Is Forgiving Student Loan Debt a Good Idea?

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Every few weeks now a petition pops up in my Facebook newsfeed urging the government to forgive all student debt. The comment from the person posting the petition usually goes something like this, “Guessing this will never happen, but can’t hurt to sign on!”

The petition now has nearly 670,000 signatures. Scrolling through the stories posted on the petition (and similar stories told on the related Occupy Student Debt site) can be a heart-wrenching experience. Former students tell stories of unemployment, worthless majors, low-paying jobs and resulting six-figure debt, insurmountable interest, forbearance and default. From a human standpoint, it’s easy to see why forgiving student debt holds some appeal. But many have questioned not only the enormous and economically unfeasible cost, but the purported benefits and fairness of a one-time student loan bailout.

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Feeling shackled by an estimated $88,000 in student loan debt, Robert Applebaum started the petition in 2009 and has seen its popularity skyrocket since last fall as some members of the Occupy Wall Street movement adopted the battle cry. His proposal is simple: Provide a one-time bailout of student loan debt—currently valued at $1 trillion—as a way to stimulate the still-limping economy. After all, college graduates are the type of people society needs to do things like start businesses, buy homes and cars, invent things and make babies — and people burdened with debt are less likely to make those kinds of decisions. Unburden them and the housing market might improve, along with the overall economy. “With the stroke of the President’s pen, millions of Americans would suddenly have hundreds, or in some cases, thousands of extra dollars in their pockets each and every month with which to spend on ailing sectors of the economy,” Applebaum writes in the petition.

That sounds like a very expensive proposition, of course. But so were the bank and auto bailouts—and, the thinking goes, if “fat cat” bankers and auto makers got a bailout, why not college graduates?

Well, as Justin Wolfers writes on the Freakonomics blog, one reason why not is that such a scheme wouldn’t be a particularly efficient fiscal stimulus. Someone who has $50,000 in debt forgiven isn’t likely to pump all those dollars back into the economy in a short amount of time. A much more effective stimulus, Wolfers says, would be to give 50 poor people $1,000 each because that money would almost immediately be spent.

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Another problem with such a plan is that most borrowers actually can afford to pay off their student loan debt. There are some borrowers who desperately need relief, but there are many others who would just rather not have to fork over a certain percentage of their income each month to pay for the education they received years ago. But if forgiveness was offered, who wouldn’t take the handout?

As it turns out, the six-figure debts that we keep hearing about in the media are actually pretty unusual. By most estimates, only a tiny minority of student loan borrowers—as little as 1%—graduate with more than $100,000 in debt. Mark Kantrowitz of FinAid.org and FastWeb.com says that only a few thousand students out of the several million who finish college each year graduate with that much debt. The average debt total at graduation is a much more reasonable—yet still significant—$27,500.

What’s more, even borrowers who can’t afford the standard repayment plan have existing alternatives if the loan is from the government. There are already programs in place that offer forgiveness, not to mention the government’s effective and underutilized Income Based Repayment program. What might be a more politically viable approach to student debt—although it would provide less fiscal stimulus—would be for the government and loan providers to have a better way of distinguishing between those borrowers who really need help and those who don’t. But of course that’s no easy task.

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Many of the concerns surrounding Applebaum’s plan involve the idea of fairness. Why should current debt holders be forgiven when for years people have paid their debts? Why should taxpayers—especially those who never attended college in the first place—foot the bill for the borrowers’ education? What about future generations? Will they just take out loads of money in college and cross their fingers for a bailout? There are no easy answers to these questions other than to say, life isn’t fair.

But perhaps the biggest roadblock to Applebaum’s plan is that a one-time bailout is a temporary fix to an on-going problem. What’s really needed is a long look at how higher education in the U.S. is financed. Many would argue the current model is fundamentally broken. Virtually everyone who applies is approved for almost unlimited student loans, regardless of how likely they are to be able to pay them back. But lenders aren’t really concerned about that because student loans cannot be discharged in bankruptcy. They know they’ll get their money back one way or another.

As a result, lenders have no incentive to work with students toward a reasonable repayment plan. And further, colleges have no incentive to keep tuition low—tuition is increasing at a rate double that of inflation—because whether they can afford it or not, students will find a way to pay the bill.

Applebaum’s proposal offers a radical and wildly unfeasible solution, both politically and economically, but it’s an idea nonetheless. “I’m not saying my solution to the student debt crisis is the very best,” he says. “If you disagree with me, what’s your solution?”

Kayla Webley is a staff writer at TIME. Find her on Twitter at @kaylawebley, on Facebook or on Google+. You can also continue the discussion on TIME’s Facebook page and on Twitter at @TIME.
MORE: 60 and Still Not Out of Student Loan Debt: Seniors Facing $36 Billion in College Loans

3 comments
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dazedandconfuzed
dazedandconfuzed

I have plenty of student loan debt myself and I am willing to make contributions to pay my debt off. However, the banks have no limit on the amounts they can charge you. I had to take loans out to attend college because I came from a family with nothing. I was fed the propaganda that a degree would help me seek a better life. If I have children, I will tell them the opposite. All a degree has offered is pain and misery. I'm working a job that doesn't even require my degree and cannot find a job that pays well enough to cover my debt and all the interest that has come along with it. My problem with the loans is the excessive interest that private and public unsubsidized loans can tack on. I have a loan with half of it that is interest that was capitalized once I graduated. I only borrowed 26000 but the capitalized interest jacked the loan over 50000. Now they expect me to fork over 528 dollars a month when I just received a 6 dollar pay cut because the economy is causing businesses everywhere to find ways to save money. I want to pay my debts back, even if I consider it a bad investment, but the interest the loans capitalized and the economy make that impossible. Maybe the government needs to take a look at all interest bearing student loans and cut or eliminate interest. It also would be good to separate the capitalized interest. The pay as you earn and IBR payment plans are great ways for federal loans but private loans have no way for the student to negotiate affordable monthly payments. There are people who want to pay their student loans, we just don't want to be homeless and hungry while we pay back the debt. 

Montcell
Montcell

Come on now, people are being enslaved by student loan debt. Remember what Adams said about another way of enslaving people besides war: Debt.

The problem is usury, plain and simple.