The failed promise of student loan forgiveness

After a month of speculation that President Joe Biden was ready to forgive student loan debt through executive action, the White House is punting the decision until later this summer. The president had reportedly considered canceling $10,000 in student debt. While the administration’s plans remain uncertain, two implications of the prospective policy are clear: More student loan forgiveness would shift an enormous expense to taxpayers, and it would not address college affordability. Tackling the problem of soaring college costs requires systemic reforms in higher education. Debt cancellation would bypass reform and continue to expand federal subsidies that have helped drive up costs for decades.

The Biden administration has already issued targeted student debt cancellations totaling $25 billion, including $5.8 billion on June 1. That’s more than any past president. In April, the administration extended once again a COVID-19 pandemic emergency policy that paused student loan repayment and interest charges. “No one has been required to pay a single dime of student loans since the president took office,” said White House spokesman Vedant Patel. This latest pause expires on Aug. 31, but don’t count on the administration to restart loan repayment in the run-up to midterm elections. The freeze costs taxpayers $5 billion in interest payments a month—more than $130 billion since the beginning of the pandemic.

The assumption behind student loans is that investing in a degree now will pay for itself in the future through higher salary opportunities. But the high rate of defaults and debt load among borrowers show that students and policymakers should proceed with caution.

Forty-five million Americans carry $1.7 trillion in federal student loan debt. The distribution of that debt is uneven, however. Half of the borrowers owe less than $20,000. A third owe less than $10,000. On the other hand, just 7 percent of borrowers owe more than $100,000, but their cumulative burden amounts to 38 percent of federal student debt. Most of these high-dollar debts are accumulated during graduate school. In other words, the largest debt loads tend to be held by those most likely to have higher-paying jobs.

Two-thirds of adults do not have a college degree, but loan forgiveness transfers college debt to them. As U.S. Sen. Tom Cotton, R-Ark., asked, “Why should a waitress who didn’t attend college pay the student loan debt of a lawyer making $300,000?”

Canceling student debt makes borrowers who have paid back their loans pick up the tab for those who haven’t. Removing current borrowers’ responsibility sets a bad precedent for students seeking new loans, encouraging higher borrowing in the expectation of future forgiveness.

In recent decades, federal subsidies have contributed to a steep rise in college costs. Rather than expanding subsidies through loan forgiveness, policymakers should pursue reforms to federal lending programs and accreditation.

One step to reform is to cap federal lending levels. The current array of federal lending programs includes options that allow borrowing up to the cost of attendance. Policymakers have proposed caps on the annual and aggregate amounts students and their families could borrow from the federal government. This would reduce the inflationary effect of federal lending on college costs.

Meanwhile, before choosing a program and signing a loan, students need to exercise due diligence with better information about the value of a particular degree. The Foundation for Research on Equal Opportunity has developed a tool for students to find out the return on investment of 60,000 degree and certificate programs, from associate to doctoral credentials. Informed and empowered consumers are key to controlling college costs.

In addition, accreditation reform could make room for innovative programs that better prepare students for employment opportunities. Currently, accreditation does not provide a reliable signal of the market value of a higher education credential. The Higher Education Reform and Opportunity Act would allow states to recognize new accreditors, including those with specialized expertise that could certify skills acquisition or individual courses of study as alternatives to full degree programs. Students could choose options focused on outcomes and right-size them for their needs, rather than taking on excess debt for a degree that’s not a good fit for their long-term objectives.

Higher education can be a powerful investment for students. Students, institutional leaders, and policymakers need to exercise prudence and stewardship to make the most of that opportunity. Wisdom calls for a course correction to address current challenges, not doubling down and compounding the problem through loan cancellation.