Student Loan Forgiveness Is Bad Policy

By William J. Luther

On Monday, Sen. Sanders put forward an ambitious plan to wipe out the $1.6 trillion in student loan debt of roughly 45 million Americans. His plan goes further than Sen. Warren’s, which would impose income-eligibility restrictions. That two Democratic party front-runners have proposed student-debt-forgiveness plans in their bids to unseat President Trump in 2020 suggests we will be talking about the issue for some time. So, is student-debt forgiveness a good idea?

Let’s start with the facts. According to The Institute for College Access & Success, 65 percent of those graduating in 2017 had taken out a loan to go to college. And, among those with loans outstanding, the average debt was $28,650. Taken together, this means that the typical student (i.e., including those with and without debt) graduating in 2017 owed just $18,623.

Is that a lot? No doubt it seems like a lot to a typical recent graduate, who has been drinking cheap beer and eating ramen noodles for the last four years. But it is roughly half the cost of a new car

The relevant question, of course, is not whether it is a lot — but whether it is worth it. For the average student, financing an education is almost certainly a good deal. College graduates earn about 80 percent more than high school graduates. Median weekly earnings for those holding a bachelor’s degree are $1,173, but only $712 for those with just a high school diploma. In other words, the average college grad earns about $23,000 more per year.

Of course, it would be unfair to attribute the entire premium to earning a college degree. Someone who is capable of completing a college degree would likely earn more even if they had chosen not to go to college. Suppose that only one-third of the wage premium a college grad enjoys comes from earning a degree. That’s still $7,666 more per year for the rest of their life. So, unless they are paying an unusually high rate to borrow (say, 15 percent or more), financing an education is probably a good deal.

But don’t some recent (and not-so-recent) grads have much, much higher levels of student loan debt? Absolutely. In 2018, the Wall Street Journal profiled Mike Meru, a 37-year-old orthodontist with roughly $1 million in student loan debt at the time. Mr. Meru paid “$1,589.97 a month — not enough to cover the interest, so his debt ... grows by $130 a day.”

If that surprises you, as it did me, you should keep reading. Mr. Meru is on a 25-year government repayment plan, after which the remaining balance will be forgiven. (If, instead, he were to work for a non-profit, he would have his debt forgiven after just 10 years.) The government repayment plan means it is in Mr. Meru’s interest to make the smallest allowable payment each month since American taxpayers will cover however much is left. In the meantime, the “government repayment plan affords the Meru family a comfortable life. Their home is on a mountain with panoramic views of the snow-capped peaks surrounding Salt Lake City. They take vacations, including a recent trip to Havana.”

Although Mr. Meru’s case seems exceptional, it is common for those pursuing professional degrees to take on higher levels of debt. The average debt for dental school grads in 2018 was $285,184. Student loan debt for medical and pharmacy school grads averaged $196,520 and $166,528, respectively. That’s a lot. But, in most cases, it is a smart financial move. Median annual earnings for dentists ($156,240), physicians and surgeons ($208,000), and pharmacists ($126,120) warrant such investments.

Student-debt forgiveness, as proposed by Sen. Sanders and others, might be popular. But it is bad policy. The benefits of higher education fall almost entirely on the recipient. So should the costs. Shielding beneficiaries from the costs encourages them to become over-educated, resulting in wasteful expenditures and pushing up the costs of education (on society) even further.

The Sanders plan is also painfully regressive. The big winners of student-debt forgiveness will be those with the most debt — that is, professional-degree holders (doctors, lawyers, pharmacists, etc.), who have relatively high incomes. The big losers will be those who do not go to college at all, who have relatively low incomes. In other words, canceling student debt transfers wealth from poor to rich.

Higher education is expensive. And policy should be designed in such a way that anyone who should go to college — that is, someone for whom the benefits of a college education exceed the costs — can go to college. That means encouraging innovative financing schemes, reining in the costs of over-subsidized colleges and universities, and encouraging students to think carefully about whether a traditional four-year degree makes sense for them.

If some would-be students still find it difficult to afford a higher education, we should consider making larger transfer payments to the least well-off. But there is no good reason to condition such payments on going to college. And such transfers should not be extended to relatively affluent dentists, doctors, and pharmacists, who will benefit greatly from the degrees they earn. 

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William J. Luther

William J. Luther is the Director of AIER's Sound Money Project and an Assistant Professor of Economics at Florida Atlantic University. His research focuses primarily on questions of currency acceptance. He has published articles in leading scholarly journals, including Journal of Economic Behavior & Organization, Economic Inquiry, Journal of Institutional Economics, Public Choice, and Quarterly Review of Economics and Finance. His popular works have appeared in The Economist, Forbes, and U.S. News & World Report. He has been cited by major media outlets, including NPR, VICE News, Al Jazeera, The Christian Science Monitor, and New Scientist.

Luther earned his M.A. and Ph.D. in Economics at George Mason University and his B.A. in Economics at Capital University. He was an AIER Summer Fellowship Program participant in 2010 and 2011.

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