The Arguments Against Student Debt Forgiveness Are All Bunk

There are very good reasons the US government should forgive student loan debt — not just for the debtors themselves, but for working-class people without college degrees too.

Student loan borrowers and advocates gather for the People's Rally To Cancel Student Debt During The Supreme Court Hearings On Student Debt Relief on February 28, 2023 in Washington, DC. (Jemal Countess / Getty Images for People's Rally to Cancel Student Debt)

The Supreme Court’s decision to strike down the Biden student debt cancellation plan came at a bad time for American households and the US economy more broadly.

President Joe Biden’s inability to pass a student debt cancellation plan through Congress was yet another instance of fledgling progressive economic policy being torpedoed by gridlock and corporate subservience. Turning instead to an injunction from the Department of Education, Biden’s plan would have slashed $430 billion in federal student loans for roughly forty-three million borrowers. This amounted to $10,000 a student (and $20,000 for recipients of Pell Grants), which would have helped shrink the average federal student loan debt balance of $37,717.

The Supreme Court majority opinion argued that the “statutory permission to modify” (elucidated in the Health and Economic Recovery Omnibus Emergency Solutions Act or HEROES legislation) does not authorize “basic and fundamental changes in the scheme,” which they argued debt cancellation would constitute. As a result, millions of students will now need to begin servicing their federal loan repayments, which were paused on account of the COVID-19 pandemic.

The resurgence of these payments comes at a time when signals of economic hazard and struggle are mounting. The US economy is not technically in a recession. But many mainstream indicators for labor market robustness mask hidden frailties in the economy, in large part due to the distorting impact of high inequality. In other words, people are living the reality of a recession, even if the official numbers don’t necessarily show it. As a result, 32 percent of American adults are falling behind on debt payments, while 25 percent of US parents have struggled to pay for food or housing in the last year.

In the aftermath of the Supreme Court decision, harrowing stories are emerging about already-struggling people who have little avenue to pay for an incoming regime of debt repayments. This includes people like Joanna Kearns, forty-two, who told the Financial Times that she is a full-time caregiver for a parent receiving cancer treatment and is trapped by $60,000 of student debt that she owes. Like other graduates, her debt was taken out while she was a teenager.

The opposition to student debt forgiveness is easy to understand. Millions of Americans are already struggling to make ends meet, and most of them have never benefitted from the advantages of a higher education degree. Why should taxpayers front a bill to pay for higher education degrees they haven’t received or benefitted from?

Yet there are very good reasons the United States should forgive student loan debt — not just for the debtors themselves, but for everyone.

The student debt crisis is the result of bad policy, greed, competition between universities, and technological change. Understanding its catalysts is important because of the “moral” character the debate often takes. “If history shows anything,” observed anthropologist and debt historian David Graeber wrote, “it is that there’s no better way to justify relations founded on violence, to make such relations seem moral, than by reframing them in the language of debt — above all, because it immediately makes it seem that it’s the victim who’s doing something wrong.”

Many Democratic and Republican members of Congress have shown indifference or callousness to the student debtors on precisely this basis. Representative Virginia Foxx, a Republican from North Carolina and chair of the House Committee on Education and the Workforce, remarked that “there’s no such thing as forgiveness” and that Biden’s plan transferred “debt from borrowers who willingly took out student loans to hard-working taxpayers who did not.” Senator Joe Manchin, a Democrat from West Virginia, similarly commented that the plan “forces hard-working taxpayers who already paid off their loans or did not go to college to shoulder the cost.”

These moralized arguments depend on two assumptions. The first is that graduates can reasonably pay back the debt. The second is that graduates in debt could have chosen to not go into debt. Yet neither assumption is necessarily true. To reaffirm the case for student loan forgiveness, it is worth taking each claim one by one, before also discussing the broader macroeconomic implications of the student debt crisis.

Prospects for Debt Repayment

On the first of these points, there is no question that higher education is no longer sufficient to guarantee entrance into the middle class — yet it is increasingly a requirement for it. For starters, the differential between those with a college degree and those without it has never been higher. According to data from the Federal Reserve Bank of New York, the median annual wage for a full-time worker with a high school diploma is $30,000. For a full-time worker with a bachelor’s degree, it’s $52,000. This gap of $22,000 is the highest on record.

The Federal Reserve Bank of New York’s data mirrors the findings of a recent paper by Lawrence Katz, Claudia Goldin, and David Autor, which similarly uncovered an increase in the college wage premium relative to high school diplomas. And much of this shift has been driven by longer-term macroeconomic movements — perhaps most notably digital technological change, which increased returns in high wage occupations through “skill-biased” dynamics.

In more recent years, however, the returns from college seem to have consolidated among a more rarefied group of institutions and disciplines. This mirrors broader labor market trends, which have seen growing wage inequality and middle-class erosion. Top universities and degrees in high-demand fields are commanding huge labor market returns, while a majority of institutions and degree-holders are left behind.

Undergraduate degrees from top ranked colleges and universities — Harvard, Stanford, MIT, for example — are vacuuming up forty-year returns around $2 million across all disciplines. For the vast majority of colleges and universities, these gains are not nearly as high. In many cases, they fail to justify their costs; for example, Emerson College’s rate of return after ten years is negative. And for students who either don’t finish their degree or attend a for-profit college, the return on their education is particularly bad.

Choosing a degree related to a growing field can bolster a student’s post-graduate chances of success. Yet shifts in labor market demand can be hard to anticipate, and teenagers often lack access to the information that would help them make the most informed decision. It is a cruel irony that in a country where it is generally illegal for an eighteen- or nineteen-year-old to drink a beer, they are nonetheless expected to make a complex decision about educational returns, debt, and degree choice, with lifelong implications. Meanwhile, tuition prices have increased by over 500 percent since the 1980s, significantly outpacing income growth.

For a majority of students, this increase in tuition has also outpaced growth in their returns on college degrees. And this manifests in a rising inability to pay off loans among each successive class of students. The result is that too many students are currently paying too much for programs that offer them far too little.

The Student Loan Choice

If millions of students cannot afford to pay off their student debt, shouldn’t they have chosen not to go into that debt in the first place?

This objection to student loan forgiveness is shortsighted. The total tuition burden is far greater than available scholarship and grant funding. So as a simple question of resources, it is impossible for most students to avoid taking on debt when they attend college. The most secure methods of avoiding debt involve two factors generally out of student control: their family’s wealth and the possibility of accessing cheaper in-state tuition.

Students frequently face a conundrum of two risky options. They can take on debt for a college degree, which may not offer them a significant enough financial return to pay off their loans. Or they can choose not to get a four-year higher education degree altogether, which brings with it limitations on economic mobility and access to middle- and high-wage occupations.

Given the role of technological shocks in hastening the returns on certain college degrees, all while wages for high school graduates stagnate, the decision not to go to college is likely to be increasingly limiting. This is to say nothing of the broader societal and cultural social goods that arise from having a population able to train, explore, and become better educated through a college degree.

The hike in tuition fees is particularly pronounced at top private institutions, but it is happening across all of American higher education. The continual growth of tuition — far outpacing inflation — owes itself to a destructive amalgam of competition between universities, cheap credit, and technological change. Since admissions for top programs is more competitive than ever before, and demand is less elastic, it has emboldened top colleges to increase tuition, investing in more robust infrastructure, resources, departments, and buildings. Lagging institutions, looking to compete with top colleges, have similarly increased their tuition to catch up.

But bad policy is the chief reason for growing tuition fees. In the 1970s, the United States began to substitute welfare transfers for access to cheap credit, which spurred exponential growth in the economy’s leverage, driving low- and middle-income households into debt. Given the high demand for admission to selective colleges and universities, the access to cheap credit functioned to artificially inflate students’ purchasing power, allowing them to pay higher tuition fees through debt financing. So colleges and universities continued to increase tuition, simply because they could. Furthermore, unlike most other developed countries, there are no tuition increase caps.

Other countries have approached higher education with much more effectiveness. Many European countries have made colleges tuition free. And even the United Kingdom — experiencing a regressive economic and political backslide from over a decade of Conservative Party rule — has implemented provisions to protect students from unbridled debt. This includes tuition caps, which don’t go far enough, but do offer some protection in keeping fees below $10,000 annually. The British approach to higher education also includes an explicit debt forgiveness scheme, linked to earnings. And all British citizens have their debt wiped after thirty years.

Whose Responsibility?

A common retort by some lawmakers is to point out that, although these US policy failures have been damaging, it is not the taxpayers’ responsibility to clean up the mess. Once again, this is a claim that we should dismiss for three reasons.

First, and most obviously, the argument is hypocritical. Under President Donald Trump, Congress passed a $1.9 trillion tax cut, disproportionately benefitting the wealthiest Americans and corporations. These cuts did not benefit the broader economy enough to counteract the loss of federal revenue and the growth in the national debt. On average the United States spends $826 billion on its military each year, exceeding the next ten countries’ defense budgets combined. Fifty-six percent of US adults support cutting this budget, which includes $422 billion spent each year on private defense contractors.

While figures capturing military waste are hard to solidify, the Pentagon’s own report found that it could save $125 billion a year by reducing staffing, through retirements and attrition. And by reigning in foreign tax havens for the rich and corporations, the United States could bring in well over $10 trillion in unpaid taxes over ten years. To reduce the federal deficit and cut the burden for middle- and low-income taxpayers, these are better places to start than preserving student debt.

Second, the securitization of student loan debt — little reported in the media — has been a source of profit for investors. Student loan asset-backed securities (SLABS) have been around since 1992, totaling an issuance of $600 billion of securities, with $170 billion worth still outstanding. Most of the securitized debt is made up of private loans. It is an effective example of how the financialization of student debt — through credit extension — created a higher education market built upon the exploitation of middle- and lower-income students.

Third, and of most concern for everyone regardless of circumstance, the student debt crisis is an economic albatross that limits economic growth in the short run while putting it at risk in the longer run. Mainstream economic research suggests that the student debt burden likely plays a role in widening economic inequality, stunting economic growth, making recessions deeper and longer lasting, and generally increasing America’s vulnerability to unexpected economic shocks. And when such shocks do occur, the glut of private debt often gets transferred into public debt in the form of a bailout, which is fronted by taxpayers.

In this regard, debt forgiveness is nothing new. America wiped clean the debt and faulty balance sheets of major banks and financial institutions in 2008, staving off an even deeper crash. In response to the COVID pandemic, the United States offered a pause on debt repayments in addition to direct welfare transfers. These didn’t go far enough in the form of a bailout for students, but they showed an understanding that eliminating student debt helps the overall economy.

Biden’s debt forgiveness plan was far from perfect. A better approach would offer a progressive forgiveness regime, tied to student earnings in addition to family income, and do more to stunt future credit-backed tuition hikes. Nevertheless, it was a start.

In the aftermath of the Supreme Court’s June 30 decision, the student debt crisis is as entrenched as it has ever been. There is little hope of Congress taking the burden off of vulnerable students, even in the form of deferred repayments, despite the signals of economic distress in the economy. And the abject failure of lawmakers serves as yet another example of American federal subservience to corporations and the financial system at large.

Make no mistake. American politicians have few scruples about wiping away debt, even in large quantities. It’s simply a matter of who owes the debt and whether they have perceived political and economic importance.

As David Graeber put it, “As it turns out, we don’t ‘all’ have to pay our debts. Only some of us do.”