Forgive and forget student loans?
Published 10:28 pm Wednesday, May 6, 2015
Thousands of young Alabamians graduating high school this month will borrow to help pay for college this fall. Student loan debt in the U.S. now totals $1.4 trillion, with the Federal government owning or guaranteeing $1.1 trillion of this. College loans now represent the second largest category of personal debt, behind only home mortgages.
Default rates for recent graduates are at their highest levels in two decades, and some fear that student loan defaults might produce financial turmoil similar to what we experienced in 2008. And yet a surprising number of people advocate for the Federal government to forgive student loans, based on both economic and moral arguments.
Much of the momentum behind forgiveness comes from a perception of graduates overwhelmed with debt. According to media reports, 2012 college graduates had an average of $29,400 in loans, a sobering statistic for 2015’s high school grads. This figure, however, is inflated by a small proportion of very large debts and applies only to students who graduate with loans. Almost 30% of grads took out no student loans, so the average across all grads was $20,900. Graduates of public universities averaged $16,700, or just over $4,000 per year, a more reasonable level of debt.
Student loan forgiveness is promoted as an economic stimulus. Recent college graduates have been unable to spend much on cars, homes, and other items due to hefty monthly loan payments. Loan delinquency can hurt the ability to borrow for these big ticket items later on. And even bankruptcy normally will not discharge student loan debt.
Forgiving these loans will not boost the economy. Cancellation would prevent lenders from spending the loan payments and not increase spending overall. The U.S. Treasury can assume the loans to make the lenders whole, but this merely burdens our economy with greater national debt. Prosperity results from voluntary exchange and value creation, not spending, so arbitrarily canceling debts produces long term economic harm.
Forgiveness proponents also offer an ethical argument, claiming that students were tricked or forced into taking out loans. While students may view the loans as free money, they must acknowledge each semester that their loans have to be repaid. The best argument here stems ironically from the value of a college education. High school graduates might fear relegation to second class economic citizenship by passing on college. An appropriate parallel might be “optional” off season workouts in sports: a player can choose not to participate, but his lack of commitment will dismay the coaches. Furthermore, not all degrees are equally valuable, a point that stories promoting the value of college often fail to emphasize, and so some students may end up with loans and a low paying degree.
The unfairness of student loan repudiation outweighs whatever credence we might give to students being pressured into borrowing. Consider three high school classmates, one of whom incurs $40,000 in college loans, a second who earns a degree without taking out loans, and a third who did not attend college. Is it really just or fair to make the latter two share the cost of their classmate’s excessive student loan debt?
Forgiveness would likely wipe out the student loan program. Future students would not restrain their borrowing if they expected their debts to be canceled, and the supply of loans would likely evaporate. This would disadvantage the hundreds of thousands of Americans who borrow responsibly to finance their education.
I suspect that student loan forgiveness would be packaged with a free college for all initiative. President Obama earlier this year endorsed the principle of free community college. “Free” college would likely be extremely costly and erode the quality of American higher education, although a discussion of these points would require another column.
Access to education, including higher education, is an enormous element of America’s opportunity society. Not everyone will be able to pay for college when they attend, and loans provide students access while eventually ensuring that they pay. Students will make responsible decisions about college only if they bear the cost. Forgiving college loans would teach students a terrible lesson about economics and responsibility.
Daniel Sutter is the Charles G. Koch Professor of Economics with the Manuel H. Johnson Center for Political Economy at Troy University and host of Econversations on TrojanVision. Respond to him at firstname.lastname@example.org and like the Johnson Center on Facebook.