Drowning In Debt

When people debate whether to forgive some or all of the $1.75 trillion in student debt that weighs on millions of American families, opponents often argue that it would be a waste and an injustice: too many relatively well-to-do and well-educated people would benefit from the spending of all taxpayers, many of whom have never had the desire or the opportunity to go to college.

As reasonable as that sounds, it's the wrong way to think about a policy that could do a lot of good, both for individuals and for the economy at large. It is based on a misleading concept of who counts as rich and ignores the extent to which debt itself is a manifestation of inequity. 

It's true that if you look at the US population by income, most student debt is owed by the top half of households. By one estimate, this group would receive about three-quarters of the forgiven dollars (in present value terms) if all debts were forgiven. This has led economists and politicians to call the policy “regressive” or take disproportionate amounts from those with lower incomes.

But this analysis is flawed on several levels. For one, it's an inappropriate way to gauge the regressivity of politics. Even Social Security, the nation's largest safety net program, may seem regressive until it is recognized that low-income participants receive more benefits than they contribute in taxes. In the case of student debt forgiveness, the income-based assessment ignores people's starting positions- the financial family resources that determine so much in life, including whether they can attend college without leaving with debt. In the United States, these early positions differ dramatically, largely due to a long and ignominious history of racism that, generation after generation, has kept Black families from gaining wealth.

Consider the investments the government has made in education over the past century. After World War II, the G.I. Bill paid for the college education of millions of returning soldiers, except for Black veterans, whose access to benefits was severely limited. Before the Civil Rights Act ended legal segregation in 1964, many public colleges and universities were largely tuition-free. But the political will to subsidize higher education has faded as enrollment rates for Blacks, Latin Americans and Asians have risen. Along with policies such as redlining (refusing to loan money to someone based on location), this fostered extreme disparities, in which middle-class white families amassed wealth to pay for higher education, while Black families had to rely much more on student loans to get the degrees from the colleges that have become more and more a prerequisite for upward mobility.

Because of such federally engineered inequality, otherwise qualified and dedicated students graduate with vastly different debt burdens, defined to an alarming extent by their race and marital status. A 2016 study found that four years after graduating from college, the average Black graduate was about $53,000 in debt, nearly double the level of the average white graduate. About 91% of Black medical students come out in debt, with an average amount of $230,000; comparable figures for white students are 71% and $200,000. Although income-based plans keep payments low, these debts stay on personal budgets for decades, preventing borrowers from starting businesses, investing in homes, and engaging in other activities, such as non-profit work or public service - which would increase the prosperity of one's own and the nation.

Regressive tax policies compound the problem. In the decade from 2021 to 2030, for example, federal and state governments are expected to spend more than $55 billion on programs like Plan 529, which provide tax benefits to the wealthiest families who can afford to save for their education and have the resources to move around the rules. Conversely, the government is forecasted to spend less than half that amount on income tax deductions for student loan interest, which is capped at $2,500 a year — not so helpful for Black medical graduates, whose interest payments could amount to more than $10,000 a year.

So far, measures to ease the student loan burden have proven woefully insufficient. The Ministry of Education has rejected about 98% of applications for its civil service loan forgiveness program. Participation in income-based repayment plans is hampered by confusing complexity, poor management, and predatory practices by loan service providers. In the end, it does not resolve overwhelming balances. The Biden administration promised to write off (and has yet to deliver) unscrupulous student debt for profit, but the amounts are small compared to the overall burden. Total default also offers little relief, as student debt remains nearly impossible to repay in the event of bankruptcy.

     Blanket debt cancellation, on the other hand, would be much more beneficial. A Roosevelt Institute study found that 70% of relief dollars would go to the poorest half of Americans, and debt forgiveness would have a disproportionate effect on the wealth of Black families. According to their estimate, a complete cancellation would increase the net worth of the median Black family by about 50%, from $16,700 to $25,000. The effects would be even stronger for lower-wealth households.

While some relatively high-income people may be eligible for assistance, in many cases these are low-income families who have managed to join the middle class and such "leakage" is not sufficient motivation to reject a policy that could help so many so quickly. Instead of perpetuating the myth that canceling student debt is for the rich, the Biden administration should recognize how regressive the status quo is and do what is best for the nation and its people. As shown above, student debt cancellation would stimulate the economy, and provide lower-class individuals with the jump-start they need.