Student loan forgiveness is happening: Why it’s amazing (and futile?)

I respond to the recent announcement of student loan forgiveness by the Biden administration.

By now you’ve all heard the news: the Biden administration announced a $10,000 reduction in the balances of student loans for some borrowers, and $20,000 reduction for some other borrowers.

This is seismic, and has, as far as I can tell, no precedent in U.S. history.

Because of the historic nature of the announcement, of course people have some strong opinions about it, and I’m of course no different.

But while I hail this announcement as being a net positive for borrowers and the wider economy as a whole, I can’t help but feel like it’s also a little futile, at least from a macroeconomic perspective.

But first, let’s make sure you understand what’s going on.

The student loan plan

I’ll be brief, because you can find this information in lots of other places (such as here or here).

You are eligible for up to $10,000 in student loan debt relief if you:

• Have that much or more in federal loans (not private)
• Earned under $125,000 a year (single/head of household) or under $250,000 (married) in either 2020 or 2021
• Had your loans disbursed by June 30 of this year

You are eligible for up to $20,000 in student loan debt relief if you:

• Qualify for all of the above
• Received a Pell Grant

I’m assuming that there will be a phase-out situation, meaning that you’re not totally screwed if you earned $125,001/$250,001 last year, but I’m unable to get confirmation on this.

This plan is supposed to go into action in October 2022. If you want to know more, sign up at the Department of Education subscription page.

The DoE may not know your income level, and so they will have an application for you to fill out. If you think you might be eligible for student loan relief, make sure you fill this application out immediately:

Why this student loan forgiveness is great

If it’s been a while since you’ve been in higher education, you may not have noticed that costs have gotten a teensy bit higher over the years.

Forget about our recent inflation situation. Historically, inflation has grown by 1-3% a year, while tuition has grown by 8% a year.

That may not seem like a big difference, but it adds up.

In 20 years, at a 2% rise each year, the cost of something will be about 150% of what it was. but at 8% a year, the cost of that same something will be almost 4700%.

Put into numbers, a $10,000 cost at a 2% yearly rise would be around $14,900 after 20 years, but would be an astonishing $46,600 at 8%.

So if you’ve been out of college or higher ed for more than a decade, and you think student loan cancellation is somehow unfair because they should just “pay what they owe”, shut up. You have no frame of reference, and your perspective is not relevant.

And that’s why this student loan debt forgiveness initiative is great: it gets today’s student loans slightly more in line with the cost of student loans of yesteryear.

Some other ways that student loan forgiveness is great:

• It could address and lessen the racial-wealth gap, according to FiveThirtyEight.
• It targets the middle class, unlike, say, the 2017 tax cuts. For example, one estimate from the Penn Wharton Budget Model finds that 75% of the benefit would go to people earning $88,000 or less, while the White House estimates that 85% of the 2017 tax cuts went to people earning more than $75,000.
• When people have less debt, they have more money to spend in the economy. I have no references for this, but this seems a self-evident fact.

Why this student loan forgiveness is futile

The average student loan debt per borrower is around $32,000.

But millions of people have way more than that, including over two million with over $100,000 in their balance.

So if you lop off $10k or even $20k, I ask you: what the hell’s the difference?

There is a difference, of course, but in many cases, this might not make a student loan massively more affordable than it was.

Plus, how does this help a 16 year old who’s about to enter college now? They can hope for debt forgiveness in the future, but they shouldn’t expect it. And worse, this may encourage borrowers to feel more comfortable borrowing, because they may believe that forgiveness is coming one day.

Which would make the whole student loan situation worse.

Finally, this does nothing to address the out-of-control rise in tuition prices (and might even exacerbate them).

Is it fair?

Some people are upset that they paid their student loans off, and now other people won’t have to.

And for reference, I paid my student loans off, and didn’t get any help.

Oh wait, I had massive amounts of help, from being a white male in America working in a lucrative field, having supportive parents, and without any medical or emotional complications.

You had help too, and if you can’t see it, that doesn’t mean that it wasn’t there.

Feel free to whine about how you worked hard while others don’t. And all you’ll sound like is petulant, selfish, and myopic. It’s not a good look.

Instead, how about you cheer on those who’ve had good fortune? Or, is there something in who in particular will be getting most of the help that you don’t like?

Perfect vs. the good

So, in short, student loan forgiveness is a sizable bandage on a massive wound, but does nothing to stop future people from being cut.

I’m not so cynical to think that it was just a political tactic though. Given the alignment between higher education and voting Democratic, I’m not sure Biden picked up any new voters here.

And I don’t have the answer to what should be done next. Ongoing loan forgiveness? Prevent colleges from charging the prices they do? Universal tuition?

All I know is: student loan forgiveness is not enough, but it’s a good start.