Why Forgiving Student Loans is a Bad Idea for Democrats

As the Democratic campaign comes into full bloom, candidates are pushing a very bad idea.  Forgiving student loans! We hear a lot about students saddled with tens of thousands of dollars of student loans and the total figure nationwide is around 2 trillion dollars.  This is a huge amount of money and it is common for progressives to see this as an easy issue to rally young people around.  It is without a doubt unfair to burden young adults with a mortgage-sized payment to get an education.  It is unfair to prevent students from poor families from getting an education because they cannot afford tuition. Forgiving student loans, however, simply makes a bad problem worse.  I have been in higher education for virtually my entire adult life.  First as an undergraduate, then after a couple years working as a graduate student, and finally for the last 25 years as a professor.  I have taught at flagship state universities, a small liberal arts college, and now at a community college.  I want everyone to go to college and get a college degree.  I sincerely believe that college graduates have exponentially more options than individuals who never graduate.  However, forgiving student loans is a case where the cure is worse than the disease.  My reflections here are based on my experiences in higher education.  I am not tarring all students, for many students, any higher education would be out of reach without financial assistance. 

First, as a professor, I pay attention to what students say.  Not only in class but also outside of class.  I listen and it has been very instructive.  I have heard students talk about the new car they are going to get when their student loans come through.  I see students buying the newest phone or moving into a nice apartment with student loan proceeds and often without roommates. Many students use student loans to study abroad.   Essentially, many students are subsidizing their lifestyle by borrowing.  I remember as an undergraduate student not having a car and not having a phone in my dorm room.  I know times are different but a spartan college life is a good preparation for life after graduation where we begin at the bottom of the totem pole and have to work our way up.  Students living beyond their means in college leads to them expecting that lifestyle when they graduate and that is often not going to be the case.  

Second, forgiving student loans penalizes the students and parents who make better choices.  When my daughters were getting ready for college, they talked about all sorts of schools from a flagship state school in another state to a private liberal arts college.  I told them I would pay for their college but only for in-state tuition at a school in Texas.  If they went anywhere else, they would have to pay for it entirely on their own.  In preparation, I did not run up any credit card debt, I didn’t buy a new car for 15 years buying only used cars I could pay for with cash.  My daughters did not have “nice” apartments and didn’t get new cars to go to college in.  I didn’t let them upgrade their phones every time a new model came out.  They were not always happy about it but when they both graduated with no debt and began working, the money they earned was theirs to keep.  They have both said how much they appreciated not having student loans as many of their friends are now paying for their spending in college with big student loan payments.   Many of my daughter’s friends took on student loans even though they had parents that earned more than I did.  Two new cars in the driveway and a vacation home make it difficult to pay tuition. 

Finally, and colleagues not like me to say it, colleges are at fault as well.  $50,000 for tuition at a large private school is simply wrong.  The way the schools then market themselves by providing “financial aid packages” that include scholarships and student loans to make the out of pocket expenses seem low is often misleading.  Most students at private schools get scholarships and that becomes an incentive to attend a school. “Well, they are giving me a $5,000 scholarship”.”  It often doesn’t occur to parents and students that the scholarship only covers 10 or 20 percent of the costs and they would be better off spending 2 years at a community college and then attending a state school with more reasonable instate costs.  In addition, colleges promote majors based on salaries.  Often these are not starting  but rather “average” salaries misleading students about their ability to pay off those loans when they graduate. 

Finally, there is the lesson we send society when people borrow money and then do not have to repay it.  It creates what economists term a “Moral Hazard.” What about incoming students?  Do they see this as a reason to borrow more?  What about students who paid off their loans, what message does it sends them.  What other questions about borrowing will it raise in society?  If there are too many car loans, mortgages, are people going to be forgiven those?  Borrow, borrow, borrow, if we borrow enough, government will just wipe it out.  There is however a moral hazard on the other side as well.  Student loan lenders know the debts are guaranteed.  This encourages them to acquire the debt as they have no risk.  Loan consolidation schemes and the pushing of student debt is equally problematic.  When there is big money to be made with little risk, the incentives turn upside down. 

Now, this does not mean that we should ignore the problem with student loans.  As of 2017 there was 1.6 trillion in student loan debt and the average student loan is 28,650.  For medical and law school graduates, the debt is often $200,000 or more.  There are ways of dealing with this problem without creating a moral hazard or being unfair to those who sought to go to school responsibly.  A simple way to make the system work and encourage college is to provide every college graduate with a graduation gift.  $30,000 from to federal government to you when you graduate.  This could be provided to all college graduates in the United States and that money could be applied to student loans first with the balance being sent as a check.  Another possible solution would be to eliminate all interest and penalties; the government could assume all the debts and then repayment would be interest free.  Finally, an AmeriCorps type program could be used to help students pay off student loans faster with larger scholarships at the end of service.  A precollege Civilian Conservation Corps that all college bound student participate in in exchange for free college tuition is another potential solution.  There are ways to deal with the problem that do not simply forgive all student loans.  Republicans will tout this as “Socialism” and another government giveaway to people who don’t want to pay their dues.  Free College plays right into their narrative.