U.S. President-elect Joe Biden waves to reporters as he arrives to announce the nominees and nominees for his economic policy team at his transitional headquarters in Wilmington, Delaware, United States, December 1, 2020 .

Leah Millis | Reuters

If President-elect Joe Biden keeps his campaign promise to forgive student loans for many borrowers, he will tick an important box for his political constituency.

However, as a boost to the struggling US economy, the move may not have much of an impact and will generate substantial opposition early in his presidency.

What to do with booming $ 1.6 trillion in education debt has been a nagging question for government officials. Half of the debt has accumulated over the past decade, when the effective nationalization of the process ushered in a wave of tuition increases and college loans that left many graduates struggling to pay their bills, to buy houses and raise families.

the most likely path Biden will follow a $ 10,000 forgiveness plan at a time when the average burden per graduate is just under $ 30,000.

This would result in an overall savings of over $ 400 billion, according to many estimates.

But in doing so, it would raise a series of thorny questions that the new administration might struggle to answer. Among them are the problems of wealth inequality, since high-income borrowers owe a larger share, the moral hazard of wiping out loans to a small group, and if forgiveness is even the best way. more efficient to solve the problem.

“It is increasingly clear that student debt has macroeconomic consequences,” said Mark Zandi, chief economist at Moody’s Analytics. “Outside of mortgage debt, it is the highest amount of outstanding household debt, and it continues to grow rapidly.”

Indeed, outstanding education loans totaled just $ 480 billion at the start of 2006. However, two pieces of legislation that effectively guaranteed access to college and the funds needed to pay for the ride pushed that figure up. 67% over the next four years. to $ 800 billion, and that’s more than doubled that total in the decade that followed.

Studies have linked the burden to lower household formation, higher delinquency rates and lower confidence in the future of borrowers.

But whether just wiping down the slate could really help is an open question.

For his part, even though Zandi insists the idea would benefit the middle class, he sees a significant weakness.

“How I could provide relief to distressed student loan borrowers, I think I would focus more on income-based repayment plans,” he said. “If you are really trying to meet our long-term educational needs, which I believe is essential for long-term economic growth, we need to think more broadly about providing higher levels of education at a cost. much lower.

Providing outright debt relief, he added, raises the question, “Do we really want to subsidize tuition? That’s what you are doing. You are giving money to students at give to universities that have raised tuition fees … and they don’t. really help anyone. “

Link debt to income

The larger question of the effectiveness of loan cancellation was the study of a working paper published last month by the prestigious Booth Business School at the University of Chicago.

Researchers Sylvain Catherine, from the Wharton School of Business at the University of Pennsylvania, and Constantine Yannelis, from the Booth School, compared the benefits of forgiveness to those of the income-based payment plans Zandi mentioned. They found that the latter offered better benefits, especially for low-income borrowers.

According to the study, people with higher debt loads are usually students enrolled in postgraduate programs and also earn more money. Thus, they would benefit more from forgiveness and create a growing disparity between income classes in the United States.

“We find that universal and capped forgiveness policies are very regressive, with the vast majority of benefits accruing to those with higher incomes,” the authors said. “On the other hand, recruiting more borrowers [Income-Driven Repayment] plans linking repayment to income lead to forgiveness for borrowers in the middle of the income distribution. “

Current IDR plans, as they are called, would have payments indexed to 10% -15% of discretionary income for borrowers with incomes 150% above the poverty line. Any remaining balance would be forgiven after 20 to 25 years. The provisions mean that low-income debt holders could end up paying nothing or very little during the term of their loans.

“Forgiveness would benefit both the top decile and the three bottom deciles combined,” wrote Catherine and Yannelis. “Blacks and Hispanics would also benefit much less than the balances suggest. Enrolling households that would benefit from an income-based refund is the cheapest and most progressive policy we are considering.”

Political questions

However, selling this type of economy could be difficult at a time when creditors and progressive politicians on Biden’s side demand immediate relief.

The president-elect has made populist themes such as easing the burden on student loans a centerpiece of his campaign and he will be pressured to speak out, with some in his party pushing for forgiveness of up to $ 50,000.

The follow-up, “will be transformational and give Biden’s approval a boost among borrowers who will benefit from it, further consolidating educated millennials and other post-gen Age X cohorts in the Democratic coalition,” Beacon said. Research in a recent policy brief on the issue. .

Beacon said he expects the issue to be part of Biden’s first 100 days agenda.

But the opposition is likely to be substantial, providing an early face-to-face for the new president and Republican lawmakers who could still control the Senate.

The Responsible Budget Committee, fearing more ignition on the country’s $ 27.4 trillion debt, said the $ 115 billion to $ 260 billion in economic benefits would produce “a much lower return than other available options. for policy makers “.

The organization said government spending would be more beneficial in the form of direct payments such as extended unemployment benefits, which are part of the stimulus packages being discussed in Congress.

There will also be a general political backlash for moral hazard reasons from those who see the folly in rewarding students for accumulating huge debts that they could not afford to colleges that took advantage of government largesse to increase costs.

The government has “allowed universities to follow this crazy trajectory of rising costs without any additional benefits for students,” said Carol Roth, head of Intercap Merchant Partners.

“The colleges are taking a lot of the blame, and they’ve basically taken the government-facilitated dollars in predatory ways,” she added.

While Roth acknowledges the larger economic problems, she said it was wrong that taxpayers have to foot the bill for some borrowers and not for others.

“We need to move away from governments that choose winners and losers,” she said. “The government should not be doing this, and it is not fair that people who have decided not to go to university, either directly or indirectly, should bear the burden of the situation that they do not have. had no role to create. “

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