We shouldn't cancel student loan debt

It's good politics, dubiously legal, and bad economics.

This week’s column is a little late for a good reason: the Supreme Court heard oral arguments on Tuesday in a suit brought by six states to block the Biden administration’s massive student loan forgiveness program. This column includes information that surfaced in those arguments.

There is no question that student loan debt is weighing down tens of millions of Americans.

The scope of the problem is staggering: 37.9 million Americans owe more than 1.75 trillion in student loan debt, with 1.61 trillion - or 92% - owed to the federal government. More than 22 million of those borrowers, who collectively owe $610 billion, are under 34 years old - prime years for wealth accumulation and starting families.

When the coronavirus pandemic swept the world in early-2020, the Trump administration used the 2003 Higher Education Relief Opportunities for Students (HEROS) Act to pause student loan repayments. The HEROS Act allows the Department of Education to “waive or modify” the terms of debt repayments during a “National Emergency” as outlined in the Public Health Service Act of 1944. Three years later, the pause remains in effect even though the country has, more or less, returned to pre-pandemic normal.

The Biden administration’s plan would make the pause permanent by canceling a portion of the debt owed by Americans to the federal government under the “waive and modify” provisions of the Act. Under the Biden plan, anyone making less than $125,000/year would see $10,000 in federal debt canceled, and married couples are eligible if their joint income is under $250,000. If a borrower received a Pell Grant, which is given to low-income families, and qualify on income, they get another $10,000 forgiven.

Seems reasonable, so what could be wrong with this plan? It turns out, a lot.

It’s a bad use of money. As planned, this plan will cost between $500-600 billion. To put this in perspective, that’s roughly the same amount of money the U.S. Government budgeted for all education spending in 2022. It’s also 2.5 times what we budgeted for veterans’ benefits, and five times the transportation budget. In fact, it’s only about $100 billion less than what we spent on national defense. This is a staggering sum of money for an executive order that’s been subject to almost no national debate and literally no debate in Congress.

As it happens, we’ll get very little bang for all those bucks.

Because it’s a badly-designed policy. The roughly 38 million federal borrowers covered under the order represent less than 12% of the population. While the Biden plan would completely zero out debt for about 31% of them (or about 13 million individuals), the average borrower owes $32,731 and the average household owes $58,957. While $10,000 is something, for most people it’s not really ‘canceling’ their student debt.

Never has so much been intended for so few.

Then there is the issue of the income caps. They’re absurdly high. If you have a $32,000 loan and a ten-year repayment term, with a 6% interest rate your payment is about $355/month. If you make $125,000/year, that payment should be easily affordable. You’re not considered a distressed borrower until payments eat up more than 20% of your income. Even the previously floated - and discarded - $75,000/year cap would not come anywhere close to meeting that threshold.

Then there is how income is calculated. To qualify, you can use either your 2020 or 2021 adjusted gross income. It does not use 2022, even though we are just weeks from closing out the 2022 tax year. A few months of continued forbearance would allow the government to use the most recent data, which would bake in a banner year for workers and upward wage growth. Instead, we’re using pandemic-era figures when unemployment briefly hit 14% and workers’ incomes are likely below their 2022 reality. Because of this, more people will qualify than would if we used current data.

It’s also inherently unfair. This is probably the most controversial take, but that doesn’t mean it isn’t true. Why is student loan debt somehow more worthy of “forgiveness” than other types of debt? Once the government has ensured national security and implemented the rule of law, its purpose is to deliver programs that improve the lives of the largest number of citizens at the lowest cost.

This plan fails on both counts. It’s largely a transfer of wealth to the top 35% of income earners - roughly the percentage of Americans with a higher-education degree - who are most likely to afford their loan payments.

Except that gift is paid for by everyone. This includes people who chose not to, or could not afford to, go to college (about two-thirds of Americans), people who put off college so as to not incur debt, and the tens of millions of people who had loans and paid them off (sometimes at great hardship). It’s also not much help to the people who live consistently below their means to stay current on their payments.

Student loan forgiveness is largely a transfer of wealth to the top 35% of income earners who are most able to afford their loan payments. Except that gift is paid for by everyone.

Then there’s moral hazard. Moral hazard theory holds that when individuals (or corporations) are shielded from the consequences of their actions, they are more likely to take risks. It’s applicable here. These are willing borrowers who were not conned or misled into taking these loans¹. They knew the terms of their loans and made the decision to sign. These borrowers made a bet that their education would afford them the means to pay off their debt in the future. If that’s not the case, it’s frankly not the American taxpayer’s problem to solve.

There’s also a much better use for this money: canceling medical debt. It’s no secret that the American healthcare system is a catastrophe. It’s extremely expensive and results in middling outcomes.

But it’s exponentially worse if you get caught in the medical debt industry.

About 29 million Americans lacked health insurance in 2021 according to the Census Bureau. Many millions more have yearly caps on how much their health insurance will pay for any illness. The result: 55% of Americans have some medical debt. One in four (25%) Americans - almost 83 million people - have more than $10,000 of it, mostly from ER visits.

Medical debt is profoundly immoral in a rich society and capricious in reality. Unlike a student loan, you can’t plan your next car accident or when you fall off a ladder. Work-based health insurance makes this system even more tenuous; if you lose your job, you lose your health insurance. As a result, Americans hold about $140 billion in medical debt, and it’s a parasitic industry: almost 60% of all third-party collections are due to medical debt, and it’s more common for minorities and people with disabilities. As a result, more than 43 million Americans have medical debt on their credit report.

This is catastrophic for wealth creation. The Consumer Bankruptcy Project found that 58.5% of bankruptcies in 2019 were due to medical debt.

Solving this issue is clearly more urgent than self-inflicted student loan debt.

Of course, this is a massive failure of imagination. As a rich country, we should be able to do two things at the same time; it’s not a misery Olympics. So it’s curious that the government looks at this as a binary, i.e., forgiveness or no forgiveness.

For student debt, the most equitable solution would be to restructure all federal student loans and peg their interest rate to inflation. This would ensure that the government gets paid back its loans in real dollar terms and that borrowers pay back what they borrowed - while also ensuring that they are, effectively, only paying back the principal. The government could do this as a “modify” under the statute tomorrow.

We should also find a way to cancel the medical debt that is weighing down a majority of mostly un- or underinsured Americans. It’s a better policy, at a fraction of the cost, more moral and defensible, and a reset of the status quo (it would cancel all pre-ACA debt). Canceling medical debt would alleviate the suffering of many of our most vulnerable and oldest members of society, be more equitable, and benefit a vastly greater number of people. This would require some creativity, but it isn’t impossible.

Under the Biden plan, canceling student loan debt is indefensible. We should find a way to equitably restructure student debt and cancel Americans’ medical debt.

If we can’t find a way to do both, it’s morally imperative that we cancel medical debt instead.

I intentionally did not address the legality of the Biden plan. The Supreme Court seemed unconvinced of the Biden administration’s arguments on Tuesday and will rule on the case in the summer.

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1. Sham institutions duping students into dodgy loans is a separate issue, and those debts have already for the most part been forgiven under a separate program