Jimmy’s Colorado Politics Column | Forgive student loans? Forget it

Written by on February 9, 2021

Last Thursday, a group of U.S. senators, led by Sens. Chuck Schumer (NY) and Elizabeth Warren (MA), put forward a resolution calling on President Biden to unilaterally “cancel” $50,000 in federal student loan debt.  All are Democrats, yet thankfully not a single one was from Colorado.  It should stay that way.

At over $1.7 trillion, it is undeniable that aggregate student loan debt represents a real crisis. The average borrower graduates indebted nearly $40,000. Student loans hamper small business startups and home ownership; they discourage marriage and families. Student loan defaults are growing. 

I can speak to this from personal experience: Despite being a decade out of undergrad this May, I still owe significant student debt.  It’s a genuine burden that should not be dismissed as a policy matter.

But let’s consider the most important question: Who is responsible for getting us into this student loan crisis in the first place?  The answer is pretty simple: The federal government.

While student loan growth traces back to the 1960s, legislation passed under Presidents Bush and Obama really sparked this crisis.  Both presidents signed legislation which, taken together, nationalized most student loans and dramatically expanded federal loan-giving programs.

Student loan debt was just $500 billion in 2007, when Bush signed his student loan bill.  It was $800 billion in 2010 when Obama signed his legislation.  Now at $1.7 trillion, that number has tripled in a decade.  If you look deeper, this actually makes intuitive sense.

In a 2019 Colorado Politics piece, I described how economists at the New York Fed found that “‘[h]igher tuition costs raise loan demand, but loan supply … [relaxes] students’ funding constraints.’  They concluded there exists a ‘pass-through effect on tuition,’ meaning, for every dollar a college or university gets in subsidized federal loans, tuition increases 65 cents. Unsubsidized loans and Pell grants boost tuition 30 cents and 55 cents, respectively.”

As I recently summed up for Newsweek, “Many think student debt has soared because tuition is steep, but it’s actually the reverse; tuition is steep because grants and loans are abundant.” 

If you understand basic economics and human behavior, a forgiveness scheme will only make things worse.  By cancelling student loans for existing borrowers, new college students will be encouraged to borrow even more.  Higher ed institutions will have more reason to keep raising prices.  That’s because they will all expect future student loan forgiveness.  Thus, student debt cancellation will make the problem even worse, not better.

There’s another important piece to this.  Starting with federal legislation in 1978 and climaxing in 2005 — coincidentally due to a bill written by then-Senator Biden — student loans became virtually impossible to discharge in bankruptcy.  While this means deeply-indebted borrowers may have no way out, the systemic problem is even more catastrophic.

Absent any real possibility for bankruptcies, there is little to no risk to the lender.  This in turn encourages even more demand for student loans and more loan-giving — contributing to the current crisis.

Given all this, it would be wise for Colorado’s delegation to continue their apparent opposition to such ideas as cancelling all student loan debt.  Sens. John Hickenlooper and Michael Bennet, for example, favor more narrowly tailored debt cancellation.

During his campaign, Hickenlooper gave no indication that he is open to broad student loan forgiveness.  His website suggests expanding cancellation opportunities for select groups engaged in public service or teachers in high-need areas, but there is little more on the subject.

Bennet, up for reelection next year, has staked out similar territory.  On his reelection website, he similarly suggests forgiving “$10,000 per year in student loan debt for up to four years for public servants and those who work in high-need professions in underserved communities.”  Bennet also favors cancelling student loans after 20 years for those who’ve “successfully made payments on time.”

While those are all bad ideas, they at least indicate that Bennet and Hickenlooper are not on board with Biden unilaterally cancelling student loan debt, or even catch-all forgiveness by congressional action.  They should hold to their view.

One good idea Bennet supports is restoring bankruptcy protection for student loans.  Not only will this offer relief for deeply-indebted borrowers, but it will also restore some risk to lending.  Congress should also make it so higher ed institutions have some skin in the game.  If future borrowers default or discharge their debt in bankruptcy, their college or university should be on the hook for a percentage of the losses.

There are other sensible ideas, such as empowering employers to help workers pay back loans tax-free, as advanced by former Sen. Cory Gardner.  But the bottom line is this: Colorado’s congressional Democrats should steer clear of broad student loan forgiveness schemes and focus on better ideas that will actually help and won’t make things worse.

Click here to read the rest of Jimmy’s February 9 column at Colorado Politics, a sister publication of The Washington Examiner.

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