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**AUGUST 15, 2022**
Kuttner on TAP
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**** Time for Student Debt Cancellation
With the climate bill safely signed into law, Biden can get on with this
long-delayed executive action.
For months, Biden has delayed making a decision. The back-from-the-dead
negotiations with Joe Manchin deferred presidential action another few
weeks while the White House did not want to rile deficit hawks.
Now, an order on debt cancellation is imminent. It is likely to be
capped at $10,000 per debtor, with income limits. The naysayers argue
that even $10,000 is too much. They are wrong.
One contention is that debt relief is a form of stimulus that the
overheated economy doesn't need. But there is currently a temporary
moratorium on debt payments that cancellation will simply make
permanent. So in terms of putting additional spendable money in the
pockets of debtors, there's no change (though at some point, temporary
pauses would have to end).
Last year, when the economy was in recession and Congress was debating
the $2.2 trillion Build Back Better Act, the Committee for a Responsible
Federal Budget examined the stimulative impact of different policies.
Debt relief capped at $10,000 was far less stimulative than most
.
It generated spending of just thirteen cents per dollar of federal
outlay.
Another argument is that debt cancellation is distributively backwards:
On average, people who go to college are better off than people who
don't. This simplistic view is profoundly wrong.
At $10,000 cancellation, the debt is wiped out for roughly the bottom
one-third of debtors (about 15 million out of 45 million carrying
student debt). These are not the people who borrowed large sums to go to
law school, med school, or business school and now earn high-six-figure
incomes. Typically, they are strivers-first-generation college
students from low- and moderate-income families who borrowed because
they didn't have affluent parents to pay tuition.
Even better than $10,000 cancellation would be $20,000, a cap that Biden
is unlikely to support.
At $20,000, half of all debtors have their debt canceled completely, and
at least half of all debt is canceled for three-quarters. But $20,000 is
still a small fraction of the debt owed by the typical doctor, lawyer,
or MBA, and that problem could be addressed by income limits.
Debt cancellation is also a particular benefit for the roughly ten
million people now in default who risk ruined credit ratings. It is a
well-targeted gain for people who never graduated and now face the
double burden of relatively low incomes and debt repayment. These
debtors are disproportionately African American.
Supposedly, people who dutifully paid off their debts will resent relief
for those who did not. But this premise leaves out the factor of
salience. Relief is far more meaningful for those who receive it than
those who arguably resent it secondhand. We have not heard a peep out of
these supposedly resentful people as the repayment moratorium has been
repeatedly extended during the pandemic.
Biden should include a special process for genuine hardship cases-such
as people with severe medical problems or those now in their seventies
and eighties who co-signed loans for children or even grandchildren. We
need more far-reaching reform, such as free community college and an end
to the debt-for-diploma system altogether. For now, partial debt
cancellation is a good start.
~ ROBERT KUTTNER
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