts. Only some of us do.”

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Julian Jacobs is a political economist researching and reporting on
income inequality, financialization, debt, voter behavior, and
technological change.

 

* Student Debt; Higher Education; Biden; Supreme Court;
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