Hiltzik: Why it is a good thing to cancel student debt

The question of whether the government should end the $ 1.6 trillion in student debt held by 43 million U.S. adults has emerged from the political debate after the idea’s strongest advocate, Sens. Elizabeth Warren and Bernie Sanders left the race for the presidential nomination.

Came back. This is because President-elect Joe Biden has approved the cancellation of at least $ 10,000 in federal loans per borrower as a relief measure COVID-19 (Democrats in Congress want to raise that amount to $ 50,000).

Biden also suggests easing the payment terms for most borrowers and taking other steps to reduce the financial burden on low-income college students.

For families with lower net worth, the relative burden of education debt has long been higher, and … this gap has become much larger over the past few decades.

Janet Yellen, then president of the Federal Reserve in 2014

Biden’s proposal also revived arguments against the cancellation of student debt, which usually revolves around issues of equity. Accordingly, it is worth examining the pros and cons. Spoiler Alert: Deleting student debt has huge benefits for individual borrowers and the economy as a whole, and better.

In reality, they want to get rid of most student debt permanently, says Steinbaum, an economist at the University of Utah and a senior fellow at the Jain Family Institute, a social science research organization.

It is a harvest of the growing popularity of income-based repayment programs that limit annual repayments as a percentage of the borrower’s income and forgive the balance remaining after a certain period of time – 20 years for university students and 25 after university or professional studies.

“Resignation is what everyone is waiting for,” Steinbaum told me. – So why are we waiting for them? Why don’t we recognize that these are bad loans and now we’re eating them?

Let’s let go of the two most common objections to forgiving student debt. The first is that canceling existing debt would be unfair to the millions of borrowers who have met their obligations and should now sit down and watch the deadlocks get unexpectedly.

As I have observed in the past, it is difficult to imagine a weaker objection or a rougher formula for government paralysis. By logic, we would not have Social Security or Medicare today. The argument would be, “My grandparents starved to death in their adulthood and died on the streets because they couldn’t get health care, so why should you take a break?”

In fact, the sacrifices that some families have made on the shoulders of their debt burden underscore the nonsense of forcing families to become impoverished in order to obtain higher education. Why do we want to ignore the lesson?

The second frequently heard objection is that debt cancellation would be a gift to relatively affluent households, as well as law, business and medical school graduates who complete their studies with high debt balances but enter well-paying areas.

This is true, but not particularly relevant to the problem. Vocational school graduates account for nearly 12% of all outstanding debt, but only about 4% of borrowers. What is important is the debt burden of the majority of borrowers who are working class and have lower incomes.

According to an analysis by the Washington Center for Equitable Growth, a progressive think tank, the debt / income ratio among households in the lower 50% of the income ladder that holds student debt is approx. 1: 1, their credit balance is about equal to their annual income.

It is particularly worrying that this proportion has only more than doubled since 2001. The proportion of higher-income households has also increased, but remains below 0.25. (In other words, their balance is less than 25% of annual income.)

In this calculation, black borrowers are particularly disadvantaged – about 30% of them have a debt / income ratio in excess of 0.5. Less than 20% of white borrowers have the same burden.

That’s against the debt relief ceiling, Steinbaum says. Minority borrowers tend to have a higher debt burden because their families are less able to support them on campus and because they usually have to obtain higher level degrees to keep up with the white market among white graduates.

“A policy with a debt ceiling can always be made more racially more equal by increasing it,” Steinbaum says.

It is reported that the economic institution believes that the release of student debt is a macroeconomic loss.

Of the more than 40 U.S. economists recently interviewed by the University of Chicago’s Booth Business School on the subject – a solid picture of scientific thinking across the entire ideological spectrum that could be expected – 60% agreed with the statement the government would issue additional debt to the to pay off all outstanding student loans would be a net regression. ”(That is, it was thought to be more favorable to wealthier households.)

None agreed with the statement, although 15 or 35% of respondents were insecure.

Many of the economists ’responses sounded as if their views were colored by their own environment (economic departments of elite institutions, some by the business school) and the situation of their lives (rich).

David Autor, for example, bought from MIT for “I paid, why couldn’t everyone else?” camp: “In addition to my children’s student loans, I would like the government to pay off my mortgage. If the latter idea shocks you, you have to be the first, ”he said in a comment to his vote.

Autor MIT staff member Daron Acemoglu noted that “there is a risk of the yuppi being allocated” as “there is a lot of student debt among those who earn more than $ 100,000 a year”.

However, in the wider policy-making world, there is more consensus that the wave of student debt is pulling the economy, suggesting that relief is progressive, not regressive, and contributes to the racial division of economic opportunities.

“University costs have grown much faster than the incomes of the vast majority of households since 2001, and have become particularly burdensome for households in the lower half of the income distribution,” said Janet Yellen, President Biden’s election finance minister in 2014 when she was chairman of the Federal Reserve Board. .

“For families with lower net worth, the relative burden of educational debt has long been higher, and … that gap has become much larger over the past few decades,” Yellen said.

Households with high student debt are less likely to buy a home, start a business, or sustain themselves during an economic downturn, economist Steinbaum and Stephanie Kelton and colleagues reported in 2018. They have less disposable income, which is another drag on overall economic growth.

The authors of the report argued that the waiver of student debt, which is based on the ability of most borrowers to repay their debt over time, was wrong. This is because although “the median debt burden has not changed much … the median borrower it has changed a lot. “

In the past, borrowers “probably came from the ranks of“ traditional students ”—that is, those who attend either high school or four-year private institutions immediately after high school, often accompanied by a family history of higher education and a wealth of family.

More recently, however, borrowers are “much more likely to be non-traditional students, often starting later in life and without a family background in college”.

In fact, they were students targeted by for-profit higher education institutions. These schools tend to have high tuition fees, especially compared to employment opportunities for their graduates.

The Obama administration has pushed back the for-profit sector and deceived student forgiveness, but both policies have been reversed by President Trump’s secretary, the majestically useless Betsy DeVos.

Unsurprisingly, DeVos has emerged as a leading critic of student debt relief. “We have heard sharp calls to resign, to forgive, to set the whole free,” DeVos said this week in a function at the Department of Education. – Any harmless label out there can’t confuse what it really is: wrong.

DeVos, who is married to Amway’s multilevel marketing realm and Erik Prince, sister of the founder of the mercenary military company Blackwater, also condemned Biden’s proposal for a tuition-free college as “a socialist takeover of higher education”.

Of course, this ignores the tradition of free public university education, once exemplified by the University of California, which was once guaranteed tuition-free by the state constitution.

This tradition is relevant in the debate on student debt because one factor in the debt explosion is the withdrawal of state support for public higher education.

“States have withdrawn funding for public higher education, tuition fees have risen, and the full prerequisite for higher education has gone from the public good to the private good,” Steinbaum told me. “Allegedly, the federal student loan system is for individuals to fund their education, and that’s because it leads to higher salaries that allow them to repay their debts.”

But this assumption proved to be wrong. Tuition increases are out of control, and the reality of the modern labor market undermines the old reality that incomes are gradually rising.

Income-driven repayment schemes only override the error, resulting in an “extremely long capital flow” to rescue borrowers, Steinbaum argues.

You’re right. The bite of the bullet now means recognizing that the privatization of higher education is a failing process. Evidence of failure manifests itself in the flood of debt itself.

America is a country that never loses the value of education and almost never succeeds in substantiating its honeyed words with the resources needed to make them happen.

“Higher education has been and remains a powerful source of economic opportunities in America,” Yellen said in that 2014 speech, “but I fear the high and growing burden of paying for it may make it difficult for many young people to take advantage of the opportunities. ”

Provided he has been confirmed as Treasury Secretary, he and his Biden administrators will be able to do something about it. The cancellation of student debt cannot be a matter of debate.