By Dr. James M. Dahle, Emergency Physician, WCI Founder
[Update after publication: Student loan holiday extended to January 31, 2022, described as “the final extension.”] I'm more aware than most of the severity of the student loan problem in this country. Recently, Senate Majority Leader Chuck Schumer reiterated his recommendation that President Biden erase up to $50K in student loans as an executive order. I first heard Schumer talk about that plan back in the Fall of 2020 and thought it sounded pretty awesome until I started thinking about it. Then I realized that sort of a policy, at least by itself, would be a terrible idea for many reasons.
11 Reasons $50,000 in Loan Forgiveness Is a Bad Idea
I actually think it is such a bad idea that it is unlikely to ever be implemented by executive order, much less get through Congress. This is despite knowing tens of thousands of my readers could potentially benefit from it (depending on how means-tested it ends up being). Let me explain why. Naturally, I assume my readers know the basics of economics, the tax code, and the realities of mathematics.
#1 Doesn't Address the Root Problem
The biggest issue is that higher education simply costs too much.
Now to be fair, part of the problem is the consumers (students) of the product (education) are making stupid decisions. Borrowing $200K to get an English or Art History degree is not very smart. Nor is it smart to go to an out-of-state public college most of the time. Nor is it smart to go to a particularly expensive school when less expensive and similar quality educations are available elsewhere. The fault does not all rely on the students, however. Their guidance counselors in high school and their parents often give bad advice (“Study what you love where you want to study it, you'll qualify for aid!”). The education industry itself can make schooling dramatically cheaper. If nothing else, spending a year learning on Zoom has taught most of us that you could have one Biology 100 teacher teaching the entire country. Put the lectures on Youtube, the exams online, and boom, you could charge $100 for this class instead of $5K.
#2 Hoses the Next Generation
Another issue with a random broad loan jubilee is what happens to the person who starts their education next year? Sure, you got yours, but what about them? Or are we going to do this every 4 years? Or are we just going to nationalize all universities? What comes next? Without an answer for that, it is just irresponsible to wipe out current debt.
#3 Nothing Is Free
Lots of people advocating for this sort of policy simply don't understand economics, tax policy, and sometimes even how debt works. I had somebody try to argue with me that “the Feds” were somebody besides you and me. It's like they missed the whole high school US Government class or something. Basically, in order to provide a government benefit, somebody else must pay for that in their taxes. That's fine, we redistribute income through the tax code all the time. But it isn't free. That money that goes toward paying for student loans can't pay for food stamps, aircraft carriers, third world aid, Social Security, Medicare, National Parks, new highways, or whatever your favorite government program is.
“But the government can just print the money, that's what they did with the COVID stimulus!” Sure, you can do that for a while…until inflation rears its ugly head. But even there, you're still choosing to print money for that purpose instead of some other good cause.
You really want to forgive the student loans of the educated instead of working on COVID vaccines or buying school lunches? This is not something like PSLF we're talking about. With PSLF, the government/taxpayers are getting something for their dollars—they're getting people willing to work for non-profits and government entities. That's not the case with broad forgiveness.
#4 A Regressive Tax on Borrowers
Need another reason? Interestingly, most of those who favor forgiveness find themselves on the left end of the political spectrum. Those same folks are usually against regressive taxes. But this is a regressive benefit by definition. If you only owe $5K in student loans, you get $5K. If you're a doctor who owes $200K, you get $50K. Few would argue that is fair.
#5 A Regressive Tax on the Less Educated
But wait, it gets worse. What about the people who chose not to go to school because it was expensive and took a job, started a business, or worked their way through an inexpensive apprenticeship? You think they're going to be happy when they see all these “college folks” getting government handouts? I wouldn't count on it. They're going to see their hard-earned tax money going to those earning more than they are.
#6 Encourages Schools to Raise Tuition
A well-known principle of economics is that what you subsidize goes up in cost. This is one reason tuition and health care have outpaced inflation over the last few decades–government subsidizes both of them heavily. Schools charge more because they can. If the students can't afford it, they can get student loans to cover it, so long as they can get admitted to the school and have a pulse. Many new schools are even for-profit institutions. Anytime government offers more grants, more loans, more IDR programs, and more forgiveness programs, the schools see it as an opportunity to raise tuition. It's kind of like prescribing narcotics to someone with chronic pain. Yes, you're helping them in the short-term, but in the long-term you're making the problem worse. Even if they avoid the constipation and addiction, they still get the hyperalgesic effects.
#7 Keeps Borrowers from Refinancing
When borrowers see programs like this (or even just hear about the possibility), it causes them to change their behavior. For example, instead of refinancing their loans (and thus paying back the taxpayer who can now loan the money to another student), they sit on them, staying in the federal system and hoping a knight on a white stallion rides in and saves them from their student loans.
#8 Keeps Borrowers from Paying Off Loans
You know what else borrowers don't do besides refinance? They don't pay off their loans, either. Policies, especially rapidly changing policies, basically punish those who do the right thing. It's a bit like the 2020 COVID-associated moratorium on federal student loan interest and payments. Those who “did the right thing” and refinanced their loans and paid them off rapidly were punished for doing so. The first law of economics is that people respond to incentives. Is this really the behavior you want to incentivize?
#9 Encourages Excessive Borrowing
One of the biggest problems of any forgiveness program is that it brings on moral hazard (note this is an economic term, not an ethics one). We already see this with IDR and PSLF forgiveness programs. If you're going to get the loans forgiven anyway, why not borrow as much as you can and drag them out as long as possible and pay as little as possible? I mean, look at the strategies out there to maximize PSLF. There are people hiring student loan advisors, deliberately paying more in taxes, earning less, and saving in the “wrong” retirement accounts because it will increase the amount forgiven via PSLF and they will come out ahead in the end. The more forgivenesses that are implemented, the more that sort of behavior will be incentivized.
#10 Encourages Dependent Behavior
Finally, the larger government becomes, the more we tend to rely on it. We even become dependent on it. We start expecting the cavalry to ride in and save us rather than being self-reliant and careful stewards of what we have and purchase. I think people are far more likely to be successful when they realize that the cavalry isn't coming, and they'll need to make some sacrifices and fix their problems themselves. That isn't necessarily an argument against giving a hand up to those who need it. But we all know that too much help can do more harm than good.
#11 Better to Owe the Department of Education than the Department of the Treasury
An executive order to forgive student loans would not change tax laws. What do the tax laws say about forgiven debt? They say it is fully taxable at ordinary income tax rates in the year forgiven. It basically is the same as with Income-Driven Repayment forgiveness programs (not PSLF). So if you get $50K in forgiveness, you now have $50K more taxable income that year. Maybe it is taxed at 22% federal and 5% state. You now owe $13,500 to the IRS.
Unlike the Department of Education, the IRS is serious about getting paid. They will seize your bank accounts. They will garnish your paychecks. They will put a lien on your property. They will charge you interest, too, just like your student loans do. Maybe penalties, as well.
If someone can't pay off their student loans over decades, what makes you think they can pay off a quarter or a third of them all in one year? Student loans go away at death, too, even if you have an estate. That's not the case for taxes. The bottom line is that it is far better to owe money to the Department of Education than the Department of the Treasury.
A Better Solution
It is relatively easy to complain about someone else's ideas. Complaining without providing a better solution is just whining, though. So here is what I think is a better solution. It has three parts:
- Get the government out of the student loan game
- Underwrite student loans
- Ensure appropriate regulation
Let's take them step by step.
#1 Get the Government Out of the Student Loan Game
There are some things that really do have to be done by the government for various reasons. Most fall into the “tragedy of the commons” type of scenarios. Military and police protection. Interstate highways. Disaster relief. These are natural roles of government. But student loans? I mean, we don't get our car loans, mortgages, or credit cards from the government. Why would we go there for student loans?
Look at the terrible job they are currently doing with them. You can get a 30-year mortgage at less than 3% but you can't borrow for medical school at anything less than 6%? And the service you get from the government student loan servicing companies compared to the folks on my recommended student loan refinancing company list? It's night and day. You have a problem with Splash or SoFI or whoever and you email me and it is fixed in 3 hours. They actually want your business. The folks at FedLoans can't even count to 120. Get the government out of the lending game. Private industry can handle this and (with appropriate levels of regulation) will likely do it better. PSLF type programs can just be used to pay off private loans, no biggie.
#2 Underwrite Student Loans
This one will require a radical sea change in thinking about student loans. You can't just walk into a bank and get a mortgage because you have a pulse. You have to have a job and a reasonable credit history, and that's for a loan that is backed by a hard asset that can be foreclosed on and sold. But you can go to the Department of Education and get a loan for whatever some for-profit college says their cost of attendance is. Nobody looks at your grades or ACT score. Nobody asks about your career plans or even what major you plan to get. Nobody looks at how much you currently owe or your current assets. Maybe we should stop lending $200K to people who want to get a degree like these which have the lowest median earnings for people between the ages of 25 and 59:
- Early Childhood Education: $39,000
- Human Services and Community Organization: $41,000
- Studio Arts: $42,000
- Social Work: $42,000
- Teacher Education: Multiple Levels: $42,000
- Visual and Performing Arts: $42,000
- Theology and Religious Vocations: $43,000
- Elementary Education: $43,000
- Drama and Theater Arts: $45,000
- Family and Consumer Sciences: $45,000
- Language and Drama Education: $45,000
- Special Needs Education: $45,000
A recent WSJ article about Columbia pointed out that half of those with a master's degree in film were making < $30,000 two years later.
Is it okay to borrow $20K to get a degree in social work or film? Probably. Is it okay to borrow $200K? No way. We are not helping people by doing that. We are hurting them. We should stop it. If colleges no longer have an unlimited number of students waiting to borrow six figures to get these sorts of degrees, they will either figure out a way to offer these degrees for less or they will go out of business.
Now, there is a counterargument to this approach. That argument is that now only the children of the rich will be able to get drama degrees from colleges that charge $50,000 a year in tuition. That is a fair point. However, since you are not helping the poor by letting them do this, I would argue you are doing them a favor by not lending them this money. They'll either find a cheaper place to attend or they will do something else with their lives. In the end, either will be a better option than attaching a six-figure ball and chain to their ankle for the next 50 years.
Now if you are a smart kid going to a cheap school and majoring in engineering, you can borrow $80K at 3%. If you struggled in high school and want to go to an expensive liberal arts college and major in theology, you'll only be able to borrow $20K at 7%. Underwriting. It should also apply to student loans.
#3 Ensure Appropriate Regulation
The downside of turning something over to the private sector is there are a lot of smart people in the private sector who figure out ways to make a profit off of their customers. Sometimes they do things that hurt the borrowers even more than the government does. Take a look at the credit card industry, for example. So a certain amount of common sense regulation would need to take place. Obviously, you need rules to prevent inappropriate discrimination. Perhaps also limits on how much can be borrowed for a certain degree or a maximum interest rate on the loans. If they don't think 8% is enough to compensate them for the risk of loaning to you, maybe they should not be able to loan to you at all. Maybe schools have to pay off a third of your loans if you can't get a job in your field within 24 months of graduation so they have skin in the game, too.
Another big problem with student loans is that you cannot get rid of them in bankruptcy. Since there is no collateral to be seized on a student loan, what is to keep someone from coming out of school and declaring bankruptcy? However, this aspect of student loans keeps people who have terrible things happen to them from ever fixing their financial life. A business owner whose business goes south can file bankruptcy. Why can't you do that if your planned “business in Dentistry” doesn't work out? You should be able to. Maybe not when you first walk out of college, of course. Perhaps there should be a 10-year moratorium from the time you leave school on eliminating student loans in bankruptcy. But if people can get out of mortgages and auto loans and business debt and credit cards with nothing worse than losing all their assets and being unable to borrow money for 2-7 years, why can't it be done with student loans?
Now, if you want to couple some sort of mass student loan forgiveness with a bipartisan reform of the system like what I have proposed, I can get behind that. But just a blanket debt jubilee? No, I think that's bad policy and bad precedent. That doesn't necessarily mean it won't occur, but I don't think it should. I don't think it is likely to happen either. The Republicans are mostly against it, and it is likely that in a year and a half they will control at least one house of Congress, as the president's party traditionally loses seats in the mid-term elections. Some of the more liberal Democrats are for it, but there does not seem to be any sort of broad consensus about it within the party. If it doesn't pass while the Democrats control the House, the Senate, and the White House, it seems unlikely to pass at all while current borrowers are managing their student loans. Besides, if you owe $200-400,000 in student loans like many doctors, having $10-50,000 forgiven should not change your student loan plan much. $50,000 barely moves the needle and $10,000 doesn't move it at all. Unlike PSLF (and even that may have been unintentional) these forgiveness programs really are not for high earners.
What do you think? Do you think broad student loan forgiveness is wise policy? How would you modify it to address these concerns? Do you think it will happen anyway? Comment below!