With the presidential election victory, control of both houses in Congress and the quasi-dictatorial powers gained by the state during the pandemic, Democrats have leveraged the power gained to pass a stimulus plan without the support of half the Senate and break records for executive orders signed by a president in less time. The next step: college debt forgiveness.
Under the new Democratic administration’s whole “don’t waste a good pandemic” approach, Senate Majority Leader Chuck Schumer and Massachusetts senator Elizabeth Warren are seeking Congressional approval to forgive up to $50,000 in student debt per person, which would cost the Treasury more than $650 billion on the grounds that debt-free students will go out and spend the newly available money and “stimulate the economy.”
Ignoring the doubts of many economists about the effectiveness of the $1.9 trillion stimulus in boosting the economy, student debt forgiveness is unlikely to do so, since Americans have already spent much of their income on home purchases (which reached record highs among young adults) and more than 30% have saved their pandemic aid checks, meaning that debt forgiveness will not lead to additional consumption to boost sales in the real sector.
In 2020 federally guaranteed college debt totaled $1.6 trillion. While that figure may seem daunting, the average student debt is just over $34,000 (including interest), and is even lower for low-income graduates, who receive substantial debt forgiveness under an income-driven repayment plan, while extraordinary debt is forgiven after 20 to 25 years.
Benefitting wealthier graduates?
Although there are people who face difficulties in paying their college debt, in the United States the average professional has an annual income of more than $51,000 (almost $20,000 above the poverty line), which allows them to spend a little more than 6% of their annual salary to pay for 10 years of university studies without this representing a deterioration in their living conditions.
The problem here is not to deny the fact that there are people who will be or are unable to pay their college debt, but to understand that forgiving up to $50,000 of debt would primarily benefit Ivy League college graduates, who earn more than $30,000 above the annual salary of the average college graduate.
A recent University of Chicago study estimates that if a $50,000 per person student debt forgiveness were approved, households in the top 10 percent of income brackets would benefit up to seven times more than households in the bottom 10 percent of income brackets. In other words, debt forgiveness simply for the cost of tuition at the most expensive colleges would disproportionately benefit those who need it the least.
Aside from primarily benefiting those who do not need it, college debt forgiveness is unnecessary, since much of the debt that affects the lowest-income students will end up being forgiven anyway.
According to the Department of Education, up to $435 billion will eventually be forgiven, because under the means-tested payments established by the Democrats, a graduate pays less than 10% of the cost of tuition per year, if they are unemployed they do not have to pay it, and after 20 years the debt is forgiven in its entirety.
Considering that many graduates are making the minimum payments and their debt will end up being forgiven, it is curious how the Democrats seek to pass legislation that primarily benefits the highest paid people in the United States under the mask of “social justice.”