SENGENBERGER | Forgive Student Loans? Forget it | Notice
Last Thursday, a group of US senators, led by Senators Chuck Schumer (NY) and Elizabeth Warren (MA), introduced a resolution calling on President Biden to unilaterally “write off” $ 50,000 in federal student loan debt. All are Democrats, but luckily not one was from Colorado. It should stay that way.
At over $ 1.7 trillion, there is no denying that total student loan debt is a real crisis. The average graduate borrower had nearly $ 40,000 in debt. Student loans hinder small business start-ups and homeownership; they discourage marriage and families. Student loan defaults are on the rise.
I can speak to this from personal experience: although I am ten years away from my undergraduate studies in May, I still owe significant student debt. It is a real burden that should not be dismissed as a matter of policy.
But consider the more important question: who is responsible for dragging us into this student loan crisis in the first place? The answer is quite simple: the federal government.
While the growth in student loans dates back to the 1960s, legislation passed under Presidents Bush and Obama really sparked this crisis. The two presidents signed a law that, taken together, nationalized most student loans and significantly expanded federal lending programs.
Student loan debt was only $ 500 billion in 2007, when Bush signed his student loan bill. It was $ 800 billion in 2010 when Obama signed his legislation. Now at $ 1.7 trillion, that number has tripled in a decade. If you look deeper, it actually makes an intuitive sense.
In an article on Colorado politics in 2019, I described how New York Fed economists found that ”[h]Higher tuition fees increase the demand for loans, but the supply of loans … [relaxes] student funding constraints. They concluded that there is a “tuition pass-through effect,” which means that for every dollar a college or university receives in federal subsidized loans, tuition fees increase by 65 cents. Unsubsidized loans and Pell grants increase tuition fees by 30 cents and 55 cents, respectively. “
As I recently summary for Newsweek“Many think student debt has skyrocketed because tuition fees are high, but it’s actually the other way around; tuition fees are high because grants and loans are plentiful. ”
If you understand basic economics and human behavior, a forgiveness program will only make things worse. By canceling student loans for existing borrowers, new students will be encouraged to borrow even more. Higher education institutions will have more reasons to keep raising prices. This is because they will all expect their student loan forgiveness in the future. So, canceling student debt will make the problem worse, not better.
There is another important element to this. Beginning with federal legislation in 1978 and culminating in 2005 – coincidentally due to a bill drafted by then-Senator Biden – student loans have become virtually impossible to discharge in bankruptcy. While this means borrowers with high debt may have no way out, the systemic problem is even more dire.
In the absence of a real possibility of bankruptcy, there is little or no risk to the lender. This encourages even more demand for student loans and more granting of loans, thus contributing to the current crisis.
In view of all this, it would be wise for the Colorado delegation to continue its apparent opposition to ideas such as the cancellation of any student loan debt. The senses. John Hickenlooper and Michael Bennet, for example, are in favor of more narrowly tailored debt cancellation.
During his campaign, Hickenlooper gave no indication that he was open to a large forgiveness of student loans. His website suggests expand the possibilities of cancellation for certain groups engaged in the civil service or for teachers in areas with high needs, but there is little more on the subject.
Bennet, reelected next year, has staked out similar territory. At his re-election site, he similarly suggests forgiving “$ 10,000 a year in student debt of up to four years for public servants and those working in high-need professions in underserved communities.” Bennet also supports the cancellation of student loans after 20 years for those who have “successfully made their payments on time.”
While these are all bad ideas, they at least indicate that Bennet and Hickenlooper disagree with Biden unilaterally canceling student loan debt, or even a catch-all remission through Congressional action. They should stay true to their point of view.
A good idea endorsed by Bennet is to restore bankruptcy protection for student loans. Not only will this provide relief to borrowers with high debt, but it will also restore some risk to the loans. Congress should also ensure that higher education institutions have some skin in the game. If prospective borrowers default or pay off their debt in bankruptcy, their college or university should bear a percentage of the losses. .
There are other sane ideas, such as empowering employers to help workers pay off their loans tax-free, as former Senator Cory Gardner argued. But the bottom line is this: Colorado Congressional Democrats should steer clear of big student loan forgiveness programs and focus on better ideas that will actually help and not make matters worse.