We find ourselves in the midst of a confusing crisis. The pandemic is not over and smart people still disagree on what the government should do about it. This is the kind of time when enterprising policy advocates might get lucky and push through things that would come under harsher criticism in quieter times. Cancellation of student debt, an idea that continues to be debated in Congress, could be such a policy. Now that Congress has spent an astounding $ 1.9 trillion on stimulus, progressive Democrats including Senate Majority Leader Chuck Schumer call for an untargeted student loan forgiveness of up to $ 50,000. Of course, this is just an attempt to plunder by the wealthiest Americans.
Most Americans probably know at least someone buried under student loans, who either didn’t complete their education, or whose degree didn’t help them get a well-paying job. Most Americans probably agree that there are big and bad institutional incentives that push a lot of people into this situation. There is, and rightly so, a strong political will to change this state of affairs.
But an untargeted loan forgiveness is not the way to achieve this. If we want to change the wrong institutional incentives and support the people who are underwater, there are other ways.
First, much of higher education is paid for with federally owned or guaranteed loans. This creates a dynamic of moral hazard where borrowers and private lenders have less incentive to judge the quality of the school. Bad schools can keep getting tuition funded by debt because the government bears most of the downside risks and is slow to remove them. Second, it is a market with government subsidized demand (through secured loans) and tight supply, making tuition fees unnecessarily high. Basically it all comes down to the fact that college is more expensive than it should be, and a lot of places that offer a worthless product survive.
Many people who have student debt due to worthless degrees did not know what they were getting into. It is not unreasonable to view this as a scam. It is not unreasonable to materially support these people, as we could materially support the victims of any other scam. But we should be directing our political energy towards stopping the scam business as a whole. If we only reimburse people who have been scammed, we are only making the installation of fraudsters more interesting. That’s why any good faith effort to tackle the mess of higher education must take into account the incentives the government is providing bad schools to keep selling worthless degrees.
An untargeted student loan forgiveness would do nothing to address the poor incentives in higher education. On its own, that would worsen these incentives. Thus, untargeted forgiveness would at best be a simple transfer of wealth. And despite the way the boosters talk about it, it would be a transfer of wealth that mostly goes to the highest paid people in the country. The economists Sylvain Catherine and Constantine Yannelis have valued that in untargeted universal forgiveness plans, half of the wealth transferred would go to those in the top 30% of the income distribution. Even an untargeted forgiveness of just $ 10,000 in loans would result in a shift primarily to wage earners above the median. Rather than looking for people scammed by bad schools, it would mostly just be a reward for the rich.
That’s why it’s a little hard to take seriously the emotional rhetoric of Democrats like Schumer calling for an untargeted forgiveness of loans up to $ 50,000. It would not solve our higher education problems and would generally just line the pockets of the highest paid people in the country. It would be naïve not to notice that the party of young high-income graduates is pushing for a huge transfer of wealth that would mainly go to this constituency. This is something of a crony capitalist nightmare, and it should make progressive supporters think twice about whether they are being honest with themselves.
The next decade will see many upheavals in higher education and labor markets. There are real challenges ahead for young people who are trying to get an education and a career. Policymakers need to think about how our educational institutions can change to help these people. Emphasis should be placed on developing new ways of financing education (such as revenue sharing agreements) and on the removal of barriers to entry into vocational training and higher education. But throwing money at wealthy voters to try to silence them is a dangerous way to avoid reality.