The Biden administration just announced its long-anticipated student loan forgiveness plan. The plan would forgive $10,000 for borrowers making less than $125,000 per year ($250,000 if married) and $20,000 for Pell grant recipients. On the bright side, the Biden plan could have been worse, such as wiping out all debt with no income restrictions. But that’s about the best thing to say about this plan.
We at the Texas Public Policy Foundation recently released a report documenting 18 reasons why student loan forgiveness like this is a mistake (Minding the Campus serialized much of the report, grouping the reasons into logical and rhetorical, educational, economic, moral, political, and legal problems).
Now that the Biden administration has announced its plan, the five worst problems are as follows:
It is expensive
This plan will likely cost at least $300 billion dollars, though as details trickle out, this number will increase (e.g., the plan includes provisions not included in the original estimate such as $20,000 in forgiveness for Pell grant recipients and the inclusion of Parent PLUS loans). All of that money would have been better spent on well-designed, well-targeted programs like the Pell grant. For context, we spend about $26 billion per year on Pell grants, so the amount being spent on forgiving loans could have financed a decade of Pell grants.
It will exacerbate the student loan debt problem
The ostensible reason forgiveness is needed is because some students have too much debt. This plan will make the problem even worse. First, students will take out even more debt from now on, under the reasonable belief that they won’t have to pay all of it back thanks to future rounds of forgiveness. Second, colleges will respond by raising tuition, since their students are now less price-sensitive. The combined effect of these will be to create even more student loan debt. If your “solution” to a problem makes the problem worse, then it’s not a very good solution.
It will increase inflation
We are experiencing the worst inflation in a generation—this plan would make it worse. As Larry Summers points out, this plan would increase inflation for two reasons. First, the recipients will feel $10,000 or $20,000 wealthier, and some won’t have to make any more loan payments, both of which will increase spending by households—and therefore inflation. Second, as noted above, colleges will increase tuition, which will directly increase inflation since college tuition is included in price indices. Indeed, the Committee for a Responsible Federal Budget estimates that the inflationary impact of loan forgiveness would offset the claimed inflation reduction from the recent Inflation Reduction Act.
It is mistargeted
While most students can repay their student loans, some do take on unaffordable debt. But the solution to that problem should focus on those with repayment problems, not the majority of borrowers who can afford to repay their debt. Any couple making $249,999 simply does not need or deserve to have its loans forgiven. Yet an estimate using the Penn Wharton Budget Model finds that the poorest 20% will receive less than 12% of all benefits from the Biden plan. That number should be 100%—or close to it.
It is regressive
The students with the most debt tend to have graduate degrees, and as a result they also tend to have high incomes. This means that blanket forgiveness would be regressive, providing the rich with greater benefits than the poor. This was clearly seen with the loan repayment pause, where I found that “pharmacists and dentists earn about triple what a new teacher earns, yet they benefit more than 10 times as much from the repayment pause” because their debt was higher. The Biden administration is claiming that the income cap of $125,000 ($250,000 if married) will prevent its plan from being regressive. But it doesn’t. The Penn Wharton model estimates that even with the income cap, the richest 20% will receive more benefit than the poorest 20%.
Given these enormous problems, what should be done?
First, there are many legal avenues that may stop this plan in its tracks. To start with, the Department of Education’s lawyers concluded that the president does not have the authority to unilaterally forgive loans. Congress can also sue under the Antideficiency Act. Student loan servicers could sue for loss of revenue. And states like Texas may also be able to sue on behalf of education agencies.
Second, as Charles C. W. Cooke writes, this plan has “shown once and for all that the government cannot be trusted to issue these loans on behalf of America’s taxpayers, and that it must not be allowed to do so again. In 2010, Congress authorized a loan program, not a system of politically motivated rolling jubilees. If the program becomes that—as it would under Biden’s loan-forgiveness scheme—it must be killed.”
I couldn’t agree more. Fortunately, there is a better way for the country to make student loans that limits government involvement by exploiting the power of markets. In a 2020 report, I argued that “The best student loan system would (a) rely on private, income contingent lending, (b) forbid loan guarantees as well as bailouts of lenders or borrowers, (c) ensure continuous competition among lenders, and (d) impose caps on annual and aggregate borrowing.”
Moving to such a system in 2020 would have been a good idea. In light of Biden’s student loan forgiveness plan, it is now essential. The best-case scenario is that Biden’s plan is stopped in court, but that it wakes up Republicans to the need to scrap our student loan system and replace it with a market-based program the next time they are in power.
The worst-case scenario is that courts don’t stop the Biden plan, and Republicans stick with the status quo the next time they are in power, in which case we can anticipate expensive new student loan forgiveness packages every election year.