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Student Debt Forgiveness: Regressive Remedy that Evades the Real Problem

April 2022


In economics the term progressive refers to policies that disproportionately benefit the poor. But in politics, progressive can mean anything that wins voters, including regressive policies that benefit the rich. The Democrats' embrace of student debt forgiveness is a perfect example.


The Democrats' current proposal to forgive $50,000 of student debt for all but the richest 5% of borrowers falls short of Bernie's nuclear option, but it is still a perversion of progressive values. It's not limited to the genuinely unfortunate borrowers, those who were victimized by sleazy private colleges or who never completed a degree. Programs to remediate these cases already exist. Rather, it rewards the majority of borrowers who successfully completed a college degree, and because of that, are well equipped to repay their loans without a handout.


In other words, the Democrats' proposal is patently regressive: it is a political patronage scheme that disproportionately benefits the high end of the income spectrum. To finance her investment in a Bachelor's (BA) degree, the typical graduate borrows a total of $29,000. But the payoff from that investment is a huge earnings premium: the median lifetime earnings of a person with a BA is $1,100,000* greater than that of a high school graduate, or about $28,000 of extra cash per year. And these numbers don't include another premium bestowed by a college degree: the superior value of employer paid health insurance.


Clearly, the typical BA graduate has the means to pay-off her debt. Indeed, on a 10-year repayment plan, monthly payments would consume only 25% of the typical graduate's earnings premium.


Of course, earning premiums vary with the graduate's major field: A chemical engineer can expect to make $2.5 million more than a high school graduate over a lifetime. But even the least practical fields generate the means to repay the typical debt. For example, a graduate in fine arts can expect an earnings premium of $600,000.


The Democrats' proposal worsens inequality because it offers no comparable debt relief for the less educated adults who comprise America's genuine working class. It only applies to Federal loans to students.


This means that college graduates would reap 92% of the benefit because they hold 92% of total student debt. The 54% of adults who are less credentialed and earn half that of college graduates would get a pittance. By favoring the interests of white privilege over those of a more non-white working class, the self proclaimed champions of social justice would make inequality worse.


Democrats push the narrative that college graduates are struggling under the yolk of student debt. If that were true, the great expansion of student debt over the last 20 years would have driven up loan delinquencies and degraded credit scores. But just the opposite occurred: delinquency rates have fallen and FICO scores have risen.


It should be obvious that America's genuine working class is more deserving of financial relief than college graduates. Consider the financial capacity to pay one's bills, including loan payments. On every indicator of financial capacity, the working class is much worse-off:

  • The net worth of college graduates is 300% higher than those without a degree, thanks in part to the former's high rate of home ownership.

  • The cash in the checking and debit accounts of college grads is 6 times greater than their high school counterparts.

  • People with a college degree are more likely to enjoy stable, full-time employment.

  • Because of the above, working class adults are almost twice as likely as college graduates to miss a consumer loan payment; which explains why their FICO scores are 33 points lower.

Despite the need, the Democrats' proposal offers no relief for the typical debt incurred by the working class. And that 'typical debt' is not nearly as lenient and generous as the Federal loans bestowed on students. The Government is truly a beneficent lender: An 18 year-old college freshman with no meaningful credit or work history automatically qualifies for an unsecured loan of up to $6250 per semester at a below-market APR of 3 to 6%; and repayment won't begin until 6 months after graduation. And if the graduate's ability to repay is jeopardized by job loss or medical emergency, she can get a deferment or other remediation.


By contrast, unsecured loans for the working class come from credit cards which charge upwards of 20% interest, and limit the credit of a first-time borrower to maybe $1000. And there are no remediation options if the borrower can't repay.


Finally, a moral consideration: while working class folks usually borrow to make ends meet, college students often tap the easy-money of federal loans to finance indulgence. For example, undergraduates who occupy on-campus housing get finger-tip access to the institution's luxurious amenities. It turns out that on-campus residents borrow at almost twice the rate of students who reside off-campus.


Even more objectionable than its regressive impact, debt forgiveness skirts the underlying problem (which is an issue worthy of a future post). For now, suffice to say that a symptom of the real problem is the high rate of student loan casualties, i.e., students who fail to reap the big pay-off of a college degree.



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