Why student loan repayments remain frozen — with no end in sight


A few months ago I hinted that we entered into a federal state student loan permafrost, a tenuous but seemingly never-ending halt to repayment coupled with continued, targeted batches of loan forgiveness. This condition is showing new signs of persistence, with the the wall street journal report last week that the US Department of Education has told loan officers not to start sending billing statements to borrowers, indicating that repayments will not resume after August 31, the day the Biden administration had chosen for the end of the current freeze extension.

It became an almost comical situation, except the freeze isn’t really a freeze, which would have made refunds resume as if nothing had happened when the freeze ended. No, during this “freeze” interest payments were set to zero, not simply held in stasis to be paid when the freeze ends. Additionally, frozen months count for various types of time-based loan forgiveness. This is why the freeze has so far cost taxpayers dearly well over $100 billion.

Of course, that might just be the student loan sideshow if the Biden administration declares some level of overall forgiveness. Some senators have called cancellation of up to $50,000 per borrower, but the Biden administration, according to reports, is looking at $10,000, maybe with income limits.

Aside from the huge constitutional problem of such a cancellation – the Constitution does not give the President the power to cancel hundreds of billions of debts – it would be very poorly targeted to those who need it. Keep in mind that people with college degrees tend to better cope with the COVID economy than those without; less than 38 percent of American adults have a bachelor’s degree; student loans are disproportionately used by people to attend a graduate school; and that higher education confers large salary bonuses.

To make it a bit more precise, using various Data sources I estimated the distribution of cancellation based on income and race, both of which were reported as reasons for forgiveness. As shown below, with $10,000 set aside, 21% would go to the top quintile (divided into the top two deciles) of households by income, and only 13% to the bottom quintile. The top two quintiles would receive almost half of all cancellations. A write-off of $50,000 would be even more skewed, with the top quintile getting 24% of the total and the bottom only 8%. Indeed, the richest people tend to consume more – and more expensive – education.

The racial argument for mass cancellation is that African-American students tend to take on more college debt than white students. That’s right, but the mass cancellation would still be misdirected because there are so many more non-black students. With $10,000, African Americans would get 20% of the total debt forgiven and white borrowers 61%. Only 6% would go to Hispanic households, which tend to consume less higher education, and 13% to “others,” including Asians who tend to consume more higher education than other groups. At $50,000, the white share drops to 60% and the African American share drops to 22%, while the Hispanic share drops 1 percentage point, and the rest remain the same.

Student Debt Cancellation Estimates, by Race

A final argument is that debt cancellation would disproportionately help people with low wealth, and when you look at running wealth seems to do so. But like Adam Looney of the Brookings Institution explains, once the value of education is factored in, the cancellation tilts in favor of the wealthy. And you have to consider that value: as Looney notes, assessing student debt without considering the value of the education is like looking at a mortgage without considering the value of the home.

Regardless of where one stands on the nullification, it’s hard to believe anyone is happy with the current kick. There is simply no rational excuse to prolong the freeze again. But nothing justifies a massive cancellation either. Maybe that’s why we’re stuck in the permafrost: Telling borrowers it’s time to return their money to taxpayers is politically difficult. But it’s the right thing to do.

This article from the Cato Institute has been republished with permission.


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