Art Carden  

Should We Forgive Student Loan Debt?

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David Pritchard kindly directed me to this April 2012 article he wrote for Occupy.com, in part a response to this piece I wrote in October, 2011. Pritchard criticizes securities based on student loans and notes that they are subsidized; however, governments intervened in the student loan market purportedly to fix the market failure emerging from the fact that human capital is valuable but illiquid.

In 2011, I claimed that student loan debt is the "'Occupy' movement's weakest talking point" for several reasons. This is still the case for the same reasons I discussed in 2011.

First:

There are a lot of college degrees out there that represent real investments in human capital. There are a lot of others that are great fun and very fulfilling, no doubt, but they are consumption goods. Most people will tell you that financing consumption with borrowed money isn't a very good idea.

If you have borrowed $100,000 to get a degree in computer science or accounting, you can have probably invested. If you have borrowed $100,000 to get a degree in dance, then you have probably consumed (after allowing for sheepskin effects and the signal that comes with just having a degree).

Second, we're in the student loan mess for a lot of the same reasons that got us into the housing mess. There are differences, like the fact that student loans can't be discharged in bankruptcy. It looked like a good idea at the time and led to some short-run successes, but it's likely unsuccessful in the short run.

Third, Justin Wolfers called forgiving student loans the "worst idea ever" in response to a 2011 petition claiming that doing so would stimulate the economy. As Wolfers asks,

If we are going to give money away, why on earth would we give it to college grads? This is the one group who we know typically have high incomes, and who have enjoyed income growth over the past four decades. The group who has been hurt over the past few decades is high school dropouts.

Further, he points out the political economy problems. If throwing money at interest group X is a bad idea, it's still a bad idea even after we've thrown money at interest group Y.

This is a bunch of kids who don't want to pay their loans back. And worse: Do this once, and what will happen in the next recession? More lobbying for free money, rather than doing something socially constructive. Moreover, if these guys succeed, others will try, too. And we'll just get more spending in the least socially productive part of our economy--the lobbying industry.

Student loan forgiveness redistributes wealth upward, which is at odds with the Occupy movement's rhetoric, and doing so would encourage even more growth in the lobbying industry as others look for handouts. Some people who have borrowed tons of money to finance college have made terrible mistakes, albeit terrible mistakes they had every incentive to make because of loan subsidies and the like. This doesn't suggest that we should make the incentives even worse by putting taxpayers on the hook for those mistakes.

Here are a few things I wrote about the Occupy movement when it was going on:

Lessons From and For the Class Struggle on Wall Street

Occupy Bourbon Street? Big-Time Sports and Inequality

Iniquity, Irresponsibility, and/or Incentives?

Smash Capitalism and You Destroy Civilization


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COMMENTS (7 to date)
Jon Murphy writes:

As an economist, I oppose student loan forgiveness.

As a former student who still has loans, I'm all for it!

Ah, the conundrums of modern life! :-)

Barry "The Economy" Soetoro writes:

As someone who "invested" and consequently has a good income, but also has a 1:1 income to student loan debt ratio, I have some thoughts.

The cost of our education is a handout to wealthy boomers who work in higher education. Our educations are expensive because anyone can get a loan (thanks to Uncle Sam), which drives the demand for college degrees virtually no matter how high tuition is.

Second, this would not be a wealth transfer UP, it would indeed be a wealth transfer down. It is a transfer from tax payers to college graduates. 80% of income taxes are paid by the top 10% or income earners. The average college grad is no where near this level of income, hence the redistribution is, in fact downward.

The real solution is to return student lending to the private sector. Notice large banks except Wells Fargo have all but ended student lending? Why? They're NEVER paying back what they borrowed!!! If it was thrust back to the private sector, individuals with good grades and who were willing to committ to wise majors would get loans. Midding intellects who want to major in Political Science with a minor in Gender Relations of the 20th century would not be buried in student loans and occupying Wall Street. They'd be mad they couldn't go to college and mad they had to work at K-Mart, but the reality is their life would be better.

It's hilarious that you make a moral arguement when the moral battle has already been lost. We have all kinds of special interests and we are reaching a tipping point where those of us who are trying not to be leeches have lost all hope and may as well jump on the bandwagon. If we can't cut 2.3% from the $3T budget (the sequester, which was so painful Republicans caved and ended it) this country is done for and the lobbyists have won. Might as well get your handout while you can.

JKB writes:

If we were to forgive the loans, we should take back the credential. The student could trade on the knowledge they acquired, but, the school would only certify that the individual had been enrolled.

The school would not offer information on grades, courses or degrees under penalty of a fine equivalent to the outstanding total balance if they even intimated at the credential. The student, upon loan payoff, could regain the credential as a publicly acknowledge good.

sam writes:

The fact that student loan debt, and not mortgage debt, is a big issue shows that the movement is indeed about redistributing wealth upward.

The outrage of the Occupy crowd is not that there is so much wealth concentrated by the elites, but that the elites are sufficiently selective not to pick them.

It is merely a case of upper-middle-class liberal arts majors that wish to have equality with upper-middle-class finance and engineering majors.

They don't want to take from the elite, they want to join them.

MingoV writes:

A person takes out a student loan for non-useful studies.

A person gets a mortgage for a fixer-upper house, mucks up the repairs, and renders the house worthless.

Almost no one believes that we should forgive the mortgage.

So, why should we forgive the college loan, especially when the loss will be borne by taxpayers?

Hazel Meade writes:

I've been saying for years that a major problem with the student loan system is that we finance people to get college degrees in essentially ANYTHING. There is no link between loan eligibility or interest rates and choice of major.

If private banks were in charge, there would be very clear restrictions on who gets loans for what course of study. Loans would be more available for STEM majors or fields where there is a high demand, and less available for field with a high unemployment rate. Loans availability would automatically adjust to market conditions. And as a result, students would get a clear signal about what they ought to study if they want to have a job in the future.

By making loans available on equal terms for any major, the student loan programs essentially obscure market signals that students need to know what they ought to take, and as a result, we end up with large numbers of college grads with useless degrees who can't find work, and can't pay back their loans.


Richard Besserer writes:

Yes, yes, yes, going forward governments should stop subsidizing student debt and rates and terms on student loans should accurately reflect risk.
But just arguing that completely misses the point of Pritchard's article.

Whether students should have borrowed $100,000 to get a degree in dance rather than economics isn't the point. If they can't pay the money back, they won't (and aren't, actually, if Pritchard's figures are at all accurate).

Someone else will have to, either lenders (many of which will fail as a result if not bailed out) or governments, if not in the form of debt forgiveness then in the form of bailouts of lenders. None of these options will be costless, and all will involve giving money to people who arguably don't deserve anybody's help.

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