Economics 101 & Public Square

How To Think About Student Loan Forgiveness

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On February 28, the Supreme Court of the United States heard oral arguments for two cases challenging the Biden Administration’s plan to cancel a portion of student loan debt. Simmering for years, the issues surrounding the burgeoning growth of student debt have now erupted into full view. Before thinking through policy positions consistent with a biblical ethic, let’s review the facts.

What did President Biden Propose?

Last August, the President announced an executive action to reduce student loan debt for millions of borrowers. The plan would cancel up to $10,000 in federal student loan debt for borrowers earning under $125,000 ($250,000 for married) and up to $20,000 for holders of Pell grants, which are need-based awards for undergraduate study. According to the Congressional Budget Office, as of June 2022, 43 million borrowers held $1.6 trillion in student loans. CBO estimates that roughly 27 percent of that debt will be canceled under the Biden plan, costing $400 billion over time. The reduction in loan repayments to the U.S. Treasury would likely increase the amount of federal borrowing

The administration justified its cancellation plan under the 2003 Higher Education Relief Opportunities for Students (HEROES) Act, originally put in place after 9/11 to alleviate hardship for holders of federal student debt who “may suffer as a result of national emergencies.” At the start of the pandemic, the Trump administration used this authority to suspend federal student loan repayments. The suspension was extended twice under President Trump and six times under President Biden; in all, 26 million borrowers received suspensions over the last three years. One motivation for the cancellation plan is the expectation that many students will have difficulty resuming payments on their obligations once the suspensions expire, and that many could default altogether. The economic fallout could be deep and lasting.

Thinking Biblically about Debt Forgiveness 

This issue has generated heated debate. Many are concerned about the cost and breadth of executive overreach should the program be permitted to proceed; others are worried about the economic fallout for millions of lower-income and minority Americans, who would likely be most negatively affected if the program were struck down by the Court. All of us should be alarmed by the debt burden of the rising generation, particularly among our lower-income and minority neighbors. Everything from household formation to home buying to childrearing will be negatively affected. This is to say nothing of the mental, emotional, and physical toll weighing on those deeply in debt. 

Applying a biblical lens to this issue provides an even deeper perspective that does not fit neatly in current political boxes. Consider the following. 

Sanctity of Obligations

To borrow money—whether for a home, car, education, or vacation—is to incur an obligation to repay. All loan documents require the borrower to pledge, in writing, to repay the loan according to the agreed upon terms of the contract. Incurring a debt is a serious commitment. In fact, the word “mortgage” comes from the French and means literally a “death pledge.” The pledge of repayment is satisfied with either the repayment or refinancing of the amount owed; in the case of serious default, the collateral can be taken through foreclosure. Proverbs 22:7 captures the serious nature of indebtedness: “The borrower is the slave of the lender.” Contracts should not be entered into lightly.

Sanctity of Contract

On the other side of the handshake are the creditors. To fail to repay is to deny the creditor his just recompense—regardless of whether non-payment occurs as a result of hardship, negligence, or even a well-intentioned debt cancellation program. In the case of federal direct lending to students, taxpayers are the true creditors, having provided $1.6 trillion in loans to their fellow citizens for higher education over the years. Taxpayers are harmed when repayment contracts are annulled—there is a loss of expected cash flows to the U.S. Treasury and a rise in government borrowing, possibly leading to higher taxes in the future. There is also an issue of fairness. Many of the taxpayers who would have to “pay” for the forgiveness of $430 billion in student loan debt never went to college themselves. 

Thus, it is wrong to think that Supreme Court justices are acting as selfish creditors as they consider the issues at stake. Even without the constitutional questions of whether the Biden administration has the authority to pursue this program (since Congress generally has the power of the purse), there is also the cascading impact such actions can have on other federal programs. Government willingness to cancel contracts—however well-intentioned it might be—ultimately adds to the cost of lending going forward, as wary private parties add a risk premium against unilateral government action. It also creates political pressure to forgive other types of government-subsidized debt.

It may not be too much of a stretch to consider the debt cancellation program a violation of the eighth commandment against stealing. One of the sins forbidden in the Westminster Larger Catechism is “all the other unjust or sinful ways of taking or withholding from our neighbor what belongs to him” (LC Q. 142). Debt cancellation takes even as it gives. Through their representatives in Congress, taxpayers should be the ones to decide whether to cancel the debt owed to them.

Sanctity of Stewardship

It can be angering to hear stories of huge student debts incurred by young people who were naïve, thoughtless, or greedy; by those who dropped out of school, or who took on additional debts to support a college lifestyle. To cancel those debts amounts to moral hazard; it reduces the incentive to properly steward one’s affairs because of the elimination of negative consequences. 

But there are other cases where students have been misled, poorly counseled, or even preyed upon. College is often sold as part of the American dream, a ticket to success—maybe even as the only ticket. The average student debt is approximately $36,000, and many students (especially those with graduate-level degrees) have debts exceeding $100,000. That so many of these debts could have been avoided with greater wisdom, better counsel, or viable alternatives is indeed tragic. Burdening a generation of young Americans with debt robs life and vitality, even if they entered these debt contracts foolishly

Given all these concerns, and the biblical injunction to “train up a child” in wisdom, older generation Americans are culpable as well. Parents need to help students “do the math” to determine if their chosen vocation will earn enough to pay off the debt, and steer them toward affordable programs. Helping ensure that students graduate is particularly critical for those with loans to repay. 

The availability of easy money has also had a pernicious effect on the educational system as a whole. The hyper-charged growth in federal loans has contributed to rising costs of a four-year college degree, which far outpace the rate of inflation. A program that originates trillions in uncollateralized loans without any guarantee of repayment—protections which undergird every other type of lending—is a program ripe for misuse and abuse. Much greater thought and care is needed to run massive government lending programs without a squinty eye on returns.

What Can We Do?

The student debt crisis is a hot mess, and there are no easy answers. Many young people are way over their heads in debt; because of the interconnectedness of our economy, their problem is ultimately everyone’s problem. Ideally, we would want a tailored cancellation program that addresses true need: those who have been defrauded or who are particularly in desperate straits. To minimize the moral hazard of a more expansive program, it would be wise to require some sort of qualitative repayment, such as community service hours. But such requirements are extremely hard for government agencies to make efficiently and fairly.  

An interesting experiment is underway that will test the myth that a college degree is the only path to success. The tight labor market has led many firms—and governments—to drop the college degree requirement. High tuition at four-year institutions is creating greater interest in attending affordable community colleges. Enhancing the quality of vocational and job-training programs would be a positive complement to “buy American” programs and other efforts to revive U.S. manufacturing. Employers benefit from a trained workforce, and hence, have a role to play in resolving the debt crisis.

Whatever the Court’s decision, the student debt crisis is an opportunity to rethink higher education and our commitments to each other. By broadening the definition of “success,” providing alternative pathways, de-stigmatizing vocational and community learning institutions, and encouraging greater financial stewardship, it may be able to set a different table for the next generation. We owe it to them.

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