A Progressive Case against Cancelling Student Debt

Including Ideas for Fixing the Mess

Student debt is currently in the news because President Biden plans to cancel $10,000 of student debt per borrower. Some politicians (for example Elizabeth Warren and AOC) advocate going even further, up to $50,000 per borrower. No one can deny that student debt is a burden that has hampered the prospects of millions of young people. Many of us have heard the heartbreaking stories of people who assiduously make their payments for years and wind up owing more than they borrowed in the first place because of usurious interest. In some cases, the debtors worry that their children will inherit this debt, and that their families will never be free. This situation is tantamount to debt peonage.

Some young people get stuck in debt because they have been victimized by fradulent for-profit colleges that cost more than accredited universities but offer worthless degrees. The vast majority of people who have taken public-service jobs and are entitled to debt forgiveness never get it, either because their loan-management company Navient tricked them into taking out the wrong kind of loan, or because of bureaucratic problems like minor flaws in their paperwork. According to this report, “Prior to 2021, just 6.7% of eligible borrowers applied for loan forgiveness; less than 0.3% of student loan debt was eventually forgiven.” And student debt hurts the rest of us too: As many as 81 percent of people with student debt delay having a family or buying a home, which puts a damper on the economy. Given all these injustices, how can there be a progressive case against canceling student debt? I agree that the current situation is untenable at best and a Dickensian misery at worst, and I think we need a solution. I just don’t think cancelling student debt is the correct one.

One disclaimer: I reject such arguments as “I paid so they should have to too,” or “I worked hard and sacrificed, and those Millennials are just lazy.” The debt burden on the current generation is an order of magnitude higher than it was in the past, and anyway, envy and generational conflict are poor bases for public policy.

But we can’t deny that paying off student debt with tax dollars is unpopular and in some ways unfair. For one thing, if we were to pay off this debt with tax money, the benefits would go to those on the higher end of the income distribution: 60 percent of student debt is held by families that make more than the median US income, and many people are in fact able to pay off their debt without government help. For another, given that about as many American adults have medical debt in collections (18 percent) as have student debt (17 percent), it is reasonable to ask why we aren’t paying off medical debt first. And while debt forgiveness would indeed help young people, the real beneficiaries would be the banks that are profiting from the interest on the loans and the universities that keep raising tuition. Canceling student debt without repairing the underlying perverse incentives would be an error akin to the 2008 bank bailout, which saved the big banks (and their shareholders’ dividends) but left ordinary people in the lurch.

Skin in the Game, Moral Hazard, and Perverse Incentives

When discussing government programs, conservatives like to say that the beneficiaries should have “skin in the game.” They are talking about moral hazard, the idea that when a person or company doesn’t have to pay the costs of taking risks, they have an incentive to incur more risk.¹ Because student debt, uniquely, is not dischargeable in bankruptcy, risky loans pose no cost to banks. They will always be paid back, even—in the case of some private loans—after the borrower’s death. This debt, like a vengeful god, “visit[s] the iniquity of the fathers upon the children unto the third and fourth generation” (Deut. 5:9). The universities, for their part, get the money up front. The only ones with skin in this game are indebted young people. In fact the current student-loan system is rife with moral hazard—with perverse incentives² for people and institutions to take risks that hurt us all:

1. Banks are incentivized to hand out profitable loans indiscriminately, because there is no risk that the loans won’t be repaid.

2. Universities are incentivized to continue to raise tuition rather than to focus on sensible ways to economize.

3. Students are incentivized not to ask whether college is the best choice for them and instead to pursue expensive degrees they may not need.

4. Businesses are incentivized to require university degrees for jobs that don’t actually need them.

Solutions for Right Now

There are a two changes we could make that would immediately improve the situation. First, we should enforce and simplify the Public Service Loan Forgiveness program, which cancels remaining student debt for people who take public-service jobs and have made 120 payments. These workers have a right to expect that we will uphold our end of this bargain. It is a disgrace that Navient defrauded hundreds of thousands of people from receiving the relief they are owed and that bureaucratic obstructionism has made it difficult for other borrowers to access this benefit. Thankfully, the Biden administration is making it easier for qualifying people to get their loans forgiven, but we could streamline the process even further. The obvious advantage of enforcing this policy is that it not only lifts a financial burden from low- and middle-income workers, but it also encourages young people to pursue careers that help other Americans.

Next, we should make student debt dischargeable in bankruptcy. There would be numerous benefits to treating student loans like any other debt and allowing struggling people to declare bankruptcy. Most obviously, bankruptcy will rescue borrowers who are so buried under inexorably compounding interest that they can never repay their debt. Bankruptcy would allow them to start fresh. Note, though, that bankruptcy carries some negative consequences, so unlike having the government pay off your debts, bankruptcy isn’t a perverse incentive. People who are able to repay their student loans would continue to do so to avoid damaging their credit rating, and only those who are truly in trouble would have the incentive to choose bankruptcy.

In addition, the threat of bankruptcy puts some of the risk of these loans back on the banks, where it belongs. If banks know that their creditors could default on their loans, they will be more amenable to negotiating with borrowers, offering them easier repayment schedules and less punishing interest rates or even forgiving part of the principal, for example. Banks do this for consumer and business loans all the time, and there is no reason that student loans should be treated any differently. Banks would also be inclined to deny student loans to prospective borrowers who aren’t college-ready. People who require remedial education are more likely to drop out of college without a degree or the ability to earn enough money to pay back their student loans.³ If banks did due diligence before handing out loans, they would save some people a lifetime of debt and put them on a more suitable educational path at the outset. Banks would also be less willing to give out loans that would go to illegitimate for-profit universities. Finally, with less tuition coming in, universities would be incentivized to focus more on instruction and to resist wasting money on administrative bloat and luxurious facilities.

Ideas for the Future

The actions discussed above would help dig us out of the current mess. But going forward, we should think about our country’s goals for higher education. We all agree that young people should get an education so that they can lead meaningful, comfortable lives. This is not (always) the same thing as getting a four-year college degree though, so we ought to consider more cost-effective and pragmatic educational options too. Between 40 and 60 percent of American college students must take remedial English and math classes in college because their high schools didn’t prepare them for college work.⁴ These remedial classes cost money but don’t count toward a degree, and they are a big reason that 40 percent of US college students drop out, with no diploma and often in debt.

Pushing all high-school graduates into four-year colleges is like trying to improve young people’s health by demanding that all our kids train to run marathons—and the training takes four years and costs $300,000. Some kids will have an aptitude for distance running and will enjoy it, but many won’t and would prefer other routes to health and fitness, were they only available and affordable. Similarly, while many high school graduates will have the interest and ability to graduate from college, others won’t. They deserve options too; we should encourage—and fund—other kinds of post-secondary education, including public service like AmeriCorps, military service, community college, vocational training, apprenticeships, and on-the-job training. This is how it’s done throughout Europe, where only the small percentage of high-school graduates who score well on rigorous academic exams go to university; other students complete apprenticeships and training programs that lead to good jobs.⁵

For students who do have the interest and ability to succeed at four-year colleges, we need to make public universities more affordable, as they were in the past. States have been cutting public funding to public universities for at least a generation. I think we should vote to reverse this trend and reinstate public funding for public universities. This would bring tuition costs down substantially. For private universities, we could follow the UK model and offer publicly-funded interest-free loans to academically-qualified low-income students. These loans could also be used at public universities and for vocational training.

We should also enact policies that fight credential inflation. It makes no sense that jobs that used to be performed successfully by high-school graduates (for example administrative assistant, hotel manager, construction supervisor, salesperson, etc.) now often require a BA. It is no wonder that high-school graduates feel like college is their only option. After all, given a choice between a candidate with a college diploma and one without, why wouldn’t companies prefer the college graduate? To counter this preference, we could provide incentives—for instance, a tax credit for businesses that hire people without a college degree for jobs that don’t require one. I would also love to see financial incentives for corporations to provide their own on-the-job training for new workers, rather than expecting job candidates to have obtained and paid for the training on their own.

I recognize that my solutions aren’t perfect. Some bankruptcies might not be warranted, and some deserving kids might still have trouble paying for college, even with an interest-free loan. The US four-year college experience is a truly wonderful time of exploration, learning, and growth, and we benefit from having as many educated, critical thinkers as possible. We don’t want to deny a college education to smart, hardworking kids simply because of money, nor should we deny our country the benefits of their talents. But our current system has burdened a generation with debt and credential inflation. We should make college more affordable, but we also need to honor other ways of educating young people for meaningful lives.

Some Inspiration

As with all our decisions, with education it is useful to ask, “Is it worth the money?” When the answer is no, we will be better off if we act accordingly. I faced this question myself. In graduate school I had a Mellon Fellowship, which paid my tuition plus a generous stipend for five years. My fellowship ran out when I was halfway through the first draft of my dissertation, and I needed to decide whether to take out a student loan or to drop out. The choice was obvious to me; I was not enjoying the process of writing my dissertation (nor, to be honest, was I getting anywhere), and I didn’t even need a PhD for the job I really wanted. So I quit, and not only have I never regretted it, but this remains one of the best decisions I have ever made for my happiness and my financial security alike.

A few years ago, one of my oldest friends offered her son a choice about what to do with the money in his college account. He could put the money toward college tuition, or he could invest it. Her son is very bright and was good at school, but he wanted to take a different path. Instead of spending the money on an elite college, he chose community college, followed by two years at a public university. He used the money he saved on tuition for a down payment on a house, moved in, and rented out the other bedrooms to help pay the mortgage. He has a job selling and overseeing the installation of energy-efficient windows. He enjoys the work, earns a good living, and is doing something to help fight climate change. Plus, he is in his mid-twenties and owns a HOUSE. I’ve been there—it’s a pretty house in a great neighborhood, and it has a large yard with mature trees. Instead of struggling with debt, my friend’s son is living the American dream.

What do you think, readers? Do you like my ideas, or do you have some of your own? Please share your thoughts in the comments!

The Tidbit

I ran across this story online recently. You know those Dungeons and Dragons ethical categories—lawful good, lawful neutral, lawful evil, etc.? Well these people are definitely chaotic good. Everyone expects kids to choose the candy, but there is another way—not as sweet, but more nutritious, and a lot of fun too. Choose potato!

1. I reject the moral-hazard argument against universal healthcare, because no one goes to the doctor willy-nilly or—barring the rare person with Munchausen Syndrome—for fun. There is no need to worry that if healthcare is free, people will use it wastefully.

But a good example of moral hazard that I think we all can accept is flood insurance. If insurance companies were to cover the entire cost of rebuilding after a catastrophic flood, homeowners would have no incentive to build in areas that aren’t flood-prone. But because insurance companies don’t do this, they force homeowners to have skin in the game and to make better choices about where to rebuild.

2. Perverse incentives are policies where we pay people and institutions to make things worse. I wrote about them in a previous post, which you can read here.

3. Again, a comparison with the 2008 financial crisis is useful. One cause of the crash was that home mortgage lenders gave out tens of thousands of subprime loans to people who had no realistic prospect of repaying them.

4. It is a sign of how entrenched the assumption is that all high-school graduates should attend college, that when I googled “remedial education” I got a series of articles describing ways to improve remedial education in universities; not a single article asked whether students who need help with basic grammar and arithmetic might be better served in a different educational setting than a four-year college.

5. When my compatriots on the left say that the US should have free college like they have in Europe, I always want to say, “Be careful what you wish for.” European universities are so inexpensive not only because of government subsidies, but also because they are not at all like universities in the US. Besides serving a much smaller percentage of the population, they tend to be spartan—dorms and dining halls are rare, as are student activities and services. Often there isn’t even a central campus. In addition, European students enter university already knowing what they will study and typically don’t take any courses outside that field.