Canceling Student Loan Debt: Go High or Go Home

By Ira Allen, Northern Arizona

Here’s the one good thing about publicly held student loan debt. What it costs to “forgive,” i.e., cancel: it isn’t the total amount of debt.

In one sense, it’s basically nothing. If I spot you $20, and then forget about it, and then remember a year later, but decide what the hell—you’ve been broke—I’m not suddenly out $20 bucks. I haven’t had the use of that money since I first gave it to you.

A step further: if instead of taking that money out of my wallet in the first place I just made it appear by editing your bank account—you had $.02, now hey presto, you’ve got $20.02—then I never lost the use of that money at all, since I never actually had it before “giving” it to you. That’s much more like how Department of Education student loans work. (Popular media habitually obscures this reality.)

The initial cost is, in essence, the miniscule human time and energy involved in editing the bank account (which process is partially farmed out to loan “servicers,” who immediately recover that miniscule up-front cost and far more in loan origination fees, which you paid from the loan right when you got it). This is then also loosely, but not any directly 1:1 way, correlated with the costs of printing money (and inflation, but that’s much, much harder to correlate cleanly).

Things are a little more complicated than that, though.

The real cost of canceling student loan debt has two dimensions: one budgetary and the other political. These are both, it turns out, somewhat hard to accurately define (i.e., to predict).

The budgetary cost is NOT the amount of debt held. It’s the amount that can be expected to be recovered, minus the cost of recovering that, minus the estimated increase in government revenues that could be attributed to canceling the debt, over the “life” of the loan. Under current rules, the budgetary cost of canceling student loan debt is dramatically smaller than the total amount of the debt. It may even be negative. In other words, in a budgetary sense, it may well cost more to NOT forgive student debt than it would to forgive it (such are the projections of economists whose models find forgiveness would massively stimulate the economy and increase tax revenues correspondingly).

Anyone who asks (like Joe Biden likes to do) where the government will “find” 1.8 trillion dollars is ether badly misinformed or deliberately blowing smoke up your ass. It costs basically NOTHING to forgive the debt, in an immediate sense. That twenty is already gone.

What it costs in a budgetary sense, if anything, depends on whether it would indeed dramatically increase tax revenues to forgive the debt (probably), and on the actual recoverable amount of debt. The recoverable amount of student loan debt–accounting for inflation over the life of existing and new loans, plus existing programs to limit payment amounts and rules for when debt is considered discharged despite not being paid back, plus the mostly bad financial circumstances of most people on the hook for doing that paying (and liable in fact to get worse as automation picks up pace)–is, over the long haul, probably not a lot. In an instantaneous sense, it’s definitely not a lot. It’s very, very, very little.

(And that’s not even getting into the relationship between health and economic benefits or general social equity advantages of canceling debt. I’m leaving aside LOTS of social value questions here, which are also part of the matrix to be discussed.)

Again, what all of this boils down to is that canceling federal student loan debt is (a) quite possibly revenue-positive over the long haul (i.e., doesn’t cost much in budgeted recoverable debt because the debt mostly is not recoverable anyhow, and does increase tax revenues through increased circulation of money in the real economy, which grows accordingly) and (b) certainly revenue-positive in the short-term (because it costs nothing to forgive and drives increased economic activity).

All this is why student loan payments have been able to be “suspended” for months during the pandemic, with next to no negative consequences for the federal budget.

There is another sort of cost, though, that’s been even harder to estimate and more in need of serious negotiation. That’s the political cost.

Negative solidarity is when people have a shitty experience and they want other people to have a shitty experience, too. There’s a lot of that going around, including with student loan debt.

There are other difficulties, too, though. One is private lenders. Canceling student loan debt held by private lenders is more tricky than canceling publicly held debt, and more likely to have true budgetary costs. And, yet, FAILING to do so would give those who owe such debt (and there are many) an extremely well-justified resentment, which would likely cost whoever oversaw the public debt cancellation dearly, politically.

Then, too, there are those who never went to college precisely BECAUSE they did not want to acquire student loan debt, and suffered diminished life outcomes because of this. Much more so than people who paid off their (in most cases, much less onerous than is today normative) debt burdens by scrimping and saving, both these groups would have a significant fairness complaint if only federally held (i.e., public) student loan debt were forgiven (and the latter also if both public and private loan debt were discharged, and nothing else done). To make these groups of people whole in some way would have serious (immediate) budgetary implications (though it might very well stimulate significant economic growth in its own right, and so be net positive through taxation over time).

The political costs of canceling student loan debt, though not entirely predictable, require serious and careful negotiation.

As is their wont, the Democratic establishment is hedging their bets about political costs by lying about budgetary costs.

That’s an approach. Whether it’s a pragmatically sound one can be judged empirically by how it’s been playing out since Clinton and the New Democrats took ideological control of the party in the 1990s, a control they’ve maintained unbroken through to the present. How has the Democratic Party been doing at winning elections countrywide, controlling the policy narrative, and managing the judiciary since the 1990s?

Oh, just about as abysmal as any major party in history.

Maybe the “hedge political costs by lying about budgetary costs” approach isn’t working. But what do I know? I’m just a radical empiricist, you know, a pragmatist.

When it comes to student loan debt, I’ve come increasingly to feel that addressing it has to be part of a REALLY big package. You cancel all the federally held debt, sure, but ALSO eat the up-front cost of paying off the privately held debt, make higher ed free or near-free, and put it all together with something like means-tested UBI: a stipend for anyone above a certain age (25?) who is making less than a certain amount. Means-testing is generally terrible, but in this case it would be a quick-and-dirty way of paying off anyone who skipped college to avoid accruing debt and ended up making less as a result.

Most of this post has been stuff I’ve devoted some time to learning about and understand reasonably well. I’m sharing it because I don’t think our public discourse about student loan debt is very reality-based (especially when it comes to people misinformed or in other cases just lying about how much canceling it will cost). That last bit is just spitballing. I don’t claim to know what the best components of a REALLY BIG package would be. That’s the public conversation we need to be having, though.

That we’re not? That the public conversation we’re having is the usual suspects crowing about how the current wildly inadequate package is the mOsT pRoGReSsiVE eVaR? That student loan forgiveness gets talked about as though multiples of 10,000 to cancel is a meaningful way—in terms of budgetary OR political costs—to frame the issue at all?

It’s all extremely depressing, is what it is. For the love of pete, some folks DESPERATELY need to stop signing up to turn off their imaginations and critical faculties on behalf of a political establishment that has proven they will only take that sacrifice and turn it into the least possible good.

Along the way, I hope to hear a lot more multidimensional talk about the political costs and rewards of a debt jubilee (and associated actions!), and hope every person who ostensibly owes student loan debt will join a debtor’s union and/or consider going on a debt strike.

Ultimately, whatever the right policy for democratic outcomes may be, we can be sure it won’t be handed down from on high, but won from below.

March 20, 2021

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