The case for canceling a lot of student debt

There's a good plan here

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Now onto today’s post, something I think the left basically has right and the centrist wonk class is botching — doing a substantial college debt relief program is a fine idea and Joe Biden should do it.

Way back in September 2019, Marcia Brown wrote an American Prospect article arguing that the executive branch has the authority to unilaterally cancel almost all of the student loans in America. This did not get a ton of attention at the time, but support for the idea has grown to the point where Chuck Schumer is advocating for it which in turn means that the Biden team is taking a serious look at it.

In the wonkish circles I travel in, almost everyone hates this idea, seeing it as regressive, as ineffective stimulus, and as an example of Democrats being trapped in the young/urban/educated bubble. None of these points is entirely percent off-base, but they are all I think overstated and somewhat blinkered in their political assessments.

Canceling 100 percent of student debt would, I think, be a mistake because a fair amount of it is held by well-paid doctors and lawyers and the like. But it’s very easy to avoid the pitfalls here — I’ve discussed this with multiple people advising Biden on economic policy and education policy and they all understand the landscape — and the people posting exaggerated accounts of how regressive loan forgiveness would be are not engaging with the real policy debate. A well-designed plan of the sort that’s actually under consideration would deliver a meaningful financial boost to lots of middle class people and not come at anyone’s expense.

Student debt: The case for some distinctions

The whole debt relief conversation got off on the wrong foot in my view by not distinguishing between college loans and loans for graduate and professional schools.

“Individuals who owe student debt are an incredibly diverse group, spanning highly educated professionals to first-year dropouts,” writes economist Adam Looney in a report for Brookings. “Some borrowers earn six-figure salaries their first year out of school, and some earn less than a high-school graduate.”

A loan forgiveness program cannot precisely tailor who gets help to each person’s specific circumstances. But distinguishing college from post-college is a logistically tractable exercise that does a lot to improve targeting.

Dentists, for example, are only 0.2 percent of student loan borrowers but they collectively owe 1.5 percent of student debt because they have a median loan balance of over $240,000. This, however, is because dentists earn a lot of money right out of school, so it makes sense for them to go into debt. And you see lawyers, MBAs, doctors, etc. are all like that — they account for tons of debt but earn good money.

So I have three broad points to make about this:

  • Indiscriminate loan forgiveness is pretty clearly a bad idea.

  • As far as I know, everyone in BidenWorld is aware of this.

  • People modeling indiscriminate forgiveness and showing how regressive it is are burning down a straw man.

And make no mistake, indiscriminate loan forgiveness really is very regressive as this thread and many others by number-crunchers point out.

But note that there are two prongs to this.

One is that you can’t really help the poorest people very much with student loan relief because they tend not to have any debt. That’s a structural feature of the system that no tweaking to your debt relief program can ameliorate.

The other is that there’s a sizable cohort of rich professionals (dentists, doctors, lawyers, and MBAs) who have large student loan balances. But if you just cut those professional schools out of the program, you eliminate a lot of the top end regressiveness while still giving a lot of help to middle class people. You can further improve the targeting by capping the total amount of debt that can be forgiven (say to $10,000) or by putting a lower limit on forgiveness to high-income people (say if you made over $100,000 last year you only get to write off $5,000).

Nothing will change the fact that this is not a good way to help poor people. But we don’t normally require super-strict prioritization in that sense. Giving a financial boost to millions of middle class people is a helpful idea even if it’s not strictly the single best idea in the whole world. That’s especially true because it’s not like there’s some button Biden could press that lets him either do student loan relief or make the Child Tax Credit fully refundable.

You can’t beat something with nothing

There’s a concept in program design and evaluation called cash benchmarking which basically says to ask “should I just be giving people money instead?” I highly recommend Annie Lowrey’s book Give People Money, which persuasively makes the case that in a wide variety of circumstances, giving people money would be a better idea. And student loan forgiveness I think easily fails the Give People Money Instead test. Rather than giving $10,000 to each college debtor, it would make a lot more sense to give a smaller sum of money to every person regardless of their debt situation.

But here’s the critical point — the whole reason we are having this conversation is there is a legal theory that Biden can enact a unilateral student loan forgiveness program and no theory that he can enact a unilateral cash grant program.

So I want to be really clear about this: If Mitch McConnell picks up the phone and says “Mr President-Elect, I would like to pass a generous universal cash grant program but my condition is the bill also needs to take the power to cancel student loans away from the Executive,” then Biden should definitely say yes to that offer.

But to the best of everyone’s knowledge, no such offer has been made or is forthcoming.

A newly elected president should try to find ways to make people’s lives better. Student loan relief is something Biden can do to make people’s lives better. It’s true that it’s not an optimal idea, but you can’t beat an idea that Biden can do with a hypothetical idea that he can’t do. And there’s no reason to see a tradeoff here.

The budget situation is very favorable

As I’ve said before, interest rates are incredibly low right now. And I don’t think most of the people commenting on this issue have fully grasped the implications of that.

The Committee for a Responsible Federal Budget, for example, argues that student debt relief delivers poor “bang for the buck” as a fiscal stimulus compared to other ideas. That’s likely true. But the question is who cares? The answer in this case is that the Committee for a Responsible Federal Budget cares because they are ideologically committed to the idea that a lowering the level of national debt is an important policy priority. They’re not fanatics. They acknowledge the possible value of fiscal stimulus. But only if it delivers a lot of bang for the buck.

That view is mistaken. The federal government sells, among other kinds of bonds, the 30-year Treasury Inflation Protected Security. This instrument pays its owners the rate of inflation, plus a little something extra. Except these days its market price is actually inflation minus a little something. The yield is less than zero.

In this situation, if you are able to deliver any amount of bang at all then your buck is well-spent. It’s true of course that for any given quantity of bucks you should try to use them on things with more rather than less bang. But in a world where the binding constraint on the government’s ability to pay for things is Mitch McConnell, rather than objective factors, you may as well use a tool that let’s you deliver a little something more than what McConnell can offer you.

It’s not optimal policy by any means, but given the real-world constraints, America can have a little student loan relief, as a treat.

People like free stuff

A meme has emerged that doling out undeserved free stuff to America’s student loan debtors would produce a political backlash from the envious.

It’s just not clear to me that’s true. The polling I’ve seen shows majority support for student loan forgiveness if you exclude high-income people. Because there are a lot of different ways you could structure the details of means-testing, the different poll questions aren’t exactly the same, but it’s generally moderately popular.

More to the point, it’s hard for me to imagine people caring that much. Or, rather, some people will have loans forgiven and they’ll care and be happy. Other people won’t see any change in their life at all and will have nothing to be mad about. Recall that Trump doled out tens of billions of dollars in free cash for farmers to counteract the negative impact his trade wars had on American agriculture. Unlike student loan relief, that policy actually did have a modest negative impact on non-farmers since we paid the price for his tariffs. But it’s just not the case that any non-farmers were particularly upset about it, while obviously farmers were happy.

Now what’s true is I don’t think this will be some kind of political blockbuster that Biden should barnstorm the country talking about. But do it as part of a week-long blitz of newsy executive actions where one day it’s debt relief, the next day you’re rejoining the Paris accords, and the day after that you’re getting vaccinated live on camera to show the public it’s safe? Why not?

Biden has two big things going for him politically. One is that the economy is going to sharply rebound in 2021 as people get vaccinated. The other is his congressional majority is too weak to do any big unpopular overreaches. But he does run the risk that important elements of his base will feel he hasn’t delivered anything for them. This is something he can deliver that won’t cost anyone else anything, and will help boost the aggregate economy a bit. He should do it.