Alabama Gazette - The people's voice of reason

Will Student Loans be Forgiven?

 

February 1, 2021 | View PDF



November’s elections imply we will likely see some Federal student loans forgiven. Current student debt levels reflect the morphing of a reasonable program. Loan forgiveness may produce significant changes for higher education.

President-elect Joe Biden has indicated a willingness to forgive $10,000 in loans per borrower via executive order. A Democratic Senate will likely result in Congressional action; Senators Charles Schumer and Elizabeth Warren want $50,000 in loans forgiven. Cancellation of all loans may now be a possibility.

Before considering the consequences of loan forgiveness, let’s consider why government should make student loans. America has long been described as the “Land of Opportunity,” and as Arthur Brooks argues, Americans accept unequal economic outcomes more readily than Europeans. Many accept unequal outcomes because they believe people have a chance to succeed based on their own efforts.

Free enterprise has generated enormous prosperity but also wealth disparities. A rising tide does lift all boats. The Fraser Institute’s Economic Freedom of the World finds that the incomes of the poorest ten percent are eight times higher in the most economically free nations than in the least economically free nations. Free markets also produce billionaires.

Inequality has become a topic of intense debate. Resentment of the rich could lead to high income and wealth taxes, which would significantly reduce economic freedom. Widespread belief in equality of opportunity short-circuits the politics of envy.

Education, including college, has long been an element of American opportunity. College is seen as a gateway to the middle class. The Bureau of Labor Statistics reports that persons with bachelor’s degrees earn 65 percent more than those with only a high school diploma, a lifetime difference of $1 million.

This difference in earnings explains why financial institutions would make college loans without government guarantees. Market-based loans would favor students: with stronger academic credentials; pursuing higher paying degrees; and with assets for collateral (e.g., well-off parents).

Libertarian professors might contend that a market for loans provides opportunity, while liberal professors might judge America inherently unfair.

The perceptions of an opportunity society that matter politically are those of Americans, not professors.

To dig into these perceptions, imagine we could design an unbiased test predicting success in college very well. Suppose we administered this test to high school juniors one time and banned anyone scoring below a given threshold from attending college.

Does this sound fair? Such a system, I suspect, would strike many of us as somehow un-American. We celebrate the rags-to-riches stories or the football walk-on who ends up being an All-American. We value the opportunity to try even when the experts tell us we will fail.

Market-based loans must offer reasonable returns to attract investors. Yet ensuring opportunity involves giving students who are likely to fail an opportunity. Maintaining an opportunity society probably requires some bad loans to marginal students. Government guarantees enable such loans, and I consider investing in maintaining equality of opportunity worthwhile.

Unfortunately, the student loan program pays for tuition at expensive private colleges and for graduate and professional degrees. This goes well beyond ensuring basic opportunity and means loan forgiveness will benefit the well-off. Households in the top 20 percent of the income distribution hold $3 of loans for every $1 held by the bottom 20 percent. A quarter of students graduate college without debt, often because they worked or started at a community college.

Forgiving outstanding loans might make current students expect their loans to be forgiven too. This would essentially usher in free college.

Yet even government money is not free, and programs typically have mechanisms containing spending. For instance, the US Department of Agriculture supports selected crop prices but limits the eligible acreage.

Washington’s financial support of higher education has to date involved few cost-control measures; loan forgiveness may provoke such controls.

Student loans reflect a familiar pattern. A reasonable rationale for a limited program provides cover for profligate spending. The problems caused by not limiting access to government-subsidized loans may now cost taxpayers, and especially responsible student borrowers, billions.

 

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