Even by post-pandemic standards, that’s a lot. This avalanche of resources will be spent in a way that’s regressive, will fail to relieve the worst financial distress, and will actually aggravate the underlying problem of tuition inflation.
The administration says that almost 90% of the debt-cancellation benefits will go to borrowers earning less than $75,000. Even if current income were the right benchmark, one might ask why the income ceiling for forgiveness was set at $125,000 (for individual taxpayers), not $75,000 or $50,000. But in fact this measure makes no sense. Graduates in their 20s earning between $75,000 and $125,000 are doing well and heading for the top deciles of the income distribution. Future doctors and lawyers might be making nothing at that point. This doesn’t mean they’re poor. Measured by likely lifetime earnings — or by wealth including human capital — they can afford to be in debt.
Far too many Americans are indeed struggling with insupportable student loans. But forgiving $10,000, or $20,000 in the case of Pell Grant recipients, makes no more than a dent in their problem. Perhaps the administration would agree, pointing to its new and more generous “income-driven repayment” plan (details, again, to follow). But who will be eligible, and how many will enroll? For every debtor in a current IDR plan, two more are eligible but not enrolled — a tribute to the schemes’ arcane administrative demands. In practice, the new IDR plan might be as irrelevant to the needs of the most distressed as the promised deluge of write-offs.
In short, Biden’s $500 billion, spread across some 40 million borrowers who mostly don’t need the money, will do little to help those in real trouble. And for the economy as a whole, the plan will increase demand as the Federal Reserve struggles to control inflation. The administration says the effect of forgiveness on demand will be offset by the promised resumption of debt payments next year. It won’t. Forgiveness, unlike suspended payments, delivers a permanent increase in spending power. Other things being equal, the result will be higher interest rates and/or higher taxes and/or lower public spending in the future.
So why do Biden’s experts think all this is good politics? Their reasoning might be that it will delight the beneficiaries, while voters at large will be impressed by the scale of the achievement and unconcerned about the longer-term effects. Therefore, expect a net boost in the Democrats’ popularity. That’s half a trillion dollars well spent.
Maybe, but it’s far from certain. The Democrats have been enjoying a revival of late — an upturn based on an apparent return to pragmatic moderation (the Inflation Reduction Act) alongside reminders of Republican extremism (the response to the overturning of Roe v. Wade, the never-ending theatrics surrounding former President Donald Trump).
The student-debt plan upsets this framing. First, the claim that the Democrats are doing all they can to get on top on inflation now appears absurd. Second, the plan seems anything but moderate: It’s a win for progressives over Democratic centrists and looks divisive.
The US is fighting a culture war that, as many Democrats see it, pits the educated and enlightened against a MAGA-loving rabble. Both camps have decided that the enemy cannot be reasoned with, only crushed. Their votes are decided, whatever happens. But swing voters will also have a say in November — and many of them still wish to see this divide mended, not deepened. The student-debt plan laughs at that idea. It might have been designed to reward one side at the expense of the other.
Moderates will also regret that the plan is unfair in another way: It fails the test of horizontal equity, which requires that people whose circumstances are alike in relevant respects are treated the same. Picture two recent graduates, working similar jobs for the same pay. One worked her way through college to avoid getting into debt; the other borrowed to have an easier time. The plan gives the first nothing; it gives the second $20,000. Not only is that unjust, it also makes the more frugal student look a fool.
People are especially sensitive to this kind of unfairness. Biden’s historic debt-cancellation plan might do as much damage to the body politic as to the economy.
More From Bloomberg Opinion:
• Forgiving Student Loans Is a Costly Mistake: The Editors
• Biden’s Student Loan Plan Neglects Older Borrowers: Alexis Leondis
• Stop Saying Student Debt Relief Is for the Rich: Romer and Perry
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Clive Crook is a Bloomberg Opinion columnist and member of the editorial board covering economics. Previously, he was deputy editor of the Economist and chief Washington commentator for the Financial Times.
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