As the student loan debt crisis rages out of control we are now hearing serious consideration of student loan debt “forgiveness” from the new presidential administration. Since I have so many unanswered questions surrounding this issue I decided to interview a renowned economist — Dr. Steve Petty.
Dr. Petty graduated from Oklahoma State University with a Ph.D. in economics and is currently the assistant professor of economics at Flagler College in Tallahassee, Florida. He previously served as the chief economist for Florida TaxWatch. He is experienced in investment research, strategic planning, and economic forecasting so I thought he would be a great person to help provide some clarity to the situation. Here’s what he had to say:
What are your overall thoughts on the student loan debt crisis? While $1.7 trillion is the second-highest debt to mortgages in our country, it only affects 45 million people which equates to just 25% of the adult American working population. So, it is really a “crisis?”
The student loan debt crisis is a bona fide crisis. The 45 million people impacted by their “early in life” decision to take on debt to finance higher education represents a very important group of people. To explain, it must be understood that higher education represents human capital investment. This investment pays off best for those who are younger, successful academically, and promptly hired upon graduation without becoming underemployed (accepting a job beneath their skills, training, education, etc.). The payoff is both for the individual and for society (private benefits and spillover benefits) and is the most important aspect of human capital investment. It represents both a higher future income stream for the individual and an additional highly educated citizen that is more likely to participate wisely in marketplaces, pay taxes, and obey the laws of the land – and initiate teachable moments with those around him/her.
Around one-quarter of the $1.7 trillion is in deferment, forbearance, or default. With COVID-19 taken into account, I wouldn’t be surprised if up to half of the $1.7 trillion is in danger of default. This translates to around half of the civilian labor force being straddled if not strangled by student loan debt in 2021. It is a crisis now on top of multiple crises. Unlike COVID-19, there is no vaccine or remedy on the immediate horizon.
Discuss the notion that wiping out $1.7 trillion in debt will “boost the economy.”
Wiping out the entire $1.7 trillion in student loan debt would produce both winners and losers. First, $1.7 trillion is a staggering amount (about 7.3% of U.S. GDP). Financial institutions that own the loans would have to be reimbursed by the federal government. Politically, it does not play very well to the majority of Americans who understand that the top 10% of Americans own 70% of U.S. wealth, most of the upper crust having been college educated.
However, to have worthwhile impact on the student loan debtors, loan forgiveness would need be at least close to half of what they owe. An immediate wipeout would be best for the debtors, however, probably not for the country right now. Forgiveness programs for those entering medical fields, teaching, etc., are not enough. Only a small minority of student loan debtors have been able to qualify for the few programs and have some of their debt forgiven. Washington needs to think outside the box as to the ways in which workers are flexible in work assignments and how more people can participate. Americans are not lazy. Americans want to work but need employers to be flexible to accommodate additional employment that would be in the national interest.
Federal student loan payments have been on pause since March 2020 as a result of the pandemic, student loan debt borrowers have not been required to make a student loan payment nor will any interest accrue during this time. Have we seen any type of “boost in the economy” as a result of this?
I haven’t seen any evidence of a boost due to student loan payment freezes. In many cases it has allowed for borrowers to pay the mortgage or car payment.
If President Joe Biden wipes out any amount of individuals’ student loan debt will they have to pay taxes on it? Will this be considered earned income? And what can or will the government do to erase this burden?
Yes, I have experienced this personally, albeit with private, not student loan, debt. Let’s face it, money has been flying out the door of the U.S. Treasury this year. Canceled student loan debt will be considered taxable income. A good idea would be for the IRS/Congress to change the tax code in the case of student loans to allow 2 (two) years for the tax on the forgiven debt to be paid. I own in excess of $50,000 in student loan debt and I could see fit to paying the tax on it in one or two years.
UPDATE: There have been some changes to this as a result of President Biden’s recent COVID-19 Stimulus Bill (American Rescue Plan Act of 2021).
Nothing is free. You can’t just make $1.7 trillion disappear. You are just moving this debt somewhere else, right? Who will ultimately pay for it? Taxpayers?
I am a free-market economist…however, I am very pragmatic. Many soon-to-be-Keynesians said during the Great Depression that you sometimes need to spend against the wind and write the check instead of doing nothing. Any forgiveness should be monetized by the U.S. Treasury (paid off with money created out of thin air, or if you prefer, newly-printed money – there is no current sign of inflation resurgence). However, regardless of forgiveness of some or all the student loan debt, there needs to be some strings attached to encourage even greater employment in fields that yield spillover benefits (education, medicine, infrastructure, etc.).
If you wipe out all the debt today, what happens to the current and future students’ debt? Is it going to be wiped out in perpetuity? Or is it the debt is forgiven today, and then the clock starts back over then everyone else still in school gets screwed. This is one of the biggest things I don’t understand.
Darn good question. However, I believe in the combination of Pell Grants and work-study programs for nearly all undergraduate higher education. Lending/borrowing is a two-edged sword. In the end, it served me well personally (I was able to start a family while pursuing my Ph.D.) but it also hamstrung me (I have had to accept employment outside my field of study to put food on the table and have a roof over my head). Student aid needs to be proffered in two different ways 1) a conservative amount for when students are in an “early-in-life” jam, and 2) more liberal amounts in exchange for public service now and/or in the future.
The thing to keep in mind is that student aid is a non-market activity. The financial institutions have not been creative in respect – they have simply relied on the federal government to back their student loan bets.
It feels like debt forgiveness would be just a band-aid effort. What do you think is the core root of the problem? Are tuition costs too high?
Good point to raise here in terms of root problem(s). Colleges and universities have not been good stewards of the monies flowing to them for educating our population and carrying out educational and extracurricular activities that promote the general welfare. Instead, colleges and universities contribute way too much to overall inequality in our society.
When I think of the sports/media contracts that delivery millions of dollars to our higher education institutions, it makes me wonder why the lion’s share doesn’t go back to overall student-centric activities (hey, why not use sports money to help fund tuition?).
Can you file for bankruptcy over student loan debt?
Just like this article alludes to, it is much more difficult to file bankruptcy for student loan debt than any other type of debt. This demonstrates how student loans are not just a normal financial market activity – involving the government directly as a guarantor presents costly problems.
How is it possible to make college free? Who pays? More taxes?
As they used to say back home…“Got me by the tail!’ Again, a college education is valuable, otherwise people wouldn’t make this investment. Therefore, it can’t be free. However, it can be made much more affordable by requiring colleges and universities to prioritize their enterprises. First and foremost, colleges don’t exist to subsidize major sports programs or just student athletes. All academically-qualified students deserve a shot at an affordable college education.
Isn’t the federal government profiting off students? Then why forgive their debt?
I think it is more accurate to say all of society benefits from additional highly educated individuals. Sure, they end up paying higher taxes via higher incomes but that is just the tip of the iceberg.
I wonder how many of the rioters at the Capitol possessed a college education. I know some do. Heck, even some regular idiots in the House and Senate possess higher education. It doesn’t make them smart but it does at least make them more likely to act in a self-interest manner that also serves the common interest at the same.
I would like to see a major overhaul of student aid and higher education spending philosophy that includes a significant amount of debt forgiveness. For many borrowers, the debt ball and chain has stifled their ability to strive to work toward a higher standard of living.
For more on my financial journey and thoughts from other unique individuals, check out my book Margin Matters: How to Live on a Simple Budget & Crush Debt Forever.