5 Reasons Making Taxpayers Pay Off Student Loans Is A Rotten Idea

5 Reasons Making Taxpayers Pay Off Student Loans Is A Rotten Idea

Regardless of whether Biden would find a loophole or merely attempt to cajole Congress, it remains concerning that there are many people who want him to force taxpayers to bail out the well off.
Elizabeth Bauer
By

Will a newly inaugurated President Joe Biden make taxpayers pay off $50,000 in student debt for everyone who has it? That’s what Senate Majority Leader Chuck Schumer, D-N.Y., has called for, according to recent reporting.

Although Biden does have a plan to make taxpayers pay $10,000 a year for each college debt-holder for up to five years of work for government or non-profit organizations, he dodged the question of the more massive Schumer plan last Monday, and subsequently indicated his call for “immediate” action referred to congressional action, not an executive order.

Regardless of whether Biden would find a loophole or a rationalization to do so through executive overreach or merely attempt to cajole Congress, it remains concerning that there are many people who want him to do so. Those who criticize this idea are called heartless, un-Christian, and selfish. But criticisms extend beyond a childish stamping of one’s feet and pouting, “It’s not fair!”

Let’s set aside making into chumps the generations of people who diligently repaid their loans or chose cheaper schools and worked part-time jobs to minimize those loans, or even chose a skilled trade rather than college. Let’s ignore the parents who saved diligently while raising their children to have money to draw on, or who took out second mortgages, depleted retirement accounts, or took out PLUS loans to meet an “expected family contribution” that’s absurdly out-of-reach to send their children to college.

Here are five other important reasons student loan bailouts are wrong and foolish.

1. There Are Reasonable Ways to Pay Your Debts Already

First, income-based repayment programs already provide substantial benefits, and are clearly fairer to everyone. Income-based repayment plans (there are multiple types, and the particulars are confusing) generally provide for loan repayments of 10 percent of discretionary income (income that’s above 150 percent of the poverty line for your family size), with amounts unpaid after 20 years paid by taxpayers.

These loans include subsidized and unsubsidized undergraduate loans, as well as PLUS loans when they’re taken out by graduate students to cover costs that exceed the maximums of the direct student loan programs. Parents who have taken out PLUS loans can also get in on this, but they have to pay 20 percent.

What’s more, Biden has proposed making this program even more generous, by reducing the repayment rate from 10 percent to 5 percent of discretionary income, increasing the income threshold to a minimum of $25,000, and removing tax obligations on the post-20-year taxpayer payoff. One suspects a GOP Congress might find a 5 percent repayment level excessively generous but agree to a compromise such as bend points similar to marginal tax rates, such as 5 percent of income above 150 percent of poverty, 10 percent of income above 300 percent of poverty.

Other reasonable proposals exist, such as increasing the accessibility of debt discharge-ability in bankruptcy, for cases in which the borrower clearly cannot benefit from the education for which the debt was incurred, especially for those who were unable even to graduate, to target any benefits to those who most need them.

2. This Is a Bailout for the Wealthy and Comfortable

Second, blanket forgiveness helps precisely those who are already better-off than average. A disproportionate share of student debt is held by higher earners: people in the top fifth, income-wise, hold 24 percent of debt, and those in the second fifth hold 30 percent, according to a hot-off-the-press analysis.

Also, many of the low earners with student debt are only low earners because they’re young, but, compared to non-debt-holders of the same age—that is, non-college attenders—they’re more likely to have high-income potential over time. This is the precise opposite of what’s intended with government programs, which should target those less well-off instead.

3. A Bailout Will Only Make the Problem Worse

Third, a blanket forgiveness program will not solve the underlying issues, and have its own unintended consequences. After all, why does a college-loan bailout matter to people? Because growing numbers of students feel they’ve gotten a raw deal, because they’ve graduated from college without believing they’ve gotten their “money’s worth” from it.

An inflation in credential expectations means that increasing numbers of those graduates are doing work that really requires only the skills of a bright high school graduate, or maybe those that would have been attained after two years at a community college, but for which, because of the increasing pursuit of white-collar jobs and the rejection of blue-collar work as too low-status, employers have been able to demand a college degree.

Of course, this is a self-perpetuating cycle. Once college attendance becomes the norm, it then becomes the means of assessing reliability and a base level of qualification. Then to stand out once again, a master’s degree become expected for jobs where it never was in the past.

What’s more, students set their expectations ever higher in the prestige level of the college they seek out, especially with the mantra being recited to them, “Go to the most prestigious college you can get into, because however much it costs, it’ll be worth it in the end, in terms of improved job prospects.” (It’s like the equivalent mantra, “Buy as much house as you can qualify for a mortgage for, because home values will only go up.”)

As a result, even in the pre-pandemic boom, according to the Federal Reserve Bank of New York, 41 percent of recent college graduates were working at jobs that did not require a college degree. The perceived need to attend college, and a prestigious, traditional college at that, and the lack of efforts to promote paths into adulthood without a college degree, is what is driving the increase in tuition rates and in student debt.

We know all this. But politicians, rather than solving the underlying problem, simply try to reduce the direct cost to students, even if the cost to society and to taxpayers remains. Debt bailouts don’t solve this. Worse, bailouts normalize this, and say a college diploma is indeed necessary.

What’s more, a one-time debt “jubilee,” as is being promoted, would create substantial other problems. After all, I write as a mother of a high school senior: what about my son and all his classmates? He’s not such a fool as to be blind to a give-away that benefits those who happened simply to be born some small number of years before him, but not his cohort.

While Biden promises other actions on college tuition, they are limited to students attending public colleges or students whose parents earn less than $125,000. Do students shift their interest to public colleges, because the cost differential between them and private colleges will have increased so substantially? How will that affect spaces available at those public colleges? Or will students select private colleges and, when the bill comes due, start agitating that fair’s fair, and they deserve bailouts, too?

4. This Will Hurt the Economy, Not Help It

Fourth, a debt bailout is being touted as a benefit to the economy, but it couldn’t possibly have meaningful stimulative effects on the economy.

How much would this cost? Estimates are $1 trillion. But unlike the CARES Act stimulus checks, which went into families’ pockets immediately, this would remove debt that would otherwise be repaid slowly over time. The share of this debt that would have actually been paid out in the short-term is small.

According to the experts at the left-leaning Urban Institute, “Forgiving student loan balances provides weak stimulus because most financial savings to borrowers show up in the future. . . . That long tail of payment reductions would do little to boost spending during the next year or two. . . . [For those with income-based repayments,] moderate reductions in loan balances would generally not lower their monthly payments and would thus have no immediate stimulus effect. Any benefit would come later, in the form of paying off the loan sooner.”

5. Teaches Americans Debt Doesn’t Matter, When It Does

Lastly, such a program will worsen Americans’ indifference to budget deficits. Temporary deficits in order to respond to COVID are one thing, but too many Americans act as if there is an unlimited storehouse of money that can be spent. When they hear that it’s unfair to those who worked to avoid and pay off their own loans, they respond that, rather than dialing back on the benefit, we can simply make things fair by giving $50,000 to every man, woman, and child.

Even before the pandemic hit, declining numbers of Americans were concerned about the federal budget deficit—from a high of 72 percent in 2013 to only 48 percent in 2019. Yet the projected debt as a percentage of GDP continues to grow: CBO projections in September forecast a 98 percent ratio in 2020, climbing to 109 percent in 2030, 142 percent in 2040, and 195 percent in 2050.

In terms of annual deficits, in 2030, federal spending is projected at 23 percent versus revenue of 18 percent; in 2040, it’s 27 percent versus 18 percent; and in 2050, 31 percent versus 19 percent. These are huge numbers. The problem can’t be solved simply by “taxing the rich.”

What about the promise of “Modern Monetary Theory” that the federal government can spend money to a near-unlimited degree because we print our own? The theory (see here for a short but useful explanation) says, “the Federal Reserve [can] permanently keep interest rates at zero to make it easier for the government to afford more spending, and even print money if necessary to pay for things,” and would prevent hyperinflation, or even excessively high inflation, by “increas[ing] taxes at the first sign that prices were beginning to rise any faster.”

But it is extremely problematic for retirees and retirement-savers for interest rates to be as low as they are for the long-term. It’s not just about government bonds; corporate bond rates drop when government bonds do, and it is simply not reasonable to expect savers and retirees to fund their retirements at the savings rates that would be necessary with rock-bottom bond rates, nor for them to rely on the stock market to do so.

It’s preposterous to imagine that the promise of increasing taxes to halt inflation is feasible when the lesson of Weimar is at least in part that politicians would not, could not, take actions that they knew were necessary to counter the hyperinflation, because the political pain was too great.

It all adds up to this: there’s simply no good reason for a massive student loan bailout.

Elizabeth Bauer is a Forbes contributor and actuary who lives in the Chicago area. She also writes as Jane the Actuary at Patheos.com and tweets at @janetheactuary.

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