When it comes to the disaster that is our student loan system, some debt forgiveness will undoubtedly be part of the solution. Millions of people are in default on their loans. Many cannot afford to pay. Other borrowers are saddled with debt for degrees they didn’t complete or that didn’t lead to a good job. In many cases, trying to collect bad debts is not worth the cost to taxpayers or the hardship imposed on borrowers. Student loans should be a vehicle for economic opportunity, not a financial life sentence.
The political question is therefore not whether to cancel a debt, but how and for whom. Debt cancellation could be an opportunity to fix the failings of the current system, make college funding fairer and more equitable, and bring hope not only to existing borrowers, but also to future students who will borrow for pay for their college and higher education. Tomorrow’s students need to know that the government also has a plan to help them.
But widespread, immediate, one-time debt forgiveness – $10,000 for everyone, regardless of circumstance, regardless of the fact that students will be borrowing an additional $100 billion next year – does not achieve any of these goals. But a targeted, phased approach to debt cancellation could do just that.
One-off and generalized forgiveness is capricious and unfair
Widespread debt cancellation is not fair, because student debt is mostly owed by higher-income, better-educated borrowers from affluent, mostly white backgrounds. Eligibility for federal loans is not based on income—virtually all U.S. students are eligible—and loans can be a convenient and inexpensive way to fund tuition or living expenses, even for families who can “afford to pay”. Therefore, who owes student debt and how much it owes primarily reflects who goes to college, whether they finish college and go on to graduate school, and whether they attend an expensive school.
High-income families are six times more likely to send their children to college than low-income families. If you meet someone with a recent college degree, more than half grew up in a high-income family. Black and Hispanic Americans remain woefully underrepresented at all levels of post-secondary education and are less likely to earn degrees. Many student borrowers do well after college – salaries for recent college and professional graduates are at record highs. Canceling the debt of wealthy, high-income, well-educated, mostly white Americans makes society more unequal, not less.
One-off, blanket forgiveness is capricious and unfair in other ways. Why does a graduate of an Ivy-League professional degree deserve the same relief as a student who pursued a low-cost community college degree? Why should the Class of 2022 get a windfall, but not students enrolling next year? Why should a borrower who has spent years paying off a balance get as much or less than someone who graduated yesterday?
Students borrow nearly $100 billion each year, but are eligible to borrow about three times as much, so the previous counts for how much prospective students borrow and repay, not to mention how much colleges charge. As imperfect as the current system is, it could get worse.
In his campaign, President Biden outlined enduring reform that included increased scholarships for low- and middle-income students, funding to reduce tuition at public colleges, and an income-based reimbursement system (IDR ) more forgiving. This view extends to our widely supported system of Pell grants and support for public colleges, but it also reflects some hard truths: there is no reason for taxpayers to subsidize exorbitant private school tuition, children from high-income families or graduates and professionals. degrees.
Done right, debt cancellation could advance that vision.
The political question is therefore not whether to cancel a debt, but how and for whom.
Biden has proposed doubling Pell’s maximum grant from its current level of $6,500. He could cancel a similar amount of debt for existing low- and middle-income borrowers and promise to do so annually for future low-income borrowers in case Congress does not act on his proposal. Targeting aid based on data the Department of Education already keeps from financial aid forms (like family income and Pell eligibility) and determining if the student was an undergraduate is faster than trying to cap forgiveness based on current income. Using these measures to target relief would be incremental and cost-effective. After all, Pell grant recipients represent 90% of student loan defaulters. And offering to provide the same help to pay for college education to past and future students would be consistent and fair.
No free college plan contemplates free higher education or subsidized tuition at expensive colleges or for high-income families. These students, past and future, should expect to start repaying their loans. The Biden administration is currently implementing new IDR plans and a fresh start for borrowers in default, which will ease the burden on borrowers and expedite the loan forgiveness enacted by Congress. These policies will help future and current borrowers. Loan repayment does not need to start immediately; Biden’s new regulatory policies should be in place first.
The best way to target help to troubled borrowers is through IDR plans, which calibrate loan repayments to borrowers’ incomes and cancel remaining debt after 20 or 25 years. Gaps in student loan debt widen after graduation based on race, economic status, and parental education, as well-off borrowers repay their loans while others cannot. This makes eventual IDR forgiveness highly targeted to disadvantaged groups and more progressive than general relief.
The IDR plans were enacted too recently and implemented so poorly, however, that almost no borrowers have yet received forgiveness. Millions of other borrowers have accrued interest and fees or defaulted on their loans in the absence of IDR protections. Biden could also use debt relief to address this issue and, in doing so, instill new confidence that these programs will work for prospective students. For example, Biden could provide relief based on years of repayment (for example, waiving a certain amount for each year of repayment beyond 10 years, so that borrowers who graduated a long time ago get the most relief) or by forfeiting balances greater than the original principal balance (and disposing of accrued interest and fees) or canceling the remaining debts of borrowers whose cumulative payments have exceeded the amounts they should have paid under of a standard plan. These options would be heavily targeted at borrowers who have struggled with their loans for many years, have loans that are unlikely to be repaid otherwise, and may reflect the help that future borrowers might expect from revamped IDR plans. Some borrowers would get less than $10,000 and others would get more, depending on their circumstances. Future borrowers would have more confidence that the government intends to make the IDR system work for them as well.
A regular criticism of targeted policies is that they are too complicated or the government cannot be trusted to implement them. These criticisms are all too true when it comes to the history of student loans. By implementing targeted policy quickly and effectively with the information the Department of Education already collects for this purpose, Biden can restore confidence that the government can deliver nuanced policies. Americans need a student loan system to work for the future, gain broad bipartisan support, and be economically viable. A targeted, coherent and useful loan relief policy could be a step towards this goal.