Here's another reason wiping out student debt is a bad idea: it does nothing to address the core problem (or at least what many people argue is the core problem): the rapidly increasing cost of college. Further subsidizing something does not seem like a good way to bring down its cost.
I don't know what Ben meant by that, but I will add my two cents: There is definitely some percentage of the student-borrowing population that is making poor choices about where to pursue their education and how to finance it. Does it make sense to take out a lot of loans to go to your dream school when you could go to a state school without loans? Does it make sense to take out $100k in loans to get an degree (an undergraduate degree!) in a field that's not in high demand nor highly compensated? I would define those as frivolous loans - but of course Ben may have meant something entirely different.
A related and hugely problematic issue is the number of students who take out loans but never get their intended degree - this is particularly a problem in community colleges (at least in CA) and some for-profit schools. At least in the cases above, the loan has (presumably) at least some return on investment, although often not enough to come out even, let alone ahead. But in cases where no degree is attained, there is NO return on the funds that were borrowed.
I agree with ShayBult. That's what I mean by frivolous loans. Generally I don't think it's frivolous to get loans for a high paying, high value degree like a medical degree or engineering degree. Although they're large and expensive, your future job will allow you to pay them back comfortably over time. But going to school for a degree that is not going to get you a job that pays well enough to pay back the loan is a poor investment. It's the reason why private education loans are much more stringent. The government is just investing poorly in education especially since the "gainful employment" standard no longer applies (not that it was perfect though).
And to be clear, I'm one of those people. I took out loans to go to Northwestern University for a History and Sociology degree. I wish I had not done that and had gone to a state school that would've literally paid me to attend there. Wouldn't have had a large amount of loans and probably would've received the same education.
I am posting about this issue tomorrow in my Happy Wanderer Substack. I am on the left, but I oppose canceling student debt and think it should instead be treated like all other forms of debt: borrowers should be allowed to discharge student debt in bankruptcy. This simple change would remove the perverse incentives on banks and universities. Currently, banks face no risk of default, so they’re incentivized to hand out loans without doing due diligence. Similarly, universities get all the tuition money up front, so they are incentivized to keep raising tuition rather than finding sensible ways to economize.
Giving student borrowers access to bankruptcy would put some of the risk of student debt where it belongs--on the banks and the universities--and help to end rising tuition and credential inflation.
I loved Obama’s crackdown on predatory for-profit colleges and would be really happy to see the left apply those efforts to similarly sketchy nonprofit university programs. There’s no reason that Liberty University should be able to take advantage of people legally with bad online education just because their excess revenue goes to highly paid executives and football coaches instead of to shareholders. I’d even be happy if the right did this, I’d just prefer to see it from the left because I think it would be popular
Originally they included non-profit schools too i believe, but Dems/Higher Ed lobby made them rescind. Then of course Devos/Trump rescinded on for-profit. Should include non-profit schools too, most of which are great, but students deserve greater transparency.
Yeah I'm happy with my education because I had highly educated parents who told me frankly how to navigate college and get a useful degree, but I have a couple college friends who were essentially conned into a "sustainability studies" major by promises (lies) that the job market would be fine in that field. They both ended up going back to school for unrelated careers in healthcare, so they essentially lost >$100k each to a glorified con job.
A weird thing about student debt, which makes me at least willing to arguments that it should not be dischargeable, is that once you have a diploma in hand, that's that. There isn't really a mechanism by which it's revocable on financial grounds--once you've got the credential, you've got the credential.
The incentive structure is thus a bit warped: if there were some hypothetical mega-MIT degree that guaranteed the recipient a lucrative career, it would make dispassionate financial sense to get a big loan for that degree and then declare bankruptcy. IANAfinancialperson, but it seems like it should never, ever make good sense for a person to *plan* on a bankruptcy before incurring debt.
I'm in a part time online grad program. It's pretty cheap -- only about $10k for the entire program -- so I've been paying tuition in cash each semester. This week I applied for the max Grad Plus loan the school offers for the program just in case Biden decides to cancel it.
Part of me would feel a little bad if I got a free $10k from the government even though I absolutely don't need it, but you can't blame people too much for responding to incentives.
Although forgiven debt is generally considered taxable income, it seems really likely that any student loan forgiveness package thr administration puts together would make it non-taxable. Otherwise it's not going to be nearly as popular.
Great nuance as always Mr. Barro. At the core of it all, student debt forgiveness doesn't solve the actual problem and only rewards a small % of possible voters while alienating a larger percentage of the voter demographic. That said if student loan interest rates were capped or tied to the rate of inflation that would be a great start. Maybe a small forgiveness or a tax credit was given to some borrowers and they actually have a plan for a date for when repayments would start I believe it would go a long way.
Agreed with everything related to the gas tax holiday. It seems like they are trying to take the time to make a right decision, but I hope it is comprehensive and all encompassing and not a half assed solution that is unpopular with voters and also doesn't' address the root cause of issues.
Really looking forward to the student debt discussion.
I've heard from some that they believe ending the pause on payments will have such a disinflationary effect it will cause our economy to continue to shrink and certainly cause a recession. What do you think about that idea?
Without trying to attribute any value for or against the gas tax holiday, I’ll approach it from an optic’s perspective: Is there a general concern from the administration that they’d enact it, shout it from the rafters, no one notices (after all, gas price fluctuations in recent months make it difficult to identify specific factors at a given time), and they suffer the aftereffect of a deficit hit later on that makes them look fiscally irresponsible?
Given the volatility of inflation and gas prices, I personally don’t see the value of the move politically. It seems way too likely to get drowned out or ignored as lacking impact on the greater financial factors the public is facing, and it will potentially be labeled as a gimmick that drove up debt.
Here's another reason wiping out student debt is a bad idea: it does nothing to address the core problem (or at least what many people argue is the core problem): the rapidly increasing cost of college. Further subsidizing something does not seem like a good way to bring down its cost.
Yes! And these are generally bad loans in the first place. Frivolous loans are only adding to the cost of higher education.
I don't know what Ben meant by that, but I will add my two cents: There is definitely some percentage of the student-borrowing population that is making poor choices about where to pursue their education and how to finance it. Does it make sense to take out a lot of loans to go to your dream school when you could go to a state school without loans? Does it make sense to take out $100k in loans to get an degree (an undergraduate degree!) in a field that's not in high demand nor highly compensated? I would define those as frivolous loans - but of course Ben may have meant something entirely different.
A related and hugely problematic issue is the number of students who take out loans but never get their intended degree - this is particularly a problem in community colleges (at least in CA) and some for-profit schools. At least in the cases above, the loan has (presumably) at least some return on investment, although often not enough to come out even, let alone ahead. But in cases where no degree is attained, there is NO return on the funds that were borrowed.
I agree with ShayBult. That's what I mean by frivolous loans. Generally I don't think it's frivolous to get loans for a high paying, high value degree like a medical degree or engineering degree. Although they're large and expensive, your future job will allow you to pay them back comfortably over time. But going to school for a degree that is not going to get you a job that pays well enough to pay back the loan is a poor investment. It's the reason why private education loans are much more stringent. The government is just investing poorly in education especially since the "gainful employment" standard no longer applies (not that it was perfect though).
And to be clear, I'm one of those people. I took out loans to go to Northwestern University for a History and Sociology degree. I wish I had not done that and had gone to a state school that would've literally paid me to attend there. Wouldn't have had a large amount of loans and probably would've received the same education.
I am posting about this issue tomorrow in my Happy Wanderer Substack. I am on the left, but I oppose canceling student debt and think it should instead be treated like all other forms of debt: borrowers should be allowed to discharge student debt in bankruptcy. This simple change would remove the perverse incentives on banks and universities. Currently, banks face no risk of default, so they’re incentivized to hand out loans without doing due diligence. Similarly, universities get all the tuition money up front, so they are incentivized to keep raising tuition rather than finding sensible ways to economize.
Giving student borrowers access to bankruptcy would put some of the risk of student debt where it belongs--on the banks and the universities--and help to end rising tuition and credential inflation.
I loved Obama’s crackdown on predatory for-profit colleges and would be really happy to see the left apply those efforts to similarly sketchy nonprofit university programs. There’s no reason that Liberty University should be able to take advantage of people legally with bad online education just because their excess revenue goes to highly paid executives and football coaches instead of to shareholders. I’d even be happy if the right did this, I’d just prefer to see it from the left because I think it would be popular
Originally they included non-profit schools too i believe, but Dems/Higher Ed lobby made them rescind. Then of course Devos/Trump rescinded on for-profit. Should include non-profit schools too, most of which are great, but students deserve greater transparency.
Yeah I'm happy with my education because I had highly educated parents who told me frankly how to navigate college and get a useful degree, but I have a couple college friends who were essentially conned into a "sustainability studies" major by promises (lies) that the job market would be fine in that field. They both ended up going back to school for unrelated careers in healthcare, so they essentially lost >$100k each to a glorified con job.
A weird thing about student debt, which makes me at least willing to arguments that it should not be dischargeable, is that once you have a diploma in hand, that's that. There isn't really a mechanism by which it's revocable on financial grounds--once you've got the credential, you've got the credential.
The incentive structure is thus a bit warped: if there were some hypothetical mega-MIT degree that guaranteed the recipient a lucrative career, it would make dispassionate financial sense to get a big loan for that degree and then declare bankruptcy. IANAfinancialperson, but it seems like it should never, ever make good sense for a person to *plan* on a bankruptcy before incurring debt.
And graduates of mega-MIT presumably don't have much in terms of assets that they would lose through a strategic bankruptcy.
I'm in a part time online grad program. It's pretty cheap -- only about $10k for the entire program -- so I've been paying tuition in cash each semester. This week I applied for the max Grad Plus loan the school offers for the program just in case Biden decides to cancel it.
Part of me would feel a little bad if I got a free $10k from the government even though I absolutely don't need it, but you can't blame people too much for responding to incentives.
Although forgiven debt is generally considered taxable income, it seems really likely that any student loan forgiveness package thr administration puts together would make it non-taxable. Otherwise it's not going to be nearly as popular.
Great nuance as always Mr. Barro. At the core of it all, student debt forgiveness doesn't solve the actual problem and only rewards a small % of possible voters while alienating a larger percentage of the voter demographic. That said if student loan interest rates were capped or tied to the rate of inflation that would be a great start. Maybe a small forgiveness or a tax credit was given to some borrowers and they actually have a plan for a date for when repayments would start I believe it would go a long way.
Agreed with everything related to the gas tax holiday. It seems like they are trying to take the time to make a right decision, but I hope it is comprehensive and all encompassing and not a half assed solution that is unpopular with voters and also doesn't' address the root cause of issues.
Really looking forward to the student debt discussion.
I've heard from some that they believe ending the pause on payments will have such a disinflationary effect it will cause our economy to continue to shrink and certainly cause a recession. What do you think about that idea?
Without trying to attribute any value for or against the gas tax holiday, I’ll approach it from an optic’s perspective: Is there a general concern from the administration that they’d enact it, shout it from the rafters, no one notices (after all, gas price fluctuations in recent months make it difficult to identify specific factors at a given time), and they suffer the aftereffect of a deficit hit later on that makes them look fiscally irresponsible?
Given the volatility of inflation and gas prices, I personally don’t see the value of the move politically. It seems way too likely to get drowned out or ignored as lacking impact on the greater financial factors the public is facing, and it will potentially be labeled as a gimmick that drove up debt.
Did I miss a Friday post last week?
There would be plenty of loan-forgiveness resentment here in the People's Republic of Madison, too.