The case for student debt relief is getting weaker. By Matthew Yglesias

The case for student debt relief is getting weaker. By Matthew Yglesias

Stimulus success means tradeoffs are real again. 

Matthew Yglesias. SlowBoring.com

I’m getting more skeptical of student debt relief, which has been a renewed flashpoint ever since Joe Biden poured some cold water on it at a town hall. The reason is that two big things have changed since I last addressed this on December 4 — Democrats won the Georgia Senate races, and the Biden administration seems to have succeeded in convincing moderates in Congress to back a huge COVID-19 relief package.

The debt situation, summarized again

This is important because in my view, the core of the whole case for debt relief was the insight that the executive branch could probably cancel student loan debt unilaterally.

Absent that context, it’s just clearly a bad idea. We can debate the merits of $2,000 checks for everyone versus a program more directly targeted at the poor. But compared to “checks for everyone,” student loan cancellation looks like targeted relief for the rich.

Kids from lower-income families tend not to go to college at all.

Those who do, tend to enroll at cheaper schools and also to get more generous financial aid packages.

Separate from family background, college graduates have higher incomes than non-graduates.

So while those with loan debt are worse off than their social peers who lack debt (due to rich parents or whatever), they are on the whole a disproportionately affluent subset of the American population.

This is further exacerbated by the fact that, per this chart from Adam Looney, a lot of student debt is amassed in professional schools. Indeed, 10% of the total loan balance is held by graduates of law schools, MBA programs, and dental schools — all of whom have average starting salaries that are above the median household income.

Consequently, a program of universal debt forgiveness ends up being highly regressive, sending lots of money to doctors and lawyers and dentists and business executives and almost nothing to poor people, who tend to have never enrolled in college.

Now I’m not from the school of thought that says everything has to be micro-targeted. Sometimes we can just give nice things to everyone.

But again, debt forgiveness is not a universal program — about 45 million people have outstanding student loan balances, which is a lot, but it’s a distinct minority of the population. And the median loan balance is $17,000 so when you talk about going all the way up to $50,000 in forgiveness (the Elizabeth Warren proposal) or total forgiveness (the Bernie Sanders proposal), you are really talking about a targeted program. It makes sense to ask whether or not it’s well-targeted.

That said, from the standpoint in December, I also really thought Biden needed to look at delivering stimulus by any means necessary. That now looks different to me.

The fiscal situation has changed

Back on December 4, it seemed likely that Republicans would hold a majority in the Senate.

Under those circumstances, the only way for a Biden administration to get Congress to spend money on its priorities would have been to cut deals with Mitch McConnell to cut taxes. The targeting of student debt forgiveness isn’t great, but it’s amazing compared to the targeting of GOP tax programs. What’s more, I thought even this kind of deal-making would be challenging and that even if Democrats won in Georgia (which of course they did), Joe Manchin and Kyrsten Sinema would be reluctant to approve anything like the volume of spending that was needed.

That’s not what happened!

Instead, as I covered in “A Better Criticism of Biden’s Covid Relief Plan,” there is so much stimulus in this plan that smart people are now wishing Congress would structure this so as to dribble the money out over two to three years rather than just doing it in one.

Concurrent with that, bond yields have been rising, and the spread between five-year inflation-protected bonds and five-year nominal bonds is getting close to the 2.5 to 3 percentage points where you’d like to see it land.

Now to be clear, real interest rates are still negative.

So I’m not against the $1.9 trillion, and I’m not against doing a second, debt-financed recovery bill to help us build back better.

But it does all mean that I think we are in fact out of the extreme emergency that I thought we’d be facing several months ago. We’re not paralyzed by partisan gridlock. Moderate Democrats aren’t being unreasonable. We have the fiscal space to do big things. But we are in a place where it does make sense to ask questions about priorities and tradeoffs. And I think that counsels seriously in favor of a measured approach to student loans.

Where we are in the discourse

The politics of all this are being driven by some slightly strange factors.

One is that Chuck Schumer, who is very much an establishment Democrat, has been coming out swinging in favor of Warren’s request for presidential forgiveness of $50,000 in student loan debt. Schumer is doing that because he is trying to guard his left flank against a primary challenge from Alexandria Ocasio-Cortez.

Warren came up with the $50,000 threshold because, according to experts I’ve spoken to who consulted with her team, student debt actually has a funny property. We have talked many, many times on Slow Boring about how generic redistribution almost always works to mechanically close racial gaps. Student loan debt turns out to be a rare exception to this, in which a more generous program is more regressive across the entire income distribution but does more to close the Black/white wealth gap.1 Warren’s team wanted to develop a proposal that paired targeting with gap-closure, so they came up with the $50,000 threshold, and now Schumer has picked it up too.

But to be clear about something that can get a little confusing, notwithstanding the fact that the typical Black student debtor owes more than the typical white student debtor, the typical Black person has a student loan balance of $0, and college enrollment rates for African Americans are below average.

Meanwhile, back in the primary, the Sanders camp was committed to outflanking Warren to the left on every topic and chose to operationalize that by endorsing total forgiveness of all student loan debt. Biden, by contrast, is warning that expansive forgiveness programs are regressive while expressing openness to a more targeted program that would exclude private colleges and professional schools but forgive up to $10,000 in public college debt.

Then you have AOC countering the regressivity point like this:

Just on a basic, technical level, I’m pretty sure AOC is wrong about this as applied to “millionaires,” which includes plenty of house-rich types whose kids would still need loans. But more than that, I think it misses the force of two points — most people don’t go to college, and a large fraction of student debt is owed by professional school graduates with high incomes.

Now when you start bringing up law school debts, people will counter that it’s not like every attorney in America is getting rich at a big firm. That’s definitely true, but it’s still the case that lawyers have above-average incomes, so it’s weird to have a targeted financial relief program for young lawyers. And I think on a symbolic level, this has become a weird kind of proxy for ideas about the education system that are not actually contained within the proposal.

One-off forgiveness is not reform

I think there’s a good case to be made that there should be a zero-cost post-secondary education option in the United States.

Public universities were either free or else very cheap during the Baby Boom era. and I think the switch from public funding to subsidized debt has not worked well. Free college is an idea that lots of people connect with emotionally, intellectually, and ideologically. But I just can’t emphasize enough that debt forgiveness does nothing to reform the higher education system. And I don’t think I’ve ever seen anyone argue that we need people to attend Harvard Business School for free at taxpayer expense.

Realistically, there probably isn’t a single correct solution for the different kinds of professional schools. You could imagine a bargain where medical education is made free, but medical compensation is more strictly regulated in line with international norms. On the lawyer front, I often hear the hypothesis that if young attorneys weren’t so burdened with debts they’d be more likely to go into public service fields. In reality, there are a lot of loan forgiveness programs for this. But more to the point, there aren’t actually tons of vacancies. If we want more public defenders, what we need to do is increase the budget for public defender offices so they can hire more attorneys and be less overworked (this seems like a good idea to me). It’s possible that a change to how legal education is financed is part of the solution.

But it starts with deciding what it is we’re trying to accomplish. Do we want more people getting random master’s degrees? I’m skeptical.

Whatever you make of these questions, it just goes back to the reality that while higher education policy is important, loan forgiveness is not higher education policy. It’s economic policy. So the question becomes: Is it good economic policy?

We need to wait and see

Back on December 4, 2020, I was bullish on loan forgiveness because I didn’t see any tradeoff — it seems like a good way to get around what I was expecting to be a recalcitrant Congress.

But now we need to pay attention to the actual congressional politics. Will Biden in fact get the full $1.9 trillion he’s asking for, or will moderates get cold feet? Will his “build back better” ideas get off the ground, or are they going to be DOA? Some kind of debt forgiveness is something his team should keep running the numbers on if it seems like it’s warranted as economic conditions evolve. But with a narrow majority in Congress, the focus should be on working with them to get important stuff done. If it looks like Congress is going to run out of enthusiasm for spending money on good ideas before the federal government runs out of borrowing capacity, then executive branch debt relief is a reasonable idea. But as long as Congress is playing ball on important initiatives, there’s no need to soak up borrowing capacity on loans.

The particular problems of young college graduates who live in expensive cities but have opted in to not-so-well-paid creative/nonprofit fields happen to loom large in the media, but this is a pretty idiosyncratic group that’s not reflective of the typical American’s problems. Based on what happens over the next few months, there may be remaining fiscal capacity that Congress just isn’t willing to use; in that case, Biden should draw up a debt forgiveness program that uses it. If there isn’t — which now actually looks plausible to me in a way that would have shocked me on December 4 — he shouldn’t.