TIPP Insights: Forgiving student loans and unforgivable policy

(Photo by MANDEL NGAN/AFP via Getty Images)


As rumors swirl that President Biden is about to issue an executive order on student loan forbearance, it is becoming evident that a terrible policy idea first proposed by Bernie Sanders during the 2020 campaign is getting worse.

Much has been discussed in the media about debt forgiveness. Proponents insist that forgiving debt is essential to help families cope with student loan monthly repayments that often stretch 15-20 years.

Opponents maintain that forgiving debt sets a bad precedent. Worse, the burden would fall on many taxpayers who never went to college. The College Board said in a comprehensive 2013 study that “on average, four-year college graduates continue to experience far less unemployment and earn higher salaries than their counterparts with only a high school education.” Is it fair that non-college-educated taxpayers should subsidize those who did attend college?

America is unique in the way it funds education. K-12 education is free, mandatory, and supported by local, state, and federal dollars. Postsecondary education has always been optional, but for those that wish to engage in it, the way America pays for it is unlike any other country.

According to Sallie Mae, parent income and savings cover nearly half of college costs (45%), while free money from scholarships and grants accounts for 25%. Student borrowing covers only 11% of the cost, so why is the Biden administration focusing on the smallest slice of the pie?

America’s compact with college-going-student borrowers is fair. The government does not require them to provide collateral or a joint-signer for an education loan. In return, students must honor other taxpayers’ trust in them and pay the loan off with interest. Federal law is very strict about the student’s obligation to repay. Education loans cannot be discharged in most cases, even in personal bankruptcy.

College students are at least 18 years old when they first sign for an education loan. The Department of Labor’s Occupational Handbook provides extensive data about careers with a bright outlook and describes over 575 occupations in extraordinary detail across 20 dimensions. Students can learn many details about their future careers, including the required tools, technology, knowledge, skills, abilities, work context, styles, values, and related occupations. Most importantly, students can learn about wage and employment trends for the next ten years. It is unreasonable to expect taxpayers to assume responsibility for students’ poor major and career choices. Besides, government policies require borrowers to attend counseling sessions about the students’ obligations before a single dollar is disbursed. Whatever happened to the core American value of responsibility and accountability for one’s actions?

One aspect of the Sallie Mae report is shocking and rarely covered by the media. A whopping 44% of families did not use scholarships that are plentifully available to help pay for college. Of these, 78% did not even apply. Many parents confessed that they were unaware that scholarship opportunities existed, and many students did not think they would win even if they applied.

Despite these apparent shortcomings in borrowers’ behavior, studies show that low-income students face significant challenges in making ends meet when they are faced with monthly payments that appear to stretch forever. But society has always been willing to help such families.

Federal Pell Grants already pay $6,495 per year for students with exceptional financial needs. The Federal Supplemental Educational Opportunity Grants (FSEOG) provide $4,000 over and above the Pell amount. Often, other endowment funds and private scholarships kick in even more money.

At the University of Texas at Austin, Pell-eligible first-year students become part of the Dell Scholars program. Dell Scholars receive a $20,000 scholarship over their time in college. Need-blind institutions, such as the top private schools that are prohibitively expensive, cover the total cost of education above the family’s expected contribution. Despite such generous programs available, 64% of our May TIPP poll respondents agreed that they would support providing $10,000 in one-time relief to low-income families.

Pandemic-era loan forgiveness schemes have been significantly beneficial. According to a Fed research note, nearly 60 percent of borrowers have not made a single loan payment since March 2020, saving them over $2.8 billion each month.

But inflation in America is now raging at 40-year highs. The Fed has nearly admitted that it will engineer a recession to inflict pain on the economy so that Americans cut down spending, forcing demand to come down. This means shuttered factories, higher unemployment, and a less-robust stock market. Adding $377 billion in free money to an already super-inflated economy is counter-intuitive at every level.

Any executive action in this matter is bound to be challenged in the courts. Congress has appropriated grant money for decades, making clear distinctions between loans and grants. Courts could find that Biden’s executive order exceeds his powers as debt forgiveness to a class of borrowers based on income would be equivalent to the administration impermissibly controlling the federal purse. Even the National Association of Student Financial Aid Administrators (NASFAA) said in a blog post that loan servicing companies and investors that own securities backed by student loans could sue the administration over broad-based debt cancellation.

The Biden administration is desperate to appear to be doing something to contain inflation. President Biden is now pressing Congress to suspend the gas tax for three months, although research shows that the relief will be a pittance for the average driver.

Friendly media outlets will provide wall-to-wall coverage of an unwise policy proposal, casting the debate as a social justice initiative. Never mind that a University of Chicago study concluded that the top 30% of U.S. households would get nearly half of all the loan forgiveness.



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