Forgiving Student-Loan Debt Would Be Regressive and Costly

A s we learned over the past couple of weeks, President Biden has been mulling an executive order to forgive $10,000 in outstanding student-loan debt per borrower. This comes after the president failed to pass such relief efforts in his Build Back Better legislative agenda last year, with mounting pressure from progressive policy-makers to go further still and eliminate up to $50,000 of debt per borrower.

Thus far the administration’s policy has been to repeatedly extend student-loan repayment pauses that were brought in at the height of the 2020 pandemic. The initial aim of these loan-payment pauses was to alleviate financial pressures on graduates when the labor market was in turmoil.

However, college-educated Americans are no longer suffering from financial turmoil. As of April, the unemployment rate for college graduates is 2 percent — exactly where it was before Covid. Hardly a demographic group desperately in need of a bailout.

Not only are current proposals to forgive student-loan debt extremely expensive, but they are also deeply regressive.

Take the current policy of pausing loan repayment as a miniature experiment in loan forgiveness. The nonpartisan Committee for a Responsible Federal Budget (CRFB) estimates that the average medical-school graduate has already benefited from $48,500 of canceled interest as of March, while a bachelor’s degree recipient benefited from $4,500 in canceled interest.

The regressive redistribution of federal funds toward high-income graduates such as lawyers, who make an average salary of $148,000, and physicians, who make an average salary of $252,000, comes on the shoulders of hard-pressed taxpayers, many of whom chose not to go to college. It’s hard to believe such a policy comes from an administration that prides itself on being “progressive.”

Given how regressive current repayment pauses are, it’s not difficult to see how deeply regressive proposals to forgive large chunks of student loan debt would be. A recent study for the Becker Friedman Institute of Economics at the University of Chicago found that erasing all student-loan debt would distribute $192 billion to the top 20 percent of earners, while only $29 billion would be distributed to the bottom 20 percent of households.

In terms of costs, a Federal Reserve Bank of New York study estimates that the cost of forgiving $10,000 of federal loans per borrower would amount to $321 billion. The same study finds that the larger the loan-forgiveness amount, the more likely the beneficiaries will be white, wealthy, and financially secure. Again, it will be hard to sell this as a progressive policy.

In light of the massive costs and regressive nature of student-loan debt forgiveness, the administration is now weighing the possibility of imposing income limits on its forgiveness plans. However, a recent analysis by the CRFB finds that income limits of $150,000 per individual would reduce costs only by $15–$20 billion. What’s more, distributional estimates find that 71 percent of the benefit of means-tested debt forgiveness would still go to the top half of income earners.

Aside from massive costs and deeply regressive outcomes, the proposed policy would also worsen the incentive structure that exists around higher education. Prospective students and their families take calculated risks when deciding whether to go to college, what to study, and how to finance their studies. For the vast majority of students, the risk pays off in the form of better credentials, a higher skill set, and increased lifetime earnings.

For example, the median earnings of a bachelor’s-degree holder are about 64 percent higher than the earnings of a high-school graduate who didn’t go to college. The median earnings of a master’s-degree holder are more than double that of a high-school graduate.

Achieving a wage premium that is double that of a high-school graduate has a cost. For those who can afford to pay full tuition while in school, it’s the tuition; but for those who can’t, the cost comes in the form of accruing student-loan debt that is paid off in small increments over many years. According to 2019 data, the average monthly repayment was between $200 and $299, or up to about $3,600 a year. Considering that the median bachelor’s-degree holder makes about $30,000 a year more than the median high-school graduate, it’s clear that this is already a great deal for the college graduate.

Why, then, would anyone expect a high-school graduate to foot the bill for college graduates? This is exactly what student-loan debt forgiveness entails.

The $321 billion added to the debt will have to be paid for by hard-pressed taxpayers — two-thirds of whom never went to college. What’s more, the proposed policy will only worsen our already out-of-control levels of inflation.

Don’t be fooled: The proposal to forgive hundreds of billions of dollars in student-loan debt is far from progressive — in fact, it might be the most regressive policy proposal in recent memory. You’d think an administration that has spent so much time bragging about how it wants the rich to “pay their fair share” would be a little less enthusiastic about shifting debt burdens from high-income professionals to low-income wage earners. A truly progressive administration would ditch the idea for good.