Student Debt Cancellation: Adding Fuel to the Fire. NewsWire

NewsWire: 9/23/22

• Will Biden’s student loan forgiveness plan push college costs even higher? Undoubtedly. While many progressives have welcomed the executive order, the plan will ultimately make the debt problem worse. (The Economist)
• NH: Predictably, Biden’s student loan forgiveness plan has been met with sharply polarized reactions. A Morning Consult poll finds that 72% of Democrats support the plan to cancel between $10K and $20K for borrowers making up to $125K, compared to only 27% of Republicans. The governors of 22 states, all Republicans, recently signed a letter asking Biden to withdraw the plan. 
• In previous pieces, I’ve made my stance on this issue clear. Loan forgiveness is worse than just a short-term palliative based on a dubious equity rationale. By itself, the initiative will make the problem even worse than it is today. Forgiveness encourages colleges to keep raising tuition, since they now expect that the federal government will ultimately cover the higher cost. And, for the same reason, it encourages students and their families to keep borrowing more. (See “Student Loans Are Already a Big Loss for Taxpayers” and “A Student Debt Jubilee…Is It Coming?”)
• The University of Pennsylvania estimates that the total cost of the plan could exceed $1T (yes, $1 trillion)--and all the while, college costs are just going to keep climbing. The Committee for a Responsible Federal Budget estimates that aggregate debt loads will return to their present levels in five years. If we want to reduce student debt over the long term, forgiving existing loans is exactly what we should not be doing. At the very least, it should be one part of a much broader overhaul of the entire system of federally subsidized college education.
• On the surface, one would expect college loan forgiveness to be a universally popular idea. It's free money offered on an income-related basis in support of a worthy public goal: more access to higher education for more Americans. But when asked if Biden's plan to cancel student debt is fair, respondents were closely split: 48% of voters agree and 44% do not.
• Why are Americans, even young Americans, so hesitant to give it more support? (See "Young People Divided on Student Debt.") One obvious drawback of almost any college-debt forgiveness plan--including the limited and means-tested Biden plan--is that it is economically regressive. Even with the income cap, an estimated 69% of the Biden plan's benefits will go to those in the top 60% of the income distribution. This violates the principle of vertical equity: Non-college workers are in effect being asked to bail out the college-educated workers.
• Such plans also violate the principle of horizontal equity. If we compare two families with equal income, the one who scrimped and saved not to borrow for college is in effect being asked to bail out the family that didn't bother to save and that borrowed instead. This particular inequity is especially invidious because it invites moral hazard. That is, it encourages fewer people to save and more people to borrow in the hopes that they won't have to repay.
• Not only does this set a bad precedent for student borrowing, but the examples, once set, can easily encourage others to ask for similar treatment from other federal lending programs. Already, a group of Democratic senators is arguing that the plan should be expanded to include parents who borrowed to pay for college for their kids.
• Perhaps the most frustrating aspect of Biden's decision is that most Americans actually do support the correct policy remedy for the skyrocketing cost of college education. And this would be for the federal government to take active measures to expand the supply of high-quality college institutions and thereby bring down the price.
• Back in 2006, President G.W. Bush's Secretary of Education, Margaret Spellings, tried to do just that, starting with a program to help employers measure the value-added quality of college degrees. Yet after vehement opposition by Ivy and near-Ivy incumbents, who didn't want the glare of objective analysis thrown on their activities and who clearly benefit from a limited number of "prestigious" schools, Spellings's program was shut down.
• But guess what? In the Morning Consult poll, a whopping 77% of American voters said that they support the idea of “developing a plan to lower the costs of higher education,” including 68% of Republicans, 75% of independents, and 86% of Democrats. This option, of course, would address the underlying problem--and it’s the only one that attracts majority support from voters across the political spectrum. Yet there are currently no plans by the administration or in Congress to make college more affordable.
• Why not? I suspect it’s because loan cancellation is easier than trying to tackle the institutional causes of pricey colleges. No one seems to complain when you add to the national debt. And free money doesn't step on the toes of pricey colleges. To the contrary, it helps feed them.
• The only bright spot here: Serious challenges are being raised about Biden's power under the law to unilaterally forgive large segments of student borrowers. Should the courts invalidate the forgiveness, lawmakers may be compelled to think a bit more seriously about how to address this problem.