Give Them a Refund? On the Ethics of Student Loan Forgiveness
Forgiving student loans isn't a wise policy decision
[Disclaimer: student loan forgiveness would personally benefit both myself and my wife. So that’s a solid reason to take my criticism as sincere].
There has been recent talk in the political world that the Biden Administration is seriously considering forgiving up to $10,000 in students loans for folks making less than $125,000 to $150,000 per year. The idea here is that the amount of money that is owed by student borrowers has ballooned to the point of unsustainability, and that by forgiving at least some student debt, it will free up college graduates to spend more to boost the economy and improve their financial situation.
And perhaps that is right as far as it goes. However, there are solid reasons to think as a policy matter, the kind of student loan forgiveness purportedly under consideration by the Biden Administration is a bad idea. There are broadly two reasons for this: the policy would be unfair and would result in negative unintended consequences.
Student Loan Forgiveness is Unfair
There are several ways the current proposal—to the extent it happens—is unfair to others. The first, and most obvious, is that it is unfair to college graduates who have already paid back their loans, and yet because of their fiscal responsibility won’t be eligible to have some of their loans forgiven. Should they be given a refund of a comparable amount to what is forgiven? Why should they be punished because they paid off their loans, but others haven’t?
One could object, of course, some people who still owe on their loans simply lack the ability to pay off their student debt through no fault of their own. And that is correct. There are, though, people who have paid off their debt by cutting down their costs, getting side jobs, and so forth—sacrificing the nice things in life, and free time, for an extended period of time, so as to pay back what they borrowed. It isn’t plausible to suppose that everyone who owes on their student loans cannot do more to pay them back than they are doing. It is unfair to those who scrimped, saved, and sacrificed to pay back their loans that those who can, but refuse, to do likewise get some of their loans forgiven.
There’s another group, though, hurt by the unfairness of student loan forgiveness: those who graduated from college, without student loans, because they picked a cheaper school, worked multiple jobs on the side, went to school part time so they could work a full-time job, and so forth. There are plenty of people who did exactly that, and didn’t have to take out student loans to pay for school—or, at least, they didn’t have to take out as many student loans, and we’re better able to pay them off. It sure looks unfair to such folks, who made sacrifices of various kinds to their avoid or minimize the student debt they took on to bail out others who didn’t.
And finally: there are those who make a good living, but who didn’t go to college at all. They likely have or had debt of various kinds, but not student loan debt. This isn’t a small group of people. And yet it doesn’t seem fair that, not only are their non-student debt not forgiven, but they have to fund student loan forgiveness with their often hard earned tax dollars—if only about 42% of Americans have college degrees, then it would stand to reason there are many Americans who don’t have one, and yet make enough money without a degree that their tax dollars would fund the student loan forgiveness policy under consideration.
And the issue doesn’t stop with unfairness—it proceeds negative (unintended) consequences too.
Unintended Bad Consequences
It is plausible that forgiving a significant portion of outstanding loans would signal that the government would be willing to do so again—if they did it once, then it can be done again. And then this suggests, in turn, that colleges would feel their future students could afford to take out even more student loans in order to pay for rising tuition costs, which could very well rise even faster with future college students having an increase ability to pay. There is some evidence for this worry from a 2015 study from the New York Federal Reserve. Among their findings were,
We estimate tuition effects of changes in institution-specific program maximums of about 60 cents on the dollar for subsidized loans and 15 cents on the dollar for unsubsidized loans. The subsidized loan effects are robust to placebo tests and the inclusion of a large number of additional controls. Consistent with the model, we find that even when universities price-discriminate, a credit expansion will raise tuition paid by all students and not only by those at the federal loan caps because of pecuniary demand externalities.
Perhaps this study is wrong, or somehow missing something. Fair enough. However, it should give us pause before partially forgiving student loans. If the aim of forgiving some student loans is to alleviate the financial costs of a higher education, it looks like forgiving (even) some student loans is the opposite of what we should be doing. It is also an excellent example of the Law of Unintended Consequences.
Give Them a Refund? On the Ethics of Student Loan Forgiveness
I agree that student loan forgiveness can *feel* unfair, but I have a hard time convincing myself that it *is* unfair. If I owe both of my children equal love, care, etc., then other things being equal it would be unfair of me to love and care for one more than the other. For both of my children have an equal amount of claim to my parental attention to them, which is a limited resource. But student loan forgiveness strikes me as very different. Adults who have paid off their student loans, unlike my hypothetical child who is tragically loved less, have nothing to lose when other debt-payers receive some sort of relief. Indeed, if the economic impact argument is on the right track, they stand to gain, to some degree. Adults who were able to avoid student loans because they went to a cheaper school likewise have nothing to lose, but potentially something to gain. There's a counterfactual sense in which had they known they'd be getting $10,000 worth of debt written off, they might've chosen differently, I suppose. But is this backwards-looking counterfactual an important consideration? I take it unfairness intuitions are grounded in the idea that people that are relevantly similar should be treated relevantly similarly. But in this case it strikes me as implausible to think adults with and without student loan burdens are relevantly similar. "I would've also liked to receive $10,000" is not a strong reason to think something unfair has occurred. If I fought and won the battle of cancer, it's not unfair that there's now this breakthrough procedure that will cure other people's cancer in a low-cost, pain-free manner. Or, if I spent big bucks on this new treatment that cured my cancer, it isn't unfair, it seems to me, now that the patent of the treatment has expired, making it much more affordable. In both cases, once again, I have nothing to lose.
Full disclosure: I have no student loan debt.