Another way to think about student debt cancellation

A lot of people just got scammed

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Now, the main attraction: student debt!

The President has unilateral authority to eliminate the loan balances of a large class of student debtors. The incoming Biden administration has flirted with versions of this ($50,000 of debt relief for everyone as proposed by Chuck Schumer? $10,000 for some?), but in contrast to the overall Biden gestalt of plucking ideas and personnel squarely from the middle of the Democratic Party, expansive student debt relief is the object of intense technical and ideological debate within the left-of-center world.

Both Bernie Sanders and Elizabeth Warren had their version of debt relief (Warren getting rid of $50,000 per borrower with household incomes below $250,000, Sanders getting rid of the whole thing) that emerged from work done by young, quite left-wing, activist-scholars who were galvanized by Occupy Wall Street.

Warren and Sanders are the two leftmost figures in the Democratic coalition and are the most comfortable raising taxes on the high income and wealthy and restricting the behavior of their businesses.

But critics of their debt relief plans — and by extension the one floated by the Biden team, which in some of its iterations, is similar to Warren’s — think the entire idea of debt relief is too friendly to the well-off. This is not a frequent criticism of these two politicians and it has become a popular line of argument in venues ranging from the center-left Brookings Institution to the Wall Street Journal’s editorial page.

The argument stems from the concept of progressivity: the idea that a policy’s benefits should scale inversely with income. Progressivity is mainly used in discussions of taxation, but can be applied to spending as well. One way of thinking about progressivity is that a policy that distributes benefits largely to the well-off should get lower priority than one that distributes its benefits to the less well-off, especially if there’s some fixed pool of dollars available to spend.

Centrists, mainstream journalists, and conservatives also like citing progressivity concerns in response to big progressive policy proposals. It’s something of a “by your logic” type of argumentation. You don’t have to argue against the goals of the program, just the way they’re carried out: “Progressives say they’re advocates for the least well off, but universal program ABC will end up shoveling XYZ dollars to the top quintile and XYZ dollars to the bottom quintile, QED. Who’s the real progressive now?”

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Progressivity is at the heart of debate over student debt relief. When Elizabeth Warren released her plan, it was criticized by Adam Looney, a former Obama administration official now at Brookings, as “regressive, expensive, and full of uncertainties.” His reasoning was simple. People with degrees tend to have higher earnings and come from higher earning families than those who don’t. This is only magnified with people with graduate degrees, who can carry the largest debt loads. Looney’s calculation adds some more precision to this intuition:

The top 20 percent of households receive about 27 percent of all annual savings, and the top 40 percent about 66 percent. The bottom 20 percent of borrowers by income get only 4 percent of the savings. Borrowers with advanced degrees represent 27 percent of borrowers, but would claim 37 percent of the annual benefit.

Student debt relief, this logic goes, doesn’t just direct more benefits to a wealthier class of borrower, it also leaves out two groups of people entirely: those who have paid off their debts and those who never went to college in the first place (it also leaves out those that were able to go to college debt-free, but we can leave that aside). This is a point made by not just technocratic centrists, but also the idiosyncratic socialist Matt Bruenig.

Zaid Jilani, who straddles the right-left divide in a difficult to describe way, argues in the Journal that student debt relief is a “Brahmin bailout, delivering economic benefits to the upper class while doing nothing for the trucker in Toledo, Ohio, or the Waffle House waitress in Atlanta. It would increase divisions between the college-educated and the rest of the country without reforming the student lending system or bloated universities that created the debt problem.”

The strongest case against this bundle of views — that student debt relief delivers benefits primarily to those, by dint of having gone to college and thus being able to attain higher wages, who are better off — comes from the progressive economist Marshall Steinbaum. There’s a lot to his analysis, including a fine-grained discussion of what counts as “progressive,” but the main point he makes is that the central assumption underlying the case against student debt cancellation was incorrect all along. Student debt holders are not actually better off for having acquired the credential and the debt that went along with it:

increasing the overall student debt load of entering cohorts did not have the effect of increasing labor market earnings. People thought that more debt would mean more education and therefore higher earnings. But instead, the labor market credentialized, reducing the earnings associated with any given level of attainment. So people needed to take on more debt to get more degrees just to get the same jobs earning the same wages. 

Instead of higher education being an investment in human capital that then increases the wages of those who made the investment, it is instead something more like a toll young people pay in order to be able to participate in the labor market.

Another argument Steinbaum makes is that looking at how the dollars are distributed is the wrong way of thinking about progressivity. Instead, we need to look at the effect those dollars have when they reach their recipients.

I think there’s some truth to both sides of the argument here — one doesn’t need to be Scrooge to hesitate about paying off the loan balances of lawyers and doctors. But there is a whole class of student debtors who have plainly not benefitted at all from their higher education “investment” and instead are more like victims of a scam. I mostly want to get away from what I think is unhelpful schema that many in the media have when talking about student debt — that debtors are all Oberlin studio art majors, or fancy lawyers, or plastic surgeons with hundreds of thousands of dollars of loans.

What I instead think we need to talk about more are the debtors who attended for-profit colleges—that aggressively marketed themselves to populations with low incomes—and are often nonwhite and with little experience with higher education.

Many students dropped out before getting any credential or acquired a credential that was worthless. According to Pew, the median debt held by borrowers without a bachelor’s degree is $10,000. This is also a group that pursued an education even if they really needed a credential, and ended up getting neither. Looney and Steinbaum actually agree that this group deserves special attention. Here’s Steinbaum:

The population of debtors has shifted down the income distribution and become more and more comprised of racial minorities with less access to family wealth and employment opportunities through their social networks.

Looney rightly identifies that lower-income people make lower payments on their outstanding debt, as a share of the full cost of interest and principal repayment, than higher-income people. That is a retelling of a fact I reported in my 2018 paper on credentialization…In other words, there is a growing group of people who have student debt and are not making payments on that debt in this age cohort relative to previous age cohorts. That group is disproportionately “non-traditional,” that is, from families with fewer or no college graduates, and who attended for-profit institutions. Given the education system’s long history of discrimination and segregation, that group is, no surprise, disproportionately students of color.

Many of these debtors are already not making payments on their debt. They may be in an income-based repayment plan, or a borrower defense to repayment process, or they may be in default because their income can’t support their interest payments. While one may look at this group and see them as being especially disadvantaged by having any education debts, others see them and say that their existence may make outright cancellation even more regressive than it seems because it doesn’t deliver the same immediate dollars and cents benefits to the lowest income debtors because they’re not actually paying right now.

But one could look at them and say that the argument in favor of some amount of student debt relief ($10,000? $25,000? $50,000?) gets stronger. If there’s a big group of borrowers that’s already not going to pay back their debts and will have a lot of it extinguished in 25 years, why not get rid of it now?

Instead of a complicated bureaucratic process that stands at the mercy of the Education Department to be implemented in order to get students out of debts incurred at fraudulent institutions, just swing the sword of executive discretion through the Gordian Knot of borrower programs.

Would mass debt relief of tens of thousands of dollars solve the student debt problem? No. Would it reform higher education financing going forward? Certainly not. Is it the best use of a marginal dollar of federal spending? Probably not, but do you see any big spending programs earmarked for the poor getting through Congress any time soon?

We should instead look at problems we know are real, those of “non-traditional” students who were essentially taken advantage of, the debt that’s weighing down on a group of young people — and ask what tools we have to alleviate them. When we look at the problem more carefully, some solutions become more clear.

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I know this is a topic many people feel very strongly about. I tried my best to do justice to the facts and the arguments deployed in a debate that, understandably and justifiably, is quite passionate. Please write to me if there’s something I missed or should think about more. In private correspondence feel free to be as rude or intemperate as you feel is appropriate, but if you choose to comment on the post itself, please try to be productive and respectful.

Also, I’m really doing my best to avoid typos as I have no chance to correct emails, but there’s going to be some no matter what and I apologize in advance. If you see one, don’t hesitate to email or DM me and I’ll fix it for the website.

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