Student loan forgiveness.

The “fairness” debate over student loan forgiveness, explained

Why economists are fighting over whether canceling debt is a good idea.

By Libby Nelson

For many of the 43 million Americans with federal student loan debt, President Joe Biden’s plan to forgive up to $20,000 in debt is unequivocally good news.

But in the days since the policy was announced, it has also led to pushback, debate, and controversy — arguments that are likely to be studied for months and adjudicated by researchers for years, if not decades.

There are two leading — and overlapping — criticisms of the loan forgiveness plan. One question is whether debt forgiveness is the right thing to do. It asks whether forgiving student loans is the best way to spend an estimated $500 billion, given that some, though not all, of those who benefit have college degrees and relatively high household incomes.

The other is about whether debt forgiveness is the right thing to do right now. If households freed from the burdens of their debts spend more money, it could drive inflation higher — meaning that the consequences of loan forgiveness would be borne by everyone, and soon. To dampen inflation, the Federal Reserve is actively trying to get consumers to spend less.

It’s unsurprising that Biden’s political opponents have raised these concerns. But the criticism has also extended to some economists who have served in previous Democratic administrations or consider themselves sympathetic to Biden’s goals. “Pouring roughly half trillion dollars of gasoline on the inflationary fire that is already burning is reckless,” Jason Furman, President Barack Obama’s chief economist, tweeted when Biden’s plan was announced.

Not all economists agree with Furman’s view. But the fact that the inflation debate is happening at all is a sign of how broader economic trends have shifted.

The push for student debt forgiveness was born a decade ago in the depths of the Great Recession, when even college graduates struggled to find work. Inflation was low and falling. It’s become reality under very different economic circumstances, and that shift is part of what’s fueling the current debate.

The first debate: Is loan forgiveness the right thing to do?

The Biden administration crafted its student debt forgiveness proposal in an attempt to avoid benefiting the wealthiest families. To be eligible for $10,000 in loan forgiveness, student debtors must have earned less than $125,000 (or $250,000 for a married couple) in the 2020 or 2021 tax years.

Students who receive Pell Grants to attend college — meaning they came from low-income families, overwhelmingly earning less than the median household income in the United States — are eligible for an additional $10,000 in debt relief. This is an extra boost for those who started higher education without the safety net of intergenerational wealth.

The proposal would entirely wipe out student debt for 20 million people — nearly half of the 43 million Americans who borrowed to pay for college and are still paying the loans back. An analysis from the Education Department found that almost 90 percent of the benefits would go to people earning less than $75,000 per year, though because any loans taken out before July 2022 are eligible for forgiveness, that figure includes current students and very recent graduates whose salaries could rise in the near future.

The reaction from Biden’s opponents has been to call forgiveness unfair, both to those who didn’t attend college and to those who already paid off their loans.

Senate Minority Leader Mitch McConnell, who would have perhaps the most to gain from a political backlash to the program, called the idea “a slap in the face to every family who sacrificed to save for college, every graduate who paid their debt, and every American who chose a certain career path or volunteered to serve in our Armed Forces in order to avoid taking on debt.”

This attitude is in line with how policymakers in the United States have typically viewed higher education. The federal government helps some students from poor families by offering Pell Grants that don’t have to be paid back, although the grant, which tops out at just under $7,000, means the majority of recipients still need loans. But the bulk of federal financial aid to students comes in the form of loans.

The American system of higher education finance is based on the idea that a college degree primarily benefits the individual who earns it. The federal government issues a small leg up by offering loans at a cheaper rate than a private bank would offer to an 18-year-old with no credit history or a young adult trying to support a family while earning a degree. (The current rate on an undergraduate student loan is just under 5 percent, compared to up to 14 percent from a private lender.)

A few assumptions underlie all of this: that most student loan borrowers are young people working toward bachelor’s degrees, that they will graduate, and that the degree will help them earn back more than enough to pay their debts. Hence the pushback against loan forgiveness: Why help out a 20-something who majored in philosophy at an expensive private college, instead of the 50-year-old next door with no degree at all?

But those assumptions are no longer always true. Biden’s plan is intended to fit the reality of the student loan program as it exists today. The lines between those who will benefit from debt forgiveness and those who are left on the sidelines are blurrier than blue-collar versus white-collar, working-class versus middle-class, old versus young.

One in five people with outstanding student loans is over age 50, some of whom likely borrowed on their own behalf (including those who pursued graduate degrees) and some of whom took out loans to pay for their children’s education. Many student debtors are no longer young adults starting at a four-year college; they’re older and more likely to attend a community college or for-profit program. An analysis by Mark Huelsman, director of policy and advocacy at the Hope Center for College, Community and Justice at Temple University, found that almost 40 percent of those who entered college in the 2011-12 school year and took on student debt never earned a credential.

Forgiveness will be especially helpful to those in default — the terrifying Upside Down of the financial aid system, where, after at least 9 months of missed payments, the Education Department can garnish wages and even Social Security checks in order to get its money back. The typical defaulter did not graduate and owes just under $10,000.

There are other versions of the fairness argument circulating. One holds that forgiveness is unfair to those who borrowed but paid off their debts — an argument that could be raised against any social program on behalf of those who were born too early to benefit from it.

The counterpoint to these critiques is that critics are holding student debt forgiveness to a fairness standard applied to few other government programs or benefits. Forgiveness could be life-changing for millions of people, especially those struggling with default, the argument goes, while hurting no one.

Which is where the other part of the critiques come in.

Is it the right thing to do right now?

The student debt forgiveness movement emerged about a decade ago from the crucible of the Great Recession. Students were borrowing more than ever to pay for college and, amid the cratering economy, were struggling to find jobs that would help them pay their loans back.

In 2012, the unemployment rate for bachelor’s degree holders was around 4.5 percent, and nearly 8 percent for college dropouts and those with two-year degrees. Interest rates were low. A prominent argument against student debt for the next eight years was that it was slowing down the economy: Young adults burdened by debt were being held back from buying homes, starting businesses, and spending money.

Few could foresee that by the time forgiveness became a reality, unemployment for bachelor’s degree recipients would have halved, interest rates would have more than doubled, and inflation would be the overriding economic concern. Even in 2019, when loan forgiveness became a serious issue in a Democratic primary campaign for the first time, inflation was rarely mentioned; by the 2020 election, with the economy contracting from the shock of the coronavirus pandemic, student debt forgiveness seemed to have a plausible path to becoming reality as a form of stimulus.

In the past year, though, things have changed. With consumer prices up 8.5 percent over a year ago, some economists now argue that debt cancellation is too big a risk. The concern is that, freed from loan debt or facing reduced payments, student borrowers will spend more at a time when the Federal Reserve is trying its best to get Americans to spend less and cool down the economy.

How much of an effect this will have — if it has one at all — is the subject of further debate.

The federal government paused repayment on most student loans during the pandemic, so millions of borrowers have not had to make a payment on their student loans in two years. The majority of student loan debtors will need to return to making some kind of payment in January, when the pause expires, even if it’s less than they would have had to pay before forgiveness.

The student loan pause was always supposed to end eventually, and it will in January. But for the past two years, the moratorium was extended multiple times, leading to an unusual situation: tens of millions of people owed student debt but didn’t have to make any payments.

Now, this situation is at the heart of the debate over inflation. When economists warn that student debt will drive up prices for everyone, what are they comparing it to? The current situation, where no one is making payments at all?

An analysis by Goldman Sachs economists found that the impact of forgiveness on inflation is likely to be offset by most borrowers resuming payments when the student loan pause ends in January. People who have had their loans forgiven will continue to pay what they’ve been paying for the past two years (nothing), meaning that their household spending should be unaffected. But people who owed more than Biden could forgive, or who earned too much to qualify for forgiveness, will have to resume making payments after two years of not doing so, meaning they’ll actually have less money to spend on everything else.

Or is the proper comparison an alternate path, where Biden allowed payments to resume for all loans, meaning that more people would owe more money per month than they will under the new plan?

Furman estimated that the loan forgiveness plan, even with the resumption of payments for most borrowers in January, could drive up inflation by 0.2 to 0.3 percentage points, compared to the alternative of resuming payments for everyone at their existing debt loads. If inflation continues to rise, prices will become more expensive for all households, meaning that American consumers broadly would pay for the consequences of debt forgiveness.

Ultimately, this argument about inflation is also tied up with the concerns about fairness. If student debt forgiveness drives inflation slightly higher, is that worth it?

Critics argue that it is not: “Student loan debt relief is spending that raises demand and increases inflation,” former Treasury Secretary Larry Summers tweeted last week. “It consumes resources that could be better used helping those who did not, for whatever reason, have the chance to attend college. It will also tend to be inflationary by raising tuitions.”

But that position is not universal. “I am not in favor of framing student-loan policy as a lever for managing inflation,” Sue Dynarski, a Harvard professor, an expert on higher education finance, and a former forgiveness skeptic, wrote in the New York Times on Tuesday. “Eliminating food subsidies for poor families — SNAP, as the food stamp program is known today — would definitely slow the economy, but that doesn’t mean we should do it.”

Where do we go from here?

One thing virtually all sides of the debate agree on is that one-time forgiveness is not enough. It is, by design, a one-off — siblings from the same family who graduate from college a few years apart, having borrowed the same amount to pay for it, could end up with debt loads that differ by thousands of dollars.

The Biden administration is hoping to make income-based student loan repayment more generous, outlining changes that would require borrowers to pay 5 percent of discretionary income per month (down from 10 percent in the current program).

But there is currently no federal plan to actually make college cheaper for students, to reduce borrowing, or to hold colleges accountable for whether students can pay off their loans. That’s not for lack of ideas or for lack of trying. The Obama administration proposed rating colleges based on the “value” they provide to students, an attempt that ultimately went nowhere.

In 2016, both Bernie Sanders and Hillary Clinton called for the federal government to partner with states to make college tuition cheaper. It inspired many of the same debates that loan forgiveness has provoked — should college be subsidized for everyone, and if so, by how much? But the “free college” program was ultimately one of the first things dropped from Democrats’ legislative agenda.

The scope of Biden’s student debt forgiveness plan might seem radical. But by leaving the ultimate structure of how American higher education is paid for unchanged, it’s actually a less dramatic departure than any of the alternatives.