This article is part of TPM Cafe, TPM’s home for opinion and news analysis.
With the election of Joe Biden to the U.S. presidency, forgiveness of federal student loan debt is suddenly on the table as a very real possibility. Millions of Americans could find the crushing financial burden of a college education lightened overnight. Biden can eliminate federal student debt with the stroke of a pen using an executive order, and progressives and prominent Democratic senators are calling for him to write-off at least $50,000 per borrower.
Theoretically he could include all $1.6 trillion of outstanding student loans. And the cancellation of student debt is popular with voters. Fifty-six percent of registered voters said they supported Senator Elizabeth Warren’s plan for cancelling debt and only 27 percent opposed it. And the cancellation of student debt would help stimulate the economy during the coronavirus recession and give a long-term boost to millions of struggling families.
Naturally, though, not everyone is on board with common sense. The arguments against debt forgiveness tend to hinge on two common misconceptions. Some opponents argue that student debt forgiveness would create a moral hazard. Another common refrain is that forgiving student debt would amount to a handout to the rich. Both arguments are wrong.
It’s not a moral hazard.
Writing in Forbes, Preston Cooper, a visiting fellow at the conservative Foundation for Research on Equal Opportunity and an alumnus of the American Enterprise Institute, argues that forgiving student debt would create a “massive moral hazard.” Yet he fundamentally misunderstands the nature of moral hazards as they relate to student debt. He contends that “moral hazard occurs when there’s an implicit or explicit promise that someone else will bear the cost of your decisions,” and he argues that forgiving student debt “causes people to make questionable choices that they would not have if they themselves were responsible for all the consequences.” He is wrong on both counts when it comes to student debt forgiveness.
Moral hazards are typically spoken of in the insurance industry and describe a situation in which one party is able to take actions knowing that any risk associated with those actions is transferred to another party. A classic example is an employee who drives a car which is owned and insured by their employer. That employee, since they neither own the car nor pay the premiums to insure it, is not incentivized to take care of it and might actually take greater risks while driving it.
In the real world, during the years before the 2008 financial crisis, subprime lenders were able to sell mortgages to people who couldn’t afford them and then package and sell those mortgages to unsuspecting investors elsewhere. It’s not the individual homeowner’s fault that Bear Stearns went bankrupt — it’s the fault of the loan originators and the speculators. Similarly, if there’s any moral hazard in the student loan system, it lies with colleges and universities — acting similarly to subprime mortgage lenders — who charge exorbitant tuition with the knowledge that the U.S. government will always provide a loan to students who can’t afford it. The schools profit but take on zero risk.
Cooper gets another aspect of this wrong as well. He makes a narrow-minded argument that cancelling student debt would encourage people in the future to “make questionable choices” by taking on debt they cannot afford. This only makes sense if one believes that the pursuit of higher education is a questionable choice to begin with, rather than something that benefits not only the individual, but society writ large. It is ludicrous to say that the correct answer to the student loan crisis in America is for people to simply be less educated; such a perspective may be penny wise, but it is pound foolish and would inevitably lead to America becoming more socially stratified and less competitive on the global stage.
It’s not a handout to the rich.
The second common argument against student debt forgiveness is that it would simply mean giving money to the already rich. This is patently false, yet the belief persists because of a failure to differentiate between income and wealth. While it is true that around 54 percent of student debt is held by households in the top two quintiles by income, this is a less meaningful statistic than it may seem at first glance. When one looks at wealth, the amount of assets — including homes and savings — versus debt owed, the student debt narrative changes radically.
Almost 81 percent of student debt is owed by households in the bottom 60 percent in terms of wealth. In other words, wealthy families, by and large, don’t have much student debt, but poorer families have quite a bit. And of course, Black families are more likely than any other category to have student debt. By definition, students from wealthy families are not taking out student loans; their parents are paying for them to go to school already (and in some cases paving the way to admission with bribes). By and large, it’s poorer students who take on student debt in the hope that education will be a key to social and economic advancement.
Sadly, the explosion of student debt in recent years means the opposite is often the case. Student debt is destroying wealth generation and the long-term value of higher education. Research from the St. Louis Fed at the end of 2019 found that although college graduates still have substantially higher incomes than those without, the wealth premium — the extent to which a college degree translated to greater wealth and class mobility than the previous generation — has cratered since 1940.
The numbers are stark. Non-white college graduates born in the 1980s or later have zero wealth premium over earlier generations. They’re functionally stuck at zero, despite having higher incomes. And wealth creation for white college graduates has plummeted as well. The report calls it a “striking divergence between the income and wealth outcomes.” While white college graduates born in the 1930s “owned 247 percent more wealth and the 1940s cohort owned 195 percent more wealth” than those without college degrees, by the 1980s that had fallen to just 42 percent. The story for Black families is even worse. For those born in the 1930s, college educated Blacks had a wealth premium of 509 percent over those without a degree. That number had fallen to zero by the 1970s and 1980s. In other words, Black families with college degrees had the same amount of wealth as those without.
Of course, student debt isn’t the only explanation for the disappearance of the college wealth premium. Accessibly priced assets — from housing to stocks — were plentiful in the earlier decades of the 20th century, and the relaxation of financial regulations during the 1980s set up younger generations for more potential problems. Yet the single biggest factor, the researchers found, was the soaring cost of higher education. The report’s authors state in no uncertain terms that “the 1980s cohort of college graduates, most of whom attended college after 2000, experienced a very sharp decline in wealth outcomes.” So while college graduates may have higher incomes than those without degrees, that extra money simply disappears into payments to the federal government.
Why we should cancel student debt.
Eliminating student debt would reshape America for the better almost overnight. Young families that have struggled to accrue wealth — such as savings for emergencies like the next pandemic or an inevitable layoff or the purchase of a starter home — would suddenly find themselves on a surer footing. Black and minority families who have struggled to gain access to higher education for generations would gain a disproportionate amount of this benefit. And with the advent of a vaccine, consumers would have more disposable income to buoy the post-COVID economy. Naturally, the astronomical cost of higher education must be tackled as well. It’s not just enough to write off the debt, the source of the problem needs to be dealt with too. But fixing the financial futures of millions of hardworking, striving people should not be delayed any longer, and President-Elect Biden already has all the power he needs to do it.