The two questions student loan forgiveness discussions keep ignoring

Public interest around student loan forgiveness has steadily climbed over the past several weeks, especially as the Biden administration signals it is closing in on acting before the student loan repayment pause — now on its fifth extension — officially ends. Pundits expect the forgiven amount to stay within the $10,000 range per borrower, and it seems likely that there will be some means test to get it.

For months now, people have drawn arguments around who benefits and who doesn’t, or who pays and who doesn’t. These are important to consider for sure, but, despite all the talk and all the positioning, everyone still seems to ignore two issues that should be front-and-center in the debate.

Dollars and no sense

The first is the amount itself. To-date, nobody has offered a logical economic rationale for forgiving $10,000 or even $50,000 in student loan debt. Yes, folks like Senator Elizabeth Warren (D-Ma) and others have made the case for how many borrowers would benefit, but who or how many benefit is an outcome. It’s not an economic basis.

If we want to hang our hats on $10,000 in forgiveness, it needs to be rooted in something. An amount like this would have much stronger backing if, for example, it was the average amount of tuition and fees students have paid for a degree over the past 20 years, or a fair-value estimate of the social return to college.

In reality, the $10,000 everyone expects (and which could very well end up costing the federal government –and taxpayers — hundreds of billions of dollars) was almost surely the product of presidential candidate Biden’s campaign strategy team.

Which leaves us to ask: should major social and economic policy be driven by a campaign slogan amount?

How “who” and “why” decide what

The second is what I would call the who or the why issue. To say student loans are a “debt sentence” is catchy, but it’s also hyper generic. We keep hearing how borrowers are struggling, but that’s not enough. Policy solutions require more precision.

Who exactly is struggling? How exactly are they struggling? These are the questions you build solutions on.

None of the proposals we keep hearing about clearly specify which borrowers they are specifically designed to help. The Biden administration has hinted it wants to base it on income, yet his own party’s progressive wing is pushing back. Forgiveness advocates would rather point to all the different sub-groups of borrowers who would benefit — including minorities or people with debt and no degree — instead of draw clear boundaries around should benefit when good policy demands it.

In the end, this reluctance to define the class of people a policy should help ends up creating criticism over how forgiveness itself is implemented.

For example, granting $10,000 of forgiveness in a one-time transaction is great if it completely wipes out someone’s balance but what if it doesn’t? What if you are a low-income or historically excluded borrower starting with $20,000 in outstanding loans and already enrolled in income-driven repayment? This person will still end up owing $10,000 in student loan debt after forgiveness, and their monthly payment will remain unchanged.

How is that relief? Who is being helped?

If forgiveness is supposed to compensate students who have not received any return on their investment in higher education, then there is no need to give everyone a break. Just put a stake in the ground and say forgiveness will be limited to borrowers who have debt but no degree, or graduates and non-completers who have never earned more than, say, 250 percent of the poverty line since leaving school.

On the other hand, if we really do believe everyone has over-paid for college, a flat dollar amount is inferior to forgiving some fraction, or percentage, of every borrower’s loan balance based on a sliding scale of need. If you are among the top 10 percent of all earners, 10 percent of your balance is wiped out. If your earnings are less than 75 percent of other Americans, then 75 percent is forgiven. Living below the poverty line? Wipe the slate clean entirely.

On the other, other hand (yes, that’s three hands), if the problem to solve is people seemingly making payments forever, then the federal government could provide forgiveness by matching borrowers’ payments to accelerate how quickly those loans are repaid. A means test can be employed to ensure only the people who need relief get it, but there’s nothing to prevent payment matches from being two or three (or five) times the amount that borrowers pay every month. Borrowers would see their balances decline, and those with different hardships or needs would still get some amount forgiven.

Whether student loan forgiveness will happen is still anyone’s guess. President Biden, his administration and members of Congress who support forgiveness owe taxpayers more transparency and clarity around who needs forgiveness, how much, and how it can best be done before fully committing to one of the largest federal relief programs in history.

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Note: this story first appeared on LinkedIn.

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PhD. Education economist. Co-author of: Student Financial Success: a surprising path to fix the college completion crisis.

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Carlo Salerno

Carlo Salerno

PhD. Education economist. Co-author of: Student Financial Success: a surprising path to fix the college completion crisis.

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