Econ 101:  Student Loan Forgiveness

“The Biden administration recently announced it will forgive roughly $500 billion in student debt…. Borrowers whose income was under $125,000 ($250,000 if married) in either 2020 or 2021 are eligible.” “Does Biden’s student debt forgiveness achieve his stated goals” Biden would forgive this government guaranteed debt by executive order. Congress has not passed a law authorizing it. In my opinion, it should be and presumably will be overturned by the Supreme Court as an overreach of executive authority. 

Many people who claim to champion social justice and more equal income distribution favor Biden’s proposal. I assume that they don’t really understand what they wish for. While I covered these issues seven years ago, perhaps some memories should be refreshed:  “Two approaches to American governance-the case of higher education financing”

The basic facts are that, aside from the idle rich who might attend college solely for cultural enrichment (which is nice if you can afford it), people attend college to acquire the knowledge and skills that enable them to earn higher incomes than otherwise. “According to new data from the Federal Reserve Bank of New York, the median annual wage for a full-time worker ages 22 to 27 with a high school diploma is $30,000. For a full-time worker with a bachelor’s degree, it’s $52,000…. The return on investment for a college degree is substantial — worth upwards of $800,000 or more in increased earnings over a lifetime.”   “Wage gap-college-high school grads”  For taxpayers to pay for this education would transfer income from the middle-income class to the higher-income class, not something that social justice champions can justify. Multiple private and government programs pay for low-income students to attend college.

As the amount of student borrowing has skyrocketed, so has the cost of college. “Over the past several decades, the cost of higher education has increased dramatically, more than doubling since 1985 at both public and private universities.” While some have attributed the incomes in the cost of college to the easy access to government guaranteed loans (especially if they don’t have to be repaid), evidence: “points instead to administrative growth as reactive to consumer demand and regulatory requirements….    Most colleges today operate their own systems of justice to comply with federal regulations like Title IX, and HR departments have grown apace with changes in federal regulations about hiring practices.” “A new theory of rising college costs”

“Administrative spending comprised just 26% of total educational spending by American colleges in 1980-1981, while instructional spending comprised 41%. Three decades later, the two categories were almost even: administrative spending made up 24% of schools’ total expenditures, while instructional spending made up 29%…. The factors that drive universities to hire more administrators can be boiled down to a few main explanations, often reflecting a shifting landscape in the higher education, including government regulations, competition between schools, and a modern population of students with increasing needs…. Perhaps most controversial is an increasing raft of federal and state regulations that universities must abide by: the Clery Act, which requires campuses to report their crime activity; new Title IX regulations that govern the handling of sexual assault; and Family Educational Rights and Privacy Act (FERPA) requirements for providing educational records….   A Vanderbilt study of 13 colleges and universities found that regulatory compliance comprises 3 to 11% of schools’ nonhospital operating expenses, taking up 4 to 15% of faculty and staff’s time….  And on a deeper level, colleges and universities are simply being asked to do more. Families expect their sons and daughters to have access to career assistance, readily available health services or counselors if they’re struggling with a mental illness.” “Bureaucrats and buildings-the case for why college is so expensive”

Those choosing to invest in college who are not helped by family and friends and have not worked and saved enough to cover the cost, generally have no credit record or collateral to offer banks or other outside lenders. This is what motivated the government guaranteed student loan program. For the future we should consider college financing arrangements in which the lender has “skin in the game.” To repeat from my blog seven years ago: Milton Friedman in 1955 and repeated in Capitalism and Freedom in 1962 made an interesting proposal for sharing the risk of investing in higher education between the borrowing student and the lender. “Enter income-share agreements ( ISAs ), which are essentially equity instruments for human capital. Investors finance a student’s college education in return for a percentage of their future income over a fixed period. ISAs are not loans and there is no outstanding balance. If students earn more than expected, they will pay more, but they also will pay less—or nothing—if their earnings do not materialize.”   “from the Wall Street Journal”

The Student Success Act proposed by Sen. Marco Rubio (R., Fla.) and Rep. Tom Petri (R., Wis.) almost a decade ago (but never adopted) would provide for the collection and publishing of information on the cost and average earnings of graduates of different colleges and fields, which would help students choose where and how to invest in their futures. We need to improve the information on which young people base their college and career choices and ensure that those who would benefit from college but can’t afford it at the time are not there by prevented from doing so. But otherwise, students choosing to benefit from college should pay for their investment.

Author: Warren Coats

I specialize in advising central banks on monetary policy and the development of the capacity to formulate and implement monetary policy.  I joined the International Monetary Fund in 1975 from which I retired in 2003 as Assistant Director of the Monetary and Financial Systems Department. While at the IMF I led or participated in missions to the central banks of over twenty countries (including Afghanistan, Bosnia, Croatia, Egypt, Iraq, Israel, Kazakhstan, Kenya, Kosovo, Kyrgystan, Moldova, Serbia, Turkey, West Bank and Gaza Strip, and Zimbabwe) and was seconded as a visiting economist to the Board of Governors of the Federal Reserve System (1979-80), and to the World Bank's World Development Report team in 1989.  After retirement from the IMF I was a member of the Board of the Cayman Islands Monetary Authority from 2003-10 and of the editorial board of the Cayman Financial Review from 2010-2017.  Prior to joining the IMF I was Assistant Prof of Economics at UVa from 1970-75.  I am currently a fellow of Johns Hopkins Krieger School of Arts and Sciences, Institute for Applied Economics, Global Health, and the Study of Business Enterprise.  In March 2019 Central Banking Journal awarded me for my “Outstanding Contribution for Capacity Building.”  My recent books are One Currency for Bosnia: Creating the Central Bank of Bosnia and Herzegovina; My Travels in the Former Soviet Union; My Travels to Afghanistan; My Travels to Jerusalem; and My Travels to Baghdad. I have a BA in Economics from the UC Berkeley and a PhD in Economics from the University of Chicago. My dissertation committee was chaired by Milton Friedman and included Robert J. Gordon.

5 thoughts on “Econ 101:  Student Loan Forgiveness”

  1. Dear Warren, your view (and perhaps mine) is an old one. The little aid POTUS is giving to students obeys to critical times w hg ere students have not been able to work in 3-4 years because of the pandemic and market conditions. Some flexibility is called for here. The time for being inflexible are for now gone. The Rubio prposal had many uncertainties A more market approach would have been the Obama extension of grace period. But this also increased interests. Whether unfair for those like you and I who paid to the cent our loans, something needs to give here.

      1. Precisely Warren. You and i will retire comfortably receiving a $20k a month (tax immune) from the WBG. Currently i have employees and ex bf with 200k student loans with no jobs or making a min wage. Your proposal of not helping them write some of the principal off will lead to increase student loan repudiation. (already happening). As a practical banker, i prefer “carrot and a stick” approach. It’s just a matter of adjusting to the times. But i understand the old thinking 🤔 as I myself was raised to pay my debt.

  2. The social and well as economic return on investment to an economy for education into graduate school and continuing to the end of one’s life time seems quite high from what you have said. If the United States is to continue its progress over the longer term, it would seem to me that it needs to step up the investment in is people, especially in medical fields. I am sure the costs of subsidized education throughout one’s life can be borne by all the profits one freely gives to an economy through increases in the money supply which presently get used up in housing appreciation and appreciation of stock market valuations, both of which are largely unearned and can also be taxed to pay for education. One only has to guess at what the redistribution benefits will be for everyone to realize that societies can easily afford raising standards of education and indeed must if they are to progress in a better than boring future world. By investing in computer education for everyone and managing the money supply growth more effectively we should be able to use all the graduates to build AI machines that will use robots to produce more and better. Why give all the spoils of capitalism to the owners of robots? Better to provide free education and tax those making profits from a growing money supply.

  3. Good points. I’d like to see all federal student aid abolished and essentially merged into reconfigured versions of the Hope Scholarships and lifelong learning credits managed through the IRS tax system. Repayment could be done via an income contingent sliding scale of surtaxes on top of regular annual income taxes. Much more details are needed, but that’s the essence of a major change that would do away with a large portion of the Department of Education as well as the nationalized system of loan origination.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

%d bloggers like this: