Income Based Debt Forgiveness: The Least the Government Can Do

In our era of austerity, many want to see government support for university budgets on the chopping block. It doesn’t matter to them that state support has already been cut dramatically (click to enlarge):

Why? There’s always ideological opposition to higher education. That’s hard to reason with. But there is also a persistent meme that student loans are some massive drain on the treasury. That view is getting harder and harder to square with reality:

“The federal government is due to book $51 billion in profit this year off new and existing federal student loans, according to estimates by the nonpartisan Congressional Budget Office. The record amount brings the government’s profit haul to nearly $120 billion over the past five years, according to CBO forecasts and Department of Education budget documents. The CBO estimates that the government will generate $184 billion in profit for new loans made this fiscal year through 2023.”

Given these enormous profits, it would seem that income based debt forgiveness would be the least the government could do for the students it is now profiting from. Of course, the government can’t be too generous to students—banks have to come first:

But let’s just be clear on exactly who is a drain on the federal budget, and who is a source of gains. Income-based repayment and some forms of income-based debt forgiveness are the least that the government (and more specifically, the elite whose declining taxes are the main reason for austerity) can do for Generation Debt.

X-Posted: Balkinization.

Frank Pasquale

Frank is Professor of Law at the University of Maryland. His research agenda focuses on challenges posed to information law by rapidly changing technology, particularly in the health care, internet, and finance industries.

Frank accepts comments via email, at pasqresearch@gmail.com. All comments emailed to pasqresearch@gmail.com may be posted here (in whole or in part), with or without attribution, either as "Dissents of the Day" or as parts of follow-up post(s). Please indicate in your comment whether or not you would like attribution, or would prefer your comment (if it is selected for posting) to be anonymous.

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8 Responses

  1. AndyK says:

    What about the moral hazard problem?

    Having no precommitments here, I would think it would be a good compromise to have a “jubilee” of sorts, forgiving student loan debt (and it can be progressive / partial forgiveness), but with some sort of mirror-image disincentive to choose school you cannot pay for.

    Perhaps a (potentially massive) scaling back of federal aid for colleges going forward.

  2. Frank Pasquale says:

    Let’s solve the moral hazard problem for banks first–it’s probably two orders of magnitude larger. Then maybe we should consider a “potentially massive scaling back of federal aid for colleges going forward” as the *perfect* way to prepare Americans for a high tech world where jobs demand more education than ever.

  3. AndyK says:

    I’m not opposed to the bank idea but that’s a different problem.

    The point is that post hoc bailouts of student loans might be necessary, but we need to find a way to stop students from getting into that situation, right?

    So shouldn’t we solve the debt-accumulation problem at the same time? Find ways to reduce higher ed sticker price OR ELSE find ways to discourage people from attending.

    Where does this go wrong? The question of the value of education is non sequitur because if the “debt bubble” and the value of education were conceptually inextricable I would think your solution would just be to pay for 100% of every student’s education.

    But since that’s not your suggestion, you need to address the moral hazard problem. My point is that a student loan bailout, ALONE, solves no structural problems and in fact causes bigger structural problems in the long run.

    Any legislator looking at this issue needs to be aware of these problems so that we don’t just throw massive piles of cash at something for no reason.

  4. AndyK says:

    Let me put it another way. We have a problem. Former students have too much debt. If we pay them, they will have incentive to accumulate more debt. This is undeniable. So we need to ask, is that debt worth it?

    If it IS worth it (which you imply), then we should just pay for the whole kitchenette: 100% coverage a la the old GI Bill. If it is NOT worth it, it is either because the price is too high or the service is too poor.

    I happen to believe we have a combination of all three problems. (1) Folks are irresponsible in their loan choices, (2) Higher Ed costs too much, and (3) Higher Ed is not for everybody.

    So we can have an “all of the above” approach. (1) Bailout current folks and to avoid the moral hazard (2) place sticker price tuition caps on recipient institutions of federal student loan aid / reduce compliance fees by helping eliminate administrator costs and regulation, (3) allow for student loan debt to be dischargeable in bankruptcy, and (4) limit available federal loans to students.

  5. Frank Pasquale says:

    “My point is that a student loan bailout, ALONE, solves no structural problems”–and that would also seem to be the point of a post that says income-based debt forgiveness is “the least the government can do.”

    As for the rest of 3: I believe we have a much bigger inequality problem, and private debt problem, than a public debt problem. Those who want to reduce the salaries of professionals (doctors, nurses, professors, etc) for whatever reason, like to focus on public debt–and have many billionaire funders like Pete Peterson to amplify that concern.

    My own view is that endlessly rising CEO and finance pay has far less economic value than that of many professionals, and is just as (if not more) directly subsidized by the state than “state universities” or “public hospitals.” I’ll start worrying about a dean earning $150,000 a year once the “defund higher ed” crowd starts accepting the possibility that modern health care, infrastructure, and education can only be supported if we raise tax rates on dividends, inherited wealth, corporations, and income over $500,000 per year. The alternative is to do to professionals what neoliberal economists have recommended for so many other workers over the years: endless pay cuts, reducing effective demand, and leading to further economic contraction.

  6. AndyK says:

    Not to put too fine a point on it, but the moral hazard problem highlights that student loan bailout in the absence of other structural reforms is pouring gasoline on a fire.

    It could indeed be the “least” the government can do, as a part of a package. But it is worse than doing nothing if it is not accompanied by other reforms.

  7. Frank Pasquale says:

    Not to put too fine a point on it, but the moral hazard problem at the banks has been and continues to be 10 to 100 times larger. I don’t see why there is so much policy energy focused on making sure poor students pay, when wealthy financiers can gamble with the world economy and always rely on a government backstop. At least the education economy creates effective demand. Much of the money in finance is trapped in a stratospheric economy of speculation and hedging. Once you have one yacht, there’s not much need for more.

  8. AndyK says:

    Are you saying that Congress should not reauthorize the Higher Ed Act until they fix the banks?

    I think Congress can fix more than one thing at once, and you’re not seriously addressing the question I raised in good faith.