The Slippery Slope of Student Loan Debt

Joe Biden has indicated he is considering an executive order to cancel student loan debt before the mid-terms.

Source: https://www.cbsnews.com/news/biden-options-forgiving-student-loan-debt/

This surely could not be politically motivated, right?

Which group now gives Biden his lowest approval ratings?

It is the Gen Z / Millennial voters which actually gave Biden the highest percentage of the vote in 2020.

Only 5% of this age demographic strongly approve of the job Biden is doing in an NPR/PBS Marist poll released last week. Compare that to the 22% of Baby Boomers and 31% of those even older who strongly approve of good old Joe.

This has to be causing panic in the Democrat party as young voters have been their bedrock voting bloc for decades. 

Perhaps throwing a trillion dollars or so their way will change their mind about Biden and the Democrats before the midterms?

Let's take a deeper dive at the underlying issues relating to student loans.

First, let's put some context around how much student debt is out there.

There is currently over $1.7 trillion in student loan debt in the United States. 

$1.6 trillion of this is held by the federal government since the Obama administration federalized most of the student loan program in 2010.

There are over 43 million outstanding student loans as of April, 2022.

To put the $1.7 trillion of student loans in perspective, that is more debt than is owed on either auto loans or credit cards.

It is also more than the entire GDP of Russia ($1.55 trillion) as it existed before the invasion of Ukraine.

As part of the Covid relief measures, the federal government allowed student debt holders forbearance on interest and principal payments. As of the end of 2021, 24 million borrowers have been in forbearance and  are paying nothing on the loans. At the beginning of 2020, only 2.7 million had their federal loans in forbearance. The forbearance period is scheduled to expire on August 31 (it was this month until Biden recently extended the date).

There are another 6 million in school that are not required to start paying their loans back, 3 million who have deferred their loans, 2 million are in a grace period and 5 million in default. That only leaves about 3 million out of the 43 million borrowers actually making payments right now.

Of course, the interest on those loans has continued to compound despite the forbearance etc. making the hole that much bigger for those who chose forbearance or deferment relief. 

It is also important to consider that about 50% of all student loan debt outstanding was taken out for graduate programs---medical and dental school, law school, MBA programs etc.

You can see the wide disparity in debt for undergraduate vs. graduate programs in the chart below based on a survey by Nerd Wallet.

Finally, there is no bankruptcy exception for student loan debt. A bankruptcy filing will not wipe out these loans. Under federal law as it is written right now student loan debt is with you forever until paid in full.

Let's now look at some of the policy considerations involved in the cancellation of any student loan debt.

It has become popular for liberal Democrats to say that student debts should be cancelled. 

It sounds so simple. Just cancel the debt and take the weight of these loans off the backs of the poor students who took out the loans and are now struggling to pay them off. It will be good for them, good for the economy and is the right thing to do.

Why should we expect these students to pay back the debt they took on for their education? 

For example, Ro Khanna, a Democrat Congressman from California, wrote an op-ed in The Washington Post this week urging Biden that it is time to cancel student debt.

Putting aside the merits on cancelling student loan debt, how can anyone believe the President has the constitutional power to use an executive order to wipe away student debt?

In particular, why would a member of the House of Representatives or U.S. Senate (such as Elizabeth Warren or Bernie Sanders) believe that anything like this can be done without approval of both Houses of Congress?

I am reminded of Federalist Paper #10 when I see this type of proposal. In Federalist #10 James Madison wrote how our Constitution with its three branches, its separation of powers and its federalist view of government was designed to protect us from dangerous factions that might try to promote "Improper and Wicked Projects".

What were three leading examples of "Improper and Wicked Projects" according to Madison?

A rage for paper money

A rage for the abolition of debts

A rage for an equal division of property

Cancelling student loans would seem to involve a trifecta involving all three.

You have the rage for the abolition of the debt that would also transfer the burden of a few onto everyone else in equal measure and it can only be financed today by the creation of even more paper money by the Federal Reserve.

The call to cancel student loan debt also creates question upon question of what comes next?

What about the people who saved or worked their way through college to avoid taking on student debt?

Do they get reimbursed? After all, they did everything right and yet are penalized in the end. What about equal justice when it comes to them?

What about the person who has just paid off their student loan after 10 years of diligence? Their roommate  from college sought every deferment and forbearance and still owes more than the original balance including accrued interest. The roommate gets their debt cancelled but its tough luck to the person who paid off their loan just last week?

What about those who decided to be a plumber, factory worker or truck driver rather than go to college? Are we going to cancel student loan debt for someone who went to graduate school but ignore the people who make the country function every day?

What about the future? If we cancel past student debt what reason is there for anyone in the future to pay for college ? Why would they do that knowing past debts were cancelled? Does this mean all college has to be "free" in the future?

What does this mean for the military? Many college students join ROTC programs in order to pay for college and avoid student debt. Even more significant, many surveys show that 70% or more of all enlistments into our voluntary armed services is motivated by the opportunity for education benefits under the GI bill. Do liberals understand that cancelling student loan debt may eventually lead to the need to reinstate the military draft? It is an unintended consequence that should not be ignored.

Do those calling for cancellation of student debt realize that under the Internal Revenue Code that debt forgiveness of debt is generally considered taxable income?  What happens when those people who thought they were getting a free ride discover they owe income taxes on that cancellation? If they were struggling to make the payments where does the cash come from to pay the taxes in one lump sum?

There was a provision in the American Rescue Plan passed last year that would exempt student loan forgiveness from taxation in limited circumstances through 2025 but would that apply to a broad-based cancellation debt by executive order? At a minimum, it would seem that any exemption from the general Internal Revenue Code provisions would have to be passed by Congress.

Of course, at the same time that Biden and the Democrats want to cancel student loan debt, colleges and universities are sitting on massive endowment funds.

There is approximately $800 billion in endowment fund money controlled by colleges and universities in the United States.

The average endowment fund increased by nearly 31% last year fueled by strong stock market returns,

Colleges get a tax subsidy in soliciting contributions to these endowment funds and pay no taxes on the income derived from the endowment investments.

At the same time, college costs have far outpaced inflation over the last 40 years.

The simple truth is that college costs could have never gone up at this rate without a supply of money to pay for it. Just as is the case with health care costs, college costs have become heavily dependent on the flow of federal money into the system.

You can see that college tuition costs really moved up markedly beginning around 2005. This has been fueled by $1.3 trillion in student loans that have been made available in the last 15 years.

Health care costs generally tracked overall inflation in the economy until Medicare and Medicaid were introduced and normal market forces were disrupted beginning in the mid-1960's.  The same has been true with student loan money.  As more student loan funds became available, the easier it became for colleges to raise tuition costs. Ironically, a program that was designed to assist students to afford college seems to be making it more unaffordable with each passing year. 

Such is what occurs over and over when a well-intentioned "liberal" idea meets the real world. A desire to do good by government ends up being the undoing of the very people it was intended to help. 

I would suggest we will see the same thing with any student debt cancellation program. There will be massive unintended consequences if we embark on that slippery slope. 

Even worse, cancelling student debt will do nothing about the core problem---college has become unaffordable for most Americans.

One common sense idea might be to change the law so that the bankruptcy laws will permit someone who is really buried with debt to be able to have the student debt discharged as with other debts.

Perhaps some type to tax should be levied on those college endowment funds to put into a general fund to pay for any defaults or cancellation of student loan debts.

It might also make sense to require the educational institution that benefited from those student loans to be required to pay half of any debt default by its students. This might help insure that the schools have skin in the game and the best long-term interests of the student in getting a return on the tuition dollars they pay with that student debt. Right now the interest of the college is solely focused on the tuition dollars received today with little regard to whether that debt can be serviced later by its students in  the job market.

Beware those who promise simple solutions to complex problems.

There is sure to be a slippery slope that will lead us all downward to a much worse place than we are in today.