The vanishing case for student loan forgiveness
With no more need for stimulus, this doesn't make sense anymore
Student loan forgiveness is back in the news since the Biden administration decided to again extend the repayment holiday.
This is a topic where I think the facts have changed considerably since Slow Boring’s debut in mid-November of 2020, and as a result I have changed my mind. Back then, I thought loan forgiveness would be a good way to assist a depressed economy and that objections were being made on nonsensical grounds by fussy technocrats who weren’t paying attention to the actual situation. But today the situation is different. The economy is not depressed, and instead the Federal Reserve is pivoting to fight inflation. That means student loan forgiveness in 2022 is a purely distributive issue — one that will shift resources from the majority of Americans with no student loan debt to the minority of Americans who have it.
Both the debtors and the non-debtors are highly heterogeneous groups, but it’s pretty clear that the non-debtors are both more numerous and poorer on average.
So while there are certainly lots of individual cases where debt relief sounds like an appealing idea, under the current circumstances the case for broad debt relief has become extremely weak. There’s basically no other situation in which progressives would talk themselves into this kind of idea, which is currently being propped up with some very odd math about the racial wealth gap.
But I’d also say that the discourse around this seems to me to be largely driven by a correct sense that the higher education finance system in the United States is messed up and bad. The problem is that the form of debt relief that is being contemplated — one with no forward-looking reforms and in which even the most dysfunctional or abusive institutions still get paid in full — won’t fix anything about the system and could make it worse. Last but not least, I think the fascination with this idea represents a kind of unhealthy obsession with executive branch unilateralism. It’s important to understand and exploit the powers of the presidency, but the thing that sane people want here is not achievable through those means. What you need is a legislative coalition for reform, and probably a bipartisan one at that.
An idea whose time has passed
Once upon a time, I thought Joe Biden was likely to take office facing high unemployment, low inflation, and a GOP-controlled senate.
In other words, it would be an economy that badly needed fiscal stimulus but where fiscal stimulus would be hard to achieve. Under the circumstances, student loan forgiveness had a very attractive property — Biden could do it.
The reason is that back in the Obama administration, congress changed the student loan program from one where the federal government mainly guaranteed loans made by private banks to one where the federal government makes the loans itself. Since Treasury is the bank, the president can choose to simply not collect the loans. This theory has never really been litigated and it’s possible it could totally flop in court. But based on what people with actual law degrees have told me, it seems likely to prevail in part because it’s not clear who could sue to stop it or on what grounds or how a court victory for opponents would even work.
Skeptics raised two important objections to this plan:
It’s not a very effective stimulus, since the short-term spending impact of forgiving $1 of student debt is pretty low.
It’s a fairly regressive form of stimulus since student loan debtors are, on average, higher income than non-debtors.
Still, my view is that under the previous circumstances, these were not persuasive considerations. The key to me was that in the real world there wasn’t some other, better stimulus that Biden could do by not forgiving student debt. It’s not as if Biden had some big stack of money and was being asked to choose to use the stack on student loan forgiveness rather than some other thing. Instead, he had some specific statutory authority and the ask was that he use it rather than not use it. I was broadly in favor, though even at the time I didn’t think universal forgiveness (why did recent dental school graduates need debt relief?) made sense.
Then things changed. In December, Mitch McConnell brokered a deal to do roughly $900 billion in Covid relief that he hoped would help his candidates in the concurrent senate elections happening in Georgia. The plan didn’t work and those candidates lost anyway. Then Joe Biden surprised me by proposing a very large $1.8 trillion American Rescue Plan. Then moderate Democratic Party senators surprised me even more by saying yes to the proposal. By February, I said the case for debt relief was getting weaker. Then after that, moderate Republican senators surprised me a bit by saying yes to a bipartisan infrastructure bill that, like the Covid relief bills, is mostly financed with debt. And in the months since February, inflation has emerged as a big topic of discussion, with the Fed accelerating the end of Quantitative Easing and everyone wondering how many interest rate increases will happen in 2022 and 2023.
Debt relief in a world of tradeoffs
This new situation completely transforms the impact of student loan relief.
In a depressed economy, loan relief is a windfall for student debtors. But to the extent that they spend that windfall, it “crowds-in” investment, employment, and economic opportunity on the part of others. Your spending is someone else’s income, so while it’s a bit arbitrary and unfair to specifically shower the cash on student debtors, it does in the end benefit most people — including the people who most need help, the unemployed.
But then instead of doling out $1 trillion in student loan relief (roughly the cost of the Schumer/Warren plan to forgive up to $50,000 per debtor) congress handed out $2.7 trillion in direct checks to the non-rich, in supplemental UI payments to the jobless, and in aid to small businesses, state and local governments, and school systems.
Those actions did not solve all the problems of the United States of America. But they did solve the specific problem of an under-stimulated economy. Today there are lots of job openings, and people say it’s the easiest time on record to find a job.
That doesn’t mean every non-working person in the country is lazy. But it means that either they are seeking a job in a very specific field that is still depressed by the virus, or else they face some non-demand impediment to working (disrupted child care, for example). Either way, a generic increase in demand won’t help, because demand is currently running very high.
And more to the point, the Fed is already taking gentle actions to slow demand. So anything you do to try to boost it with debt relief will end up being offset by a faster pace of interest rate increases. Stimulus is a kind of free lunch. But it’s not an unlimited free lunch buffet. Once you’ve done it, you’ve done it and you’re back in a world of tradeoffs.