• Tag Archives student debt

  • Households Earning $300k+ a Year Are Biggest Beneficiaries of New Student Debt ‘Cancellation’ Plan, Penn Wharton Study Finds

    Posted on by Azrael Comment
    Image Credit: iStock

    President Joe Biden introduced new provisions to his student debt relief plan earlier this month, and the primary beneficiaries are high-income earners, according to a new analysis released by the Wharton School of the University of Pennsylvania.

    While Biden’s 2023 SAVE Plan already put taxpayers on the hook for $475 billion, the new plans add another $84 billion to the tally — largely by “canceling” the student debt of some 750,000 households making more than $312,000 a year on average. 

    The average debt relief for these households is $25,500, the study found.

    In June 2023, the Supreme Court struck down the Biden administration’s previous loan forgiveness program, which was implemented without congressional approval. And like Biden’s previous attempt to stick taxpayers with hundreds of billions of dollars of student loans via executive action, the latest attempts have sparked numerous lawsuits and appear headed for a legal showdown.

    “This latest attempt to sidestep the Constitution is only the most recent instance in a long but troubling pattern of the President relying on innocuous language from decades-old statutes to impose drastic, costly policy changes on the American people without their consent,” one of the lawsuits reads.

    Whether the White House’s latest scheme fares any better in court than the previous one is yet to be determined. What’s clear is that it is a dreadful, immoral, and dangerous policy.

    For starters, the public treasury is being used to pay off the student loans of families who represent the top 5% of earners in the United States. This would be an unjust, senseless, and reckless policy even in fat economic times. But the times are hardly fat.

    The national debt stands at nearly $35 trillion right now, and payments to service that debt are surging at a historic rate. Meanwhile, inflation in the U.S. remains stubbornly high. Consumer prices were up nearly 4% year-over-year in February, nearly double the Federal Reserve’s 2% target.

    Biden’s student loan forgiveness scheme is likely to goose consumer spending, which economists say will make inflation even worse.

    “I think there’s real concern among economists in that [debt forgiveness] is just going to create more of an inflationary problem,” University of Cincinnati economist Michael Jones told Cincinnati Edition, an NPR affiliate, last year.

    Higher inflation and more debt are not the only consequences of debt forgiveness.

    The Bennett Hypothesis, named after former Education Secretary William J. Bennett, states that one of the reasons tuition is so high in the first place is the steady flood of federal dollars for college-bound students, which allows universities to jack prices higher and higher.

    An abundance of peer-reviewed economic research supports this thesis, including a study conducted by the Federal Reserve Bank of New York that found colleges hiked tuition by 60 cents for each dollar of federal aid doled out. Loan forgiveness is likely to have a similar effect.

    All of these examples illustrate what we already know. Waving a wand to strike the outstanding $250,000 loan of the musician who wants to take a sabbatical to India to meditate isn’t consequence-free. It comes with economic trade-offs, just like everything else.

    And loan forgiveness shouldn’t be confused with charity. In fact, making taxpayers pay back loans they never took out is nothing short of legalized plunder.

    The 19th-century economist Frederic Bastiat wrote at length about legalized plunder, and he reminded us that there are just two ways that wealth is acquired. One way is through voluntary exchange and individual activity. The other is through theft and coercion.

    Voluntary is a key word here. A philosopher no less renowned than Aristotle observed that for an act to be virtuous, it must be voluntary. This is why freely paying off your nephew’s student loan with your own money is a virtuous act of charity, while using money taken from your neighbors under duress is not.

    Despite those letters sent to debt relief recipients that read, “Congratulations! The Biden-Harris Administration has forgiven your federal student loan(s),” loan forgiveness is not an act of charity. Nor is it sound policy.

    Yet Bastiat likely would not have been surprised to see U.S. presidents taking credit for using the public treasury, funds obtained from the people under the threat of government force, to cover the loans of wealthy, highly educated families with vast earning power. 

    “When plunder becomes a way of life for a group of men in a society,” he wrote in Economic Sophisms, “over the course of time they create for themselves a legal system that authorizes it and a moral code that glorifies it.”https://www.youtube.com/embed/aro6vBg1y1s?feature=oembed

    This article originally appeared in The Washington Examiner.


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  • Student Debt Forgiveness Is Already Happening Because of the Payment “Freeze”

    Posted on by Azrael Comment

    In March of 2020, Donald Trump paused federal student loan payments and “froze” interest accumulation in an effort to help borrowers through the difficulty of pandemic shutdowns.

    The Oval Office has changed occupants, pandemic shutdowns have ended, but the payment and interest freeze has been extended several times. As Friedman quipped, “there’s nothing so permanent as a temporary government program.”

    When Brad Polumbo and I wrote about temporary pandemic programs (including the student-loan payment freeze) becoming permanent in September, I noticed some criticism in the line of “the programs are still here because the pandemic is still here.”

    Well, for what it’s worth, Fauci now says we’re out of the pandemic phase. Of course, some may simply disagree with Fauci. To some, we may never be.

    In any case, the student loan payment freeze has certainly outlasted the government shutdown. And, although there are many problems in the economy right now, it wouldn’t be hard to point to worse economies in the past when student loan payments were still being collected.

    So I think it’s safe to say that the payment freeze has moved on from being temporary relief, and it can now be better classified as “student loan forgiveness”.

    Why would a pause on payments and interest accumulation fall under the category of student loan forgiveness?

    Well, every day this program continues, borrowers are exempted from paying interest they agreed to pay. Or, put differently, the federal government is taking the hit for the monthly interest payment in terms of lost cash inflows.

    Ultimately, this means taxpayers are the generous ones picking up the tab. Why? Well, when the federal government chooses not to charge interest it is owed, the revenue of the government is lower than it would be.

    All government spending must ultimately be financed with government revenue. So when the government spends money or borrows money, it must ultimately come from the taxes it collects (for the sake of simplicity we’ll ignore revenue via seigniorage).

    So if the government decides to spend the same amount it budgeted to spend before freezing interest, and it receives less money from interest due to the freeze, it must take more money from present or future taxpayers.

    Alternatively, even if the government decided to spend less money to offset the lack of interest received (an otherworldly scenario), taxpayers would still be worse off because they’d be paying the same taxes for less government services provided.

    In either case, taxpayers are left holding the bag. Student loan holders who don’t have to make payments or deal with interest accumulation are better off. Interest is forgiven on the public’s dime.

    If you’re not a finance person, this might seem minor. How much could this really be costing? Well, in the first few months, it was probably not that much. But the thing about interest is, it compounds.

    To estimate the total revenue the federal government has forgone with this freeze, let’s do a simple back-of-the-envelope estimate.

    Student loan interest compounds daily, but the rate on the loans is represented in annual terms. In other words, a 4% interest rate on your federal student loans means your balance will be 4% larger at the end of the year if you didn’t pay anything toward the initial loan amount itself.

    For simplicity’s sake, imagine you had a loan of $100, and a 4% interest rate in annual terms. At the end of the year, you’d owe 100*1.04=$104. Next year the 4% interest would accumulate on the balance of $104 so your new balance would be $104*1.04=$108.16.

    In reality, this understates the growth of the loan balance because of factors dealing with how annual interest rates are expressed compared to how interest compounds, but this simplification will do for a conservative estimate.

    So to find the total amount of interest forgone, we need the balance of federal loans and the average interest rate (weighted by loan amount).

    Average interest rate data are difficult to come by. Educationaldata.org claims the average rate for Federal Student Loans is 4.12%. But this number is just an average of interest rates since 2013, not a weighted average. It also uses only undergraduate loans which have lower interest rates. If you extend that back to 2007, you get an unweighted average of 4.66%.

    I also did some quick calculations using Federal Reserve Data on outstanding student loans to determine the weight of different years. This gave me a weighted average of 4.69%. Lastly, If I use only the last 10 years, I get a weighted average of 4.03%.

    Since most federal student loans are paid off in 10 years, let’s stick with the lower 4.03%, which will provide a more conservative estimate anyways. (My guess is this is much lower than reality, but it provides some guidance.)

    We have an interest rate, but what about an amount? Well, outstanding Federal Student Loan debt is $1.61 trillion.

    Finally, as a last simplifying assumption, I’ll be calculating the forgiveness over two years. It’s been 2 years and 3 months, but not including the last 3 months of forgiven interest provides a more conservative estimate.

    So, compounding 4.03% interest on $1.61 trillion twice leaves a total balance of $1.74 trillion. This means a total of over $130 billion dollars in interest has been forgiven. Since there are 43 million borrowers, this comes out to an average of around $3,078 of interest forgiveness per borrower.

    In other words, we’re already 30% of the way to Biden’s $10,000 forgiveness dream.

    As a recent FEE article summarized, student loan forgiveness tends to benefit the wealthy at the expense of the poor and middle class. Economists call this sort of policy regressive (not to be confused with the “going backward” meaning of the term).

    It’s clear why. Those with large student loan balances tend to be people pursuing higher-paying careers with an expensive education. Being a doctor or a lawyer is lucrative but becoming one is expensive. And top liberal arts schools charge higher tuition than state schools.

    The student loan payment freeze is in some ways even more regressive. Remember, the $3,078 of forgiveness was an average. That means some borrowers are benefiting more than that and some are benefiting less. Unlike a flat $10,000 forgiveness, which at least forgives all borrowers equally, the interest freeze is most beneficial for those with large loan balances.

    Bankrate claims the average lawyer graduates with $165,000 in student loan debt. At the interest rate of 4.03% this translates to over $13,000 in forgiven interest. In fact, anyone with student debt more than $125,000 has already received more than the $10,000 in forgiveness Biden has promised.

    Compare this to someone who graduates from a regional college with $10,000 in debt. This only translates to around $800 in forgiveness.

    To sum up, student loan forgiveness is already here. And it’s already helping the rich at the expense of the poor.


    Peter Jacobsen

    Peter Jacobsen teaches economics at Ottawa University where he holds the positions of Assistant Professor and Gwartney Professor of Economic Education and Research at the Gwartney Institute. He received his graduate education George Mason University and received his undergraduate education Southeast Missouri State University. His research interest is at the intersection of political economy, development economics, and population economics. His website can be found here.

    This article was originally published on FEE.org. Read the original article.


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  • Don’t Blame Capitalism for Surging Student Debt and High Tuition

    Posted on by Azrael Comment


    studentdebt

    American college graduates are suffering financially under the weight of $1.5 trillion of student loan debt. The bulk of that debt stems from worrisome federal student loan practices and ballooning state tuition costs. Approximately 75 percent of college students attend a state university or college with tuition rates set by legislatures or state institutions. Over 85 percent of student loans are generated under the federal student loan program. In the past three decades, tuition at state colleges has increased by 313 percent.

    Oddly, some seem to blame “capitalism” for the student loan predicament. Ray Dalio, billionaire investor, cited massive student debt loads in a recent article that made the case for reforming capitalism. Presidential Candidate John Hickenlooper penned an op-ed for the Wall Street Journal boldly proclaiming he is running for president to save capitalism. The very first point in his argument is that (public) high school education doesn’t provide adequate training for the modern economy. Anecdotally, we have heard the federal student loan predicament conflated with capitalism.

    The pain of student debt is real. Sadly, there are many adults burdened by thousands of dollars in loan debt. Khalilah Beecham-Watkins, a first-generation college student and young mom, is one of many who feels as if they’re a prisoner to student loan debt. Khalilah has been working to pay down her $80,000 debt while helping her husband tackle his own loan obligations. In an interview last year, she said, “I feel like I’m drowning.”

    As is well-reported, many young adults feel like Khalilah. In the United States, the average student loan debt is more than $37,000. As unsettling as that figure is, some graduates face even higher debt loads. About five percent of degree earners have student loan debt totaling $100,000 or more. Stories like Khalilah’s need to be told so that students don’t flippantly take on crushing debt without recognizing the gravity of such a decision.

    This significant debt load is exacerbated by the fact that many graduates are finding it difficult to find well-paying jobs, which has spiraled into incredibly high rates of loan delinquency: More than one out of every 10 loan recipients is unable to keep up with payments. The Brookings Institute estimates that nearly 40 percent of borrowers will default by 2023. These are sobering statistics, and it’s important that borrowers be fully aware of the risks and benefits associated with debt of all kinds, including student loans.

    Despite the burden that comes with debt, there are undeniable long-term benefits to earning a degree. In our skills-based economy, it is no surprise that a person with a bachelor’s degree will earn significantly more than a person with only a high school diploma. It has been estimated that a bachelor’s degree increases a person’s average lifetime earnings by $2.8 million.

    And the more degrees someone holds, the more their earning potential increases. Studies indicate that earning a graduate degree could triple a person’s expected income. But in the near-term, the financial stress of loan delinquency, deferred consumption, and lower net worth is real.

    While the buck ultimately stops with each of us when it comes to our own financial decisions, the student loan quagmire is chiefly the product of federal policy. Federal laws prohibiting sound commercial lending practices and states setting tuition rates high enough to guarantee they’re able to absorb all the federal money they can are complicit in this widespread problem.

    Rather than addressing the underlying problems of federal financial aid and rising public college tuition, politicians like Senators Elizabeth Warren or Bernie Sanders are offering politically expedient ideas. Sen. Warren proposes debt cancellation of up to $50,000 to more than 42 million people.

    Sen. Warren’s plan would eliminate debt for 75% of borrowers with student loans, and federal funding to ensure students attend state college for free. But nothing in life is free. Warren’s sleight-of-hand doesn’t make existing debt or future tuition magically disappear. Rather those costs are passed on to taxpayers. And since college graduates earn roughly twice as much as high school graduates and can expect to be in higher tax brackets, guess who would be paying the taxes for Sen. Warren’s plan.

    To understand the federal student loan mess, it is necessary to understand some details about the loans that are at the center of the issue. The federal government provides a few types of loans, but the largest share of student debt comes from subsidized and unsubsidized federal loans.

    In the case of a subsidized loan, the Department of Education pays the interest on the loan while the student is in school and for six months thereafter. A student can qualify for this type of loan whether or not they are creditworthy or have the ability to repay the loan.

    In typical commercial lending, a bank would not offer a loan to an individual who didn’t hold a reasonable promise of being able and willing to repay it. This harkens back to 2008 when the US housing market collapsed because of irresponsible lending practices and the belief that everyone—no matter their financial situation—should own a home. It should be no surprise, then, that some economists predict a similar implosion of the student loan market. In other contexts, this would be called predatory lending.

    The second contributor to these financial aid troubles is ballooning state college tuition rates. State legislatures and state institutions set public college rates, so these state officials should be held accountable to provide lower-cost alternatives. One lower-cost alternative to traditional on-campus programs would be to offer a basic skills-based college curriculum online at-cost, i.e., based on the marginal cost of providing downloadable lecture videos and similar programming.

    While the total cost to a student of an online degree currently tends to be less than a traditional degree, the tuition is often the same. By offering video of select classes, schools could unlock the value of their existing educational resources and expand access to more students. However, state schools are largely immune from market discipline, which encourages cost-cutting and leveraging economies of scale. Instead of reducing operating costs and tuition prices, state schools soak up the flow of federal loan dollars.

    On the finance side, state universities could offer their own alternative to federal student loans. Take, for instance, the market-oriented model of Purdue University and offer income sharing agreements (ISAs). Income sharing agreements allow consumers to pay off a debt by sharing a portion of the student’s income with the lender for a set number of years. Instead of a loan, ISAs allow investors to take “equity” in a student’s future earnings for a period of time.

    The problem with the financial aid predicament is that market discipline has been eliminated from state college education and federal financial aid. Public colleges aren’t going to be privatized and run like for-profit businesses any time soon. However, by applying market-based innovations and lessons from the private sector to state colleges, it may be possible to expand access to state college, offer alternative financing arrangements (like income sharing agreements), and reduce the cost of college through technology and economies of scale.


    Doug McCullough

    Doug McCullough is Director of Lone Star Policy Institute.

    This article was originally published on FEE.org. Read the original article.

     

     


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