The most distressed borrowers didn’t get degrees and owe less than $5,000.
Student-loan cancellation may be an appealing idea, but it would enrich the privileged and leave behind—or perhaps even drain money from—the truly needy. Progressive calls for President-elect Joe Biden to forgive student debt in his first 100 days of office should be ignored in lieu of a more moderate proposal: forgiveness capped at $5,000 of debt.
Workers with a college degree are the highest paid in the economy and the last to get laid off during a downturn. Sure, having debt is worse than not having debt. But because of the large financial returns to postsecondary education, folks with debt and a degree are often better off than those who have neither. It’s clear in the data: Borrowers with the largest balances are the least likely to default. That’s because they’ve often invested in professional or graduate degrees that lead to careers with high earning potential.
Borrowers who owe less than $5,000 are the most likely to default. Many in this category started a degree but didn’t finish, and thus aren’t enjoying the higher earnings afforded by a degree.
Then there are those with no college education. The plight of borrowers with college degrees is surely preferable to that of workers getting by on the lower wages paid to the less-educated. Many Americans without degrees come from less well-off families; a higher percentage lack emergency savings; and they are the first to be laid off in a downturn.
Each dollar spent on loan relief is a dollar raised in taxes, and far less than half of taxpayers have a four-year degree. Student-loan cancellation would bleed the working class to alleviate debt for those with more-lucrative career options. The progressive nature of the existing tax code helps to focus the payment burden on the more affluent, but the spending would still drain resources that could otherwise be spent on programs benefiting those with greater needs.
That brings us back to my proposal, a $5,000 student-loan jubilee in the form of a one-time tax credit. That would ensure that most borrowers who are truly up a creek can escape debt and move on with their lives. And such a proposal would buy the government the time, and perhaps the political leeway, to pass legislation that would streamline the existing student-loan repayment programs and ensure that struggling borrowers with large balances who are eligible would have the time to enroll in them. Washington could even expand those programs to require borrowers to pay a smaller fraction of their monthly income to loan repayment or allow debts to be forgiven sooner. At least these changes would ensure that dollars spent on loan relief flow to those that need them most.
More than half of Americans have built their lives and made ends meet without a college degree. Call universal student loan cancellation what it is: elitist.
This piece originally appeared at The Wall Street Journal (paywall)
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