January 24, 2021
by Steve Stofka
Some members of the Democratic Party have called for a forgiveness of all student debt, which the Federal Reserve estimates at more than $1.7 trillion, which has doubled since the onset of the financial crisis and recession in 2007-8. On the campaign trail, President Biden seemed receptive to a forgiveness of $10,000 as a uniform application of policy (Urban, 2020).
Many of us react instinctually to debt forgiveness, ready to condemn the idea outright because we were taught as children to pay our debts. The ancient Greeks committed individuals and families to slavery for failure to pay their debts (ABI, n.d.). The Romans allowed creditors to dismember debtors. American colonists had debtors flogged, ears cut off and imprisoned.
Our laws have become more forgiving in the past three centuries, but the attitudes of many Americans have not improved as much. In the depths of the 2009 recession, CNBC reporter Rick Santelli criticized a mortgage debt relief program and ignited a storm of passion that contributed to the formation of the Tea Party movement. Will a student debt forgiveness program arouse similar sentiments?
A week before Congress passed the CARES act on March 27, 2020, Education Secretary Betsy DeVos suspended payments on federal student loans payments (DOE, 2021). The CARES act formalized that suspension but only for six months. President Trump then directed her to continue the suspension of payments and waiver of interest. President Biden has continued that policy until September 2021.
Who got the loan money? Some of it went to for-profit institutions. Students at for-profit institutions total two million, less than 5% of the 42 million students enrolled in higher education (Bennett et al., 2010). During the financial crisis, for-profits received a lot of criticism for abusive recruitment practices, low graduation rates, high default rates and poor student outcomes. Under tightened regulations during the Obama administration, several lost eligibility for federal student loans and subsequently shut down.
Ok, goes the argument, some students got a bad deal. Shouldn’t they still have to honor their contracts? What if the government forgave all debts involving a product or service which did not perform as promised? The buyer would no longer have to be diligent about quality. Eventually the quality of goods and services would decrease. Those who use this argument see debt forgiveness of any kind as a slippery slope to the downfall of the entire economy and the impoverishment of society.
The bulk of the $1.7 trillion of outstanding debt was paid to public educational institutions, who have raised tuition far above the general rate of inflation. Since 1985, inflation adjusted tuition has doubled (NCES, 2021). Over the past two decades, states have cut back their funding for higher education, throwing the extra burden onto students. In analyzing the shift, Douglas Webber found that the student burden had tripled since 2000 (2017).
Where did the money go? To state institutions. Imagine each student wearing a backpack loaded with 10 pounds of debt. State governments took 20 pounds of weight off their books and put it in the backpacks of the students, those least able to bear that burden. A forgiveness of debt, total or partial, would take some or all that weight out of the backpacks of each student and put it on the Federal balance sheet.
At its core, debt is about justice, a subject that we struggle to discuss rationally because we are social animals who process the subject of fairness with our monkey brains. In 18th century England, the punishment for crimes, including debt, was in proportion to the outrage of society at the criminal. In a more rational approach, the philosopher and legislator Jeremy Bentham introduced a “felicity calculus” that would guide legislators and judges to enact punishments that were proportional to the consequences of a crime and the profit of the crime to the criminal.
Our laws no longer treat debtors as criminals, but in the case of a student’s debt, how is society to judge the profit that a student will earn over a lifetime from their education? On average they will make a higher income and pay higher taxes. If all student debt is forgiven, one student will receive a benefit of $100,000 while another will receive a $30,000 benefit. Is that just? I personally think a $10,000 uniform forgiveness is more just. A debt forgiven cannot be unforgiven; moderation is the key.
We can never agree on issues of distribution of benefits. Small children argue whether they got the same amount of chocolate milk if the glasses are shaped differently. In the parable of the workers in the vineyard, workers who only worked one hour received the same amount of money as those who had worked all day. Is that fair? The landowner insisted that it was his money to do whatever he wanted.
In a democracy, we have an instinctual sense that the Federal government’s money does not belong to the government. Some of us claim an equal say in how that money is spent, whether we pay a small amount or a large amount of federal tax. Some of us decide the justice of debt forgiveness as though the debt was owed to us personally. Some of us don’t see this as a personal issue; the federal debt is as remote as the Andromeda galaxy. Those two groups cannot agree.
In a democracy, we argue about the rules. We compete to elect the people who make the rules. Half of us like the rules; half don’t. A democracy survives only as long as each half can forgive the other half for their tyranny while they were in the majority. As long as each half feels that they are getting a turn at making the rules, there is a grudging tolerance, if not forgiveness, and a democracy survives. When one half of the people feel as though they are shut out of the rule making process, the fighting starts. If we can’t practice some forgiveness we don’t deserve a democracy. Tyranny and aristocracy are the political choices of those who don’t forgive. I’ll take democracy.
American Bankruptcy Institute (ABI). (n.d.). A (Very) Brief History of Bankruptcy and Debt in the West. Retrieved January 23, 2021, from https://www.abi.org/feed-item/a-very-brief-history-of-bankruptcy-and-debt-in-the-west
Bennett, D., Lucchesi, A., & Vedder, R. (2010, June 30). For-Profit Higher Education: Growth, Innovation and Regulation. Retrieved January 23, 2021, from https://eric.ed.gov/?id=ED536282
NCES. (2021). The NCES Fast Facts Tool provides quick answers to many education questions (National Center for Education Statistics). Retrieved January 23, 2021, from https://nces.ed.gov/fastfacts/display.asp?id=76
Urban Institute & Brookings Institute, Tax Policy Center (Urban). (2020, October 15). An Updated Analysis of Former Vic President Biden’s Tax Proposals. [PDF]. Retrieved from https://www.urban.org/sites/default/files/publication/103075/an_updated_analysis_of_former_vice_president_bidens_tax_proposals_1.pdf
U.S. Dept. of Education (DOE). (2021). Coronavirus and Forbearance Info for Students, Borrowers, and Parents. Retrieved January 23, 2021, from https://studentaid.gov/announcements-events/coronavirus
Webber, D. A. (2017). State divestment and tuition at public institutions. Economics of Education Review, 60, 1-4. doi:10.1016/j.econedurev.2017.07.007