On Wednesday, President Biden announced his long-awaited plan to cancel student loans — effectively wiping away up to $10,000 for borrowers with individual income below $125,000 (and couples with joint income below $250,000). The administration’s plan forgives up to $20,000 for Pell Grant recipients under the same income limits.
The move, which will cost taxpayers hundreds of billions of dollars, lacks any economic rationale and reeks of political motives. Advocates for cancellation argue that it was needed to help economically disadvantaged Americans and to work toward closing the racial wealth gap. The problem is that it hardly achieves either of those goals; it delivers the most benefits to people earning far more than the average American and awards the bulk of relief to white households.
The media often portray borrowers with student debt as economically disadvantaged, but the reality is that people with debt are often among the highest earners in the economy. That’s because the economic return on education is large. Biden’s decision to exclude the highest earners from eligibility for student loan relief makes the plan less regressive than it otherwise could be. But the cutoff, $125,000 for individuals, means that borrowers earning three times the median income in the United States are still eligible for this giveaway.
More important, the plan delivers nothing to the actual most disadvantaged group in the economy, workers without any education after high school, which make up more than one-third of the adult population. These people will receive nothing from this round of handouts but will be on the hook to face the consequences of the spending; some combination of higher taxes, a greater deficit, cuts to other federal programs, and modestly higher prices in the broader economy.
It’s hard to accept that this step was taken to address the racial wealth gap, or to address racial inequality more broadly. The majority of beneficiaries will probably be white. Publicly available data won’t allow for a detailed empirical analysis of who will benefit from the announced plan, but examination of a similar plan suggested that two-thirds of benefits would go to white borrowers and less than one-quarter of benefits would go to Black borrowers. The enacted plan will probably prove to be more generous to Black borrowers (thanks to the unanticipated provision that awards more forgiveness to Pell Grant recipients), but it will still be the case that white Americans are a major beneficiary of the program.
If economic relief or addressing racial inequity had been the goal, the White House would have ignored student loans entirely and focused on programs that target those goals explicitly, like refundable tax credits or reparations. Instead, they ended up with an expensive pandering campaign aimed at turning out middle-class, educated voters that the party will need in the coming election cycles to maintain any power in national politics.
The fairness and the naked political ambition behind the plan are reason enough to object to it, but my concern is centered on the problems it creates for the future.
This plan may prove to be inflationary, but the scale and nature of the intervention will likely not yield excessive inflationary pressure. While each individual beneficiary will be receiving a large influx of wealth, it will only affect their current spending by the amount that it reduces their monthly payments. If this were a good policy otherwise, I’d argue that the contribution to inflation would be worth it. But as it is, it adds (minor) insult to injury.
But there is reason to worry that this will increase costs for higher education. We are already grappling with out-of-control rates of tuition inflation and this plan has the potential to make matters much worse. If future students anticipate this is just the first of many loan-cancellation events, they may be willing to pay and borrow more to pay for college. The resulting increase in demand for higher education will allow institutions, colleges, and universities, to raise prices even further. Last week’s announcement was without precedent, so it is difficult to estimate how large of an effect this might have on student spending behavior, but at the very least we can tell that it is pushing us in the wrong direction.
Additionally, the plan does nothing to address the challenges that got us to where we are today. Analysis from the Committee for a Responsible Federal Budget suggests that it will take less than 10 years to return to the levels of outstanding debt that we are facing today; and that doesn’t even take into account the possibility that we’ll be facing higher prices and less conservative borrowing as a result of last week’s cancellation announcement.
I’ve spent the past decade working to help policy makers and the public better understand the nuanced challenges of higher education finance. So this plan, which seems designed to prey on our collective misunderstandings of this issue, is especially disappointing. But even Americans without a dog in this fight should be saddened by this plan. It highlights a failure of national policy makers to respectfully manage taxpayer dollars and to enact the painfully overdue reforms that are necessary to keep higher education functioning as the engine of economic mobility that we rely on it to be.