On Cancelling Student Debt

In my email Inbox, "Can Bernie send you a "'Cancel ALL student debt' sticker?"

Hell, NO!

Bernie Talks ...

Bernie Sanders wants us to cancel all student debt.  I agree with several of Sanders’ progressive ideas, but this idea is an AWFUL idea!

For starters, 65% of American taxpayers never set foot in a college classroom!  So, 65% of those whose taxes will pay off student debt are those who never went to college and never will.  That is unfair on its face!  And, politically, it's not too smart, either.  Many of these folks may have been Bernie supporters – or Democrats – but this move could push them away.

Putting fairness and politics aside for the moment, what does Sanders mean by ALL student debt?

Some student debt is federal loans, some is state loans, some is private bank loans, and some is non-bank (loan shark) loans.  If Sanders means to cancel all student debt, he will have to cancel private debt by paying the private creditors with taxpayers’ funds.  So, in the end, cancelling ALL student debt will be on the taxpayers’ dime.  Cancelling student debt won’t cost the taxpayers a single dime as there is no spending associated with it; it will just reduce incoming tax revenues, which is really the other side of the same coin, as it will add to that year’s federal deficit.  What is most likely is that Sanders’ proposal would only impact federally financed student loans (which still represents 92% of all student debt).

Still, cancelling all student debt is not as simple as it sounds.

How far back will “ALL student debt” go?  Tens of millions of Americans have paid off all their student debt.  Will Sanders reimburse them retroactively for their (already paid off) debt?  Not likely.  Or will he only pay off unpaid debt, no matter how old or young it is?  Will Sanders’s program extend into the future?  For how long?  I don’t think he wants to prepay any loans; I think he wants to wait until the loans begin to be paid off (after graduation, at least).  Yesterday’s grads will look at today’s grads with some envy, as they were never rescued by the Fed (but the price of higher education was not so burdensome then).

What if a student fails to graduate, does Sanders plan to pay off his debt, too?  Will a student with a final GPA of 1.0 receive the same debt cancellation benefits as a student who earns a 4.0 GPA?  Will Sanders plan include paying off debt that pays for schooling overseas?  Does Sanders intend to subsidize non-citizen students, or naturalized students?

Will Sanders’ plan include paying off the debt that paid for higher education, like grad school, law school, med school, business school, etc.?  Does he intend to pay off the debt of students whose future income will land them in the top 5% or 10% – or 1% – of our economy?  Does someone who earns $100K right out of college or grad school need debt forgiveness?  Should he receive any such debt forgiveness?

One of the unhappy economic consequences of the easy availability of debt (and especially debt that will be forgiven!) is that colleges and universities inevitably raise their prices and freeze scholarship grants, as the demand for their services continues to explode (because of the ever-easier availability of funds to pay for college for more and more of us).

No student wants to go into debt to pay for college, but debt appears to them as a better choice than forgoing college altogether, or working part-time while attending school, or working full time while going to school at night – taking seven years rather than four before realizing higher education’s long-term benefits.

We should keep firmly in mind that Bernie Sanders will not be paying the bill, American taxpayers will be footing the bill.  And it will be huge.  If Sanders were to make clear that his plan would cover all types of job training, it would be easier for many of us to stomach; but even then, college-educated Americans will always benefit more than those without a college degree.  Not only financially, but also in quality of life.

Clearly, Sanders does not plan this largesse to be a one-time gift; he believes that every American who wants a college education should not be deterred by its cost.  I agree with him there, while not agreeing on how it should be achieved.

Joe Biden Acts ...

President Joe Biden has – by Executive Order – taken a middle way.  His plan makes no attempt to pay for all student debt, capping benefits at $10,000 or $20,000, the latter for the neediest.  And it is a one-time fix that is calibrated somewhat to help those most in need.  It is estimated to help 45 million students and it will cost some $300 billion.  Forty-five million is a lot of beneficiaries but it is less than 15% of us.  And $300 billion is a sizable chunk of loose change.  And it is still “unfair” but at less cost to the taxpayers than Sanders’ proposal.

The size of the problem is: 40 million Americans owe $1.7 trillion in student debt.  That averages $42,500 / debtor.  But most debt holders owe less than $20,000, and those with the highest debt have paid for post-graduate school and will easily pay it all down over time.  Those with the highest debt need Joe’s help the least.  And uncle Joe has structured it so that the most needy are helped the most.  Good!

Ben Paine's 2¢ worth ...

But, if I were asked for my opinion on how to pay for higher education, here is what I think.  These thoughts are all about going forward, they say nothing about resolving the issue of existing student debt.

First, the federal government should not be in the business of making loans to students.  PERIOD!  There goes 92% of all student debt going forward.  Private banks will still write loans for students entering college.  BUT, the end of federal student loans will drive colleges and universities to cut their tuition fees, as the demand side of paying for college will begin to collapse.  And, just as colleges will favor students who seem most likely to succeed, so will the banks favor those students who seem to them most likely to pay back their loans.  The best students will gain admission and scholarships to the best colleges; the best students will win from the banks the biggest loans and the lowest payback interest rates.  And many fewer Americans will choose college, for better or for worse.

Second, no great school – Harvard, Yale, Princeton, Stanford, Berkeley, CalTech, MIT, etc. – will ever refuse admission to a “great” student (“great” is whatever a university says it means – academics, sports, the arts) because he or she can’t pay their way.  The university may call it scholarships, stipends, grants, whatever it takes to grab that stellar student for their school.  To you high school kids: scholarships are WAY better than loans, so if you are not a star yet, it's time to get moving!

Third, every state should fund community colleges.  FREE to the student.  As many or as few as their state legislatures decide.  But of course, there will still be competition for the limited seats of each FREE college.  So, if you are not prepared for college based on your high school record, these free colleges will not admit you.

Note: I have been told that community colleges never turn away a prospective student.  That may or may not be true – for one state or another – but eventually FREE college for the student bumps up against the taxes that will pay for it.  So, maybe you should be born in New York or California.

Americans are #1 in our willingness to give EVERYONE a second chance.  So, if you were a slacker in high school, when you know you are ready to turn your life around, you will have all sorts of ways to prove it.  But you will have to PROVE it.  Then, doors will open that were once shut to you.

There are thousands of colleges across the land that are neither great nor “free.”  Some of them are not accredited, some are outright scams.  The middling student who can’t pass the requirements of the state’s community colleges will be well-advised to practice due diligence before requesting admission from a middling college.

Fourth, as a smarter way than granting student loans, the federal government should cut a $10,000 check for every American when they reach age 18 or (better?) when they graduate high school (or earn a GED).   Not only would this be more equitable, it would also cause colleges to begin dropping their costs to attend (due to lower Demand: people will more readily take out a loan – or pay for something with a credit card – than spend their actual savings).  It will cost us some $40 billion (or less) in taxes annually.  But it should pay for itself with a healthier and better educated citizenry.  And it will help those with no college in their future, too.  Thomas Paine would approve.

I don’t believe that the government (taxpayers) should be called on to subsidize those who end up living financially handsome lives, even if they began poor.  I also believe that we should help those who choose lives of public service (the military, public school teaching, police and fire work, etc.) that won’t lead to a life of luxury.  I think we can do this by calibrating loan pay-back rates according to income.  For example, a teacher may have a loan of $100K to pay back over 20 years.  But because of her (indecently) modest annual income, she should have her entire loan payment, year by year, reimbursed.  And, yes, this is government subsidy paying off private bank loans, a month at a time.  On the other hand, a lawyer or a dentist on his way up should expect to pay off 100% of his loans if he is reasonably successful.  But I also believe that we should appreciate the sacrifices that doctors and lawyers and some others make to get where they are going.  Indeed, I believe that they pay for their ambitious choices with great fulfillment – and high stress.  And stress kills, in small ways and large.  Lives are measured in many ways, and dollars is not always the most important.

Cancelling student debt goes against the American grain.  But student debt would not be the problem it is were it not for debt enabling so many Americans to attend college who might not otherwise.  In other words, the easy availability of debt has caused the cost of higher education to explode these last few decades due to heightened demand for college's benefits.  So many of us old guys recall the cost of college tuition being measured in the hundreds of dollars, not in the tens of thousands.

I admire Sanders for his heart: health care should be free, a “right” for all Americans.  College should be free, a “right” for all Americans.  But “free” and a “right” covers over the fact that they are NOT FREE, someone has to pay for them.  Society, right?  Right, sometimes called by its more honest name, taxpayers.  I agree with Sanders 12000% that our über-wealthy get away with murder, filing tax returns with little or no taxable income, and thus no income taxes at all.  But I have addressed this Congressional evil (it is NOT an oversight) in many of my posts (e.g. A Wealth Tax, 2019, and A Wealth Tax, 2021).  Even after we get Musk and Bezos to pay tens of billions annually in tax on their wealth (and only YOU can make this happen!), neither healthcare nor education will then be FREE.  But at least we will pay for these benefits with real money, not more printed dollars, not more DEBT!

What do you think? And why?