Introduction:
Abraham and Strain claim a debt relief proposal for student borrowers considered by President Biden is regressive. They cite research indicating that a blanket forgiveness of $10,000 in student debt relief would offer $3.60 in debt relief to households with the highest 10 percent of income compared to $1.00 for the bottom 10 percent. The research they cite also found that ¾ of the benefit from the proposal under consideration would flow to households with income over the median. They argue that expansion of Income Driven Replacement (IDR) loan programs and alteration in the treatment of student debt in bankruptcy would be a more effective way to assist students with excessive student loans.
Comments on arguments advanced by Abraham and Strain:
I am not surprised that student debt does not provide much benefit to households with income in the bottom ten percent because education is the best way to avoid poverty. Most of the advantages of the current student loan discharge proposal appear to go to middle income people with income between the 25th and 75thpercentile. The percent of people receiving benefits in the middle of the income distribution is a much more interesting portrayal of the equity of the proposal than the percent of benefits going to people with income over the median.
IDR programs have proven to be ineffective at providing debt relief to student borrowers, especially middle-income borrowers. The Public Service Loan Forgiveness loans, which are tied to IDR loans were not discharged in a timely fashion and it is likely that borrowers in long-term IDR programs will experience a similar fate. People in IDR loan programs often can’t qualify for a home mortgage because of uncertainty about their income and loan payment. The relative merits of an IDR versus a conventional loan are unknowable immediately after the student borrower finishes school and starts repayment. IDR loans can be negatively amortized, and many IDR borrowers pay substantially more on their loan than if they took out a conventional loan.
Abraham and Strain argue for allowing the discharge of student loans in bankruptcy, an action that would not pass Congress. Alternatively, it would be useful to modify chapter 13 bankruptcy payment rules to allow for increased student debt payments and decreased payments on other consumer loans during the chapter 13 bankruptcy period. This proposal also probably lacks the 60 votes needed to get through the Senate.
Abraham and Strain argue that it is inappropriate to treat student borrowers from people who borrowed for other purposes. However, this is exactly what current bankruptcy law does and Congress is not going to change this situation. A second-best answer is to provide debt relief.
The $10,000 immediate student loan debt discharge strikes me as excessively generous. I agree that it could encourage increased future borrowing. I would structure debt relief at the greater of 20 percent of outstanding loans per year or $3,000 per borrower per year for five years. I would exclude borrowers with household income greater than the 90th percentile.
Concluding Remark:
These has been a constant increase in the trend growth of the number of entrants to the workforce with student debt, the average student debt burden for new workers, and the number of older workers leaving the workforce and entering retirement with unpaid student loans.
I understand that most people with student debt are better off than people who never went to college but increases in the burden of going to college will almost certainly increase the number of people foregoing higher education. Congress is not going to act on this problem. Many of the proposed solutions won’t work. Some unilateral debt relief is the only way to avoid worsening debt burdens and increases in the number of people foregoing higher education.
David Bernstein, an economist living in Denver Colorado is the author of A 2024 Health Care Reform Proposal. Use promotion code REFORM101 for a discount on the paper.