Who Benefits from Student Loan Forgiveness and Free College?
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| Yes! We graduated! We have a negative net worth. Now what? // photo by Pixabay |
As college loan debt continues to pile on, left-wing politicians have scrambled to out-progressive each other with student loan forgiveness and promises of free college. Recent college grads, overwhelmingly Democrats, have mostly jumped on board. Several friends and acquaintances, all in the eat the rich mindset, have remarked how it must be done to help people with crushing debt.
So who, exactly, benefits most from student loan forgiveness?
Spoiler alert: it's the rich to the upper-middle class.
Forgiving Student Loans
Let's say student loans are forgiven tomorrow. Okay, what about the person, from a poor background, who worked her ass off all through college and after, to pay off her student loan completely the day before? What about that person? Does she get any of her money back? It's not like she hasn't lost anything as Social Democrats like to argue. While all of her friends are going out to eat at the new sushi joint, she was buying the cheapest possible scraps in the manager's clearance rack at the discount grocery store. While her peers bought new clothes once a month, she was wearing her clothes thin. While her roommates were able to attend parties and football games, she was pulling the late shift at her job, also cutting into studying time. While her classmates studied abroad and took vacations, she would drive the 30 minutes home to synergize costs with her parents. Then when she graduated, she drained her savings from working in college to pay off the loans early while her fellow graduates took post-graduation trips. To suggest that there was no loss is a ridiculous notion.
The above, by the way, was a rough, if a bit romanticized, description of my wife's life in college, who paid off her student loan in short order after graduation.
These people, who admirably did the responsible thing and sacrificed to make sure they wouldn't be in debt after graduation, will have lost an incredible amount of opportunity cost while the people that were more irresponsible will have been bailed out. Nobody's clamoring to repay the lost opportunity cost that responsible people paid. In other words, we would be subsidizing irresponsibility. When you subsidize something, you get more of it.
This was pretty well personified in an interaction Elizabeth Warren had with a pissed off father who talked about how he sacrificed his quality of life to put his daughter through school without debt while his richer neighbor who acted much less responsibly, would be gifted tens of thousands of dollars under Warren's student debt relief plan.
Undaunted by this obvious injustice, Warren later stated that it still must be done in the name of progress. Just because people did it right before doesn't mean we shouldn't do the right thing moving forward. She said "We build a future going forward by making it better. By that same logic, what would we have done? Not started Social Security because we didn't start it last week for you or last month for you?"
Well, yes, it would be nice to not have my money forcibly withheld from my paycheck for them to give back to me at far worse rates of return that I would have gotten if I was able to invest it myself. But regardless, the two situations are completely noncoplanar. Student loans are something someone actively takes out to achieve a goal. Social Security is taken out and given to everybody, not just a select few. Further, what you get out of Social Security depends on what you put into it, a completely different situation than her student loan forgiveness plan that gives money out to people who expressly did not contribute at all, at the expense of people who did put money into paying the loans. Even the first person to receive a Social Security check had to pay some money into the system though she got a phenomenal rate of return (what is that scheme called, where early adopters get all the gains at the expense of the late adopters...rhymes with Fonzie...?). Shocking that Warren, the self-described "policy wonk" didn't know any of this or didn't care to examine her analogy closely enough.
But let's take her argument as valid and we cancel student debt. How would student loan forgiveness work out? Who wins and who loses?
The Foundation for Education in Economics cites a recent University of Chicago study that concludes the top 20% of income earners would receive six times more benefit than the bottom 20% of income earners from student debt cancellation. The top quintile would receive $192 billion in debt cancellation and the bottom quintile would receive only $29 billion. The study's abstract goes on to say that the top 10% would receive as many benefits as the bottom three deciles combined, with Blacks and Hispanics receiving far less than originally believed. The study's co-author states that "Outstanding student debt is inversely correlated with economic hardship." FEE also points to a study from a few years ago by a left-leaning institution that arrived at the same conclusion.
Wait...so debt cancellation is a wealth transfer...to the wealthy?
Yes. And that makes sense if one just takes a little bit of time to think about it.
While it's true that the study looks at income earners in total and the wealthy attend college at far higher rates than the poor, this is still well within metrics we should be studying. People who don't go to college are still affected by this public policy since they are still being taxed for this.
As FEE points out, only one in three people over 25 hold four-year college degrees. There is a far higher percentage of the wealthy with college degrees versus the poor, and as the study points out, the wealthy typically have taken out larger loans since they are more likely to afford the higher tuition at private schools.
The bizarreness of the progressives redistributing wealth toward the wealthy doesn't stop there.
Elizabeth Warren, the paragon of poor academic rigor in research, continues her impressive track record of being wrong, by saying recently that forgiving student debt would be a huge economic stimulus. Economic quacks such as Bernie Sanders and Alexandria Ocasio-Cortez concurred with Warren's opinion.
Of course, the notion that striking debt would result in an economic stimulus is positively ludicrous. It's the most intellectually lazy claim that can be made about student loan forgiveness. They see debt being wiped away, so suddenly, all these people with student loans don't have to pay back a loan so they can now spend money on other things. Free money! There are numerous economic fallacies displayed here, but the obvious one is: where does all the debt go? What happens to the discharged debt? Do they think it just vanishes into thin air? Of course not. The guarantors or lenders of the debt eat the cost. In the case of student loans, the lenders and guarantors are overwhelmingly taxpayers, estimated at 92% of all student loans. That means if the debt is canceled, 92% of the $1.6 trillion in student loans will be stricken from the assets column on the government balance sheet, for which every person in the United States, which includes those debt holders, will have to answer for, either in higher taxes or inflation. I can forgive the average Joe for not understanding this, but for the people that have an oversized say in the matter, I cannot.
These are obviously a group of people that have never read Economics in One Lesson by Henry Hazlitt. Perhaps Peter Schiff said it best: "If @ewarren is correct that canceling student debt will grow the economy, why stop there? Let's cancel credit card debt and really boost the economy. How about throwing in auto debt? In fact, why not just cancel mortgage debt and set off the greatest economic boom in history?"
Even more nefariously, as Jason Furman, in a tweet, pointed out, student debt forgiveness would be taxable. Great. So students getting their debt canceled has a positive effect in the form of a slow trickle over the loan's maturity, while suddenly getting hit by a few thousand to five figures of payment to the IRS due next April with a potential bump up to the next tax bracket? If we agree that these people are suffering financially, how does a 4-5 figure sudden payment to the IR-freaking-S, an institution not exactly known for its forgiveness, be a universally good thing? As even Furman says, in Keynesian terms, the multiplier for this policy is close to zero.
"Free" College
Okay, so canceling debt isn't the best idea in the world. But we can certainly make college free, right? Then all poor people can go to college!
As Lee Corso might say: Not so fast!
A college with no tuition isn't without cost. The cost simply shifts from the user to everybody, whether someone utilizes the service or not. When someone else is footing the bill, price signals fail to work and costs spiral out of control. Well, in this case, continues to spiral out of control. It's one of the many reasons why public school education, on average, costs more per pupil than private school tuition per pupil.
Further, attending college has large opportunity costs. Since time is finite, it is much more difficult to work, go to class, and study at the same time. Many can do with part-time jobs, but rarely full-time jobs. These jobs also usually have little to do with their chosen field of study, meaning they don't fully synergize into increased future earnings. For the poor, this is a gargantuan cost while for the rich, it's a much smaller cost, given the assets available to each respective group. The poor need that job far more desperately than the rich.
For starters, people have to eat. And clothe themselves. And have shelter. All of these cost money and when you're studying, you aren't earning money to pay for these present needs. If they come from poor families, they may also have a need to earn money to help supplement the low earnings in the family. This immediate need may require a full-time job so the person can afford to do all those things.
Sure enough, if we look at Sweden, where they have "free" college, 85% of students graduate with debt at $19k on average, compared to 50% in the US at $24.8k on average. The cost of living isn't free, particularly in places like Sweden where there is a relatively flat 60% income tax rate along with a 25% value-added tax, in part, to fund all of this free college. The article includes a caveat that Swedish culture strives for independence as early as leaving for college, but the same would likely be the case in terms of the poor in the US, perhaps not by culture, but by necessity.
In addition, it's likely that people who attended better K-12 schools (the rich) have a far higher chance of attending college than people who attended failing public schools (the destitute), simply due to the inequality of public schools.
It is fully reasonable to conclude, therefore, that the rich will still attend college at a significantly higher rate than the poor, even if college is "free".
But all taxpayers will be paying into the cost of college for everyone. Since the poor are far more likely to not attend college, and will still pay taxes as well as the hidden and regressive inflation tax, the poor will be paying for a service that largely benefits the middle class and the rich.
What Happens with Free College
Other than it being a wealth transfer from the poor to the rich, what are the other consequences of free college?
The number of high school graduates going to college will likely increase. I think few would argue against this. However, this is not necessarily a good thing, as many would automatically assume. It's not likely graduation rates would improve. It's actually more likely that the graduation rates would decline. People whose best track in life isn't college will take this route, and find out after wasting a year or two, that college wasn't the way to go for them. Of course, this could be remedied by making college easier, but that just contributes to the ever-declining value of college degrees. This isn't even to say that they are necessarily not able to make the grades, but that what they end up doing in life may have better approaches than college. Even many tech companies no longer require college degrees, with Tim Cook of Apple stating that half of their US workforce do not have college degrees.
For students that would do fine in college, it is highly likely that the length of time it takes for them to graduate would increase. This would likely not be the poor students who would still struggle to afford to live through college, but rather the richer kids that can coast on stipends from parents. Sure enough, we can look at some countries with "free" college like Denmark, where they have a problem with what they call "eternity students", or "evighedsstuderende", that hang around in college for six years or more with no plans to graduate. Denmark's government also includes stipends to students for living costs, mimicking rich kids' situations, while Sweden's free tuition but no stipends resemble poor kids' situations. Recall that Sweden's students still rack up debt for college. This suggests that the rich would further soak up public funds at higher rates than the poor would.
Taxes will also have to go up. Striking student loans, nearing $1.7 trillion and rapidly growing, would be a gargantuan task, a number far higher than the total US deficit in 2019. How much more is uncertain with respect to free college, but it's not insignificant. Department of Education data suggests that the elimination of tuition at public institutions only would cost at least $79 billion annually. The Times article suggests some of the existing expenditures like Pell Grants, can be used to cover some of the $79 billion. Sure enough, Bernie Sanders uses a similar figure in his free college plan that pledges two-thirds of the cost increase from the federal government. What's his tax plan to cover this? A tax on stock, bonds, and derivatives trades. So, if one sells or buys $100 worth of stock, the tax is 50 cents. This is really a 1% tax since the plan appears to tax both the purchase and sale sides.
As always, these central planners (and central planner wannabes) think economics is just simple arithmetic. No, you can't just take existing costs and assume that is the number you need to tax annually as if the policy doesn't create any changes. Likewise, no, you can't just take existing economic activity, multiply it by some tax number, and determine how much tax revenue it brings in. This is why politicians' cost estimates are always less than reality bears and their tax revenue predictions are always higher than reality. Once tuition becomes free at public universities, demand for it will spike, drawing not just more people into colleges, but siphon students away from private colleges. Likewise, once they tax stock trades in this fashion, stock trades will decline, and I believe they would plummet. High Frequency Trading, which operates on tiny margins and gigantic volume, would likely pretty much cease to exist when 1% of the trade volume is taxed. Whatever your thoughts on HFT, it would greatly reduce liquidity in the market and the tax revenue would disappear, along with it. Although HFT has declined since its heyday around 2010, it still accounts for a substantial percentage of total trades. Even still, this tax is highly destructive, as it further discourages savings/investment and it instantly makes everyone's investment portfolio nest egg (including pension plans) suddenly worth 0.5% less, a prospect that surely doesn't help the poor that had responsibly invested for retirement. Sanders's plan underestimates cost, overestimates revenues, and at the same time, proves to be highly destructive.
There is no realistic model, not even the Nordic model that taxes everyone regressively, that can reasonably tax rich people exclusively for free college for all. At least, not without serious consequences for the people it's purported to help.
Why is College so Expensive?
Studies have stated that loan subsidies and guarantees have been the primary contributing factor to tuition rates. Over the decades, the government has thrown subsidies at students to attend universities and has guaranteed loans to students, and today, nearly all student loans are via the government.
This really falls under the Captain Obvious category of Jeopardy, but it seems to be completely glossed over in mainstream discussions about the cost of college. When subsidies are doled out to purchase a product or service, what happens to the demand for such a good or service? It goes up. Likewise, if a loan is guaranteed on the backs of taxpayers, what happens to the demand and supply of the loan? It goes up. Couple that with politicians' (among others') continued insistence that college is the only way to be successful in life and what do you get? Massively increased demand with little regard to costs.
What happens when you get demand spikes while regard to costs goes by the wayside? Higher prices. Typically supply should track with higher demand, but universities are dominated by public institutions, which are inherently more inflexible. Since free college would not extend to private colleges, it's not likely private colleges would expand to keep pace. For whatever reason, the number of 4-year colleges has not really grown significantly since 2010 and has actually declined in more recent years, even as tuition rates continue its dramatic climb. Perhaps regulation prevents new private institutions from opening, which would not surprise me, but I don't know the answer to this.
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| Texas A&M student rec center. The university spent $50 million in 2014 to expand it. I guess it wasn't enough so they are spending another $35 million in expansions in 2020, just six years later. // photo by OldAg07 |
Think about it this way. If the government guarantees mortgage loans and doles out grants for people to buy townhomes, what do you think would happen? Mortgage companies would encourage people to buy townhomes since there's no longer a risk in defaulting loans. Not only that, but bigger and better townhomes because with guaranteed loans, there are only benefits for mortgage companies when people take out more money than they can afford. People would spend more money on bigger and better townhomes because hey, they had x amount to spend and now they have x amount plus subsidies. Developers would build fewer single-family homes and condos because, well, people now want townhomes because its perceived cost is so much lower, even though in reality, the hidden costs make it higher. I use the example of homes because this phenomenon played no small role in the housing crisis that led to the Great Recession.
If we move to free college, all consideration for cost goes out the window. Because who cares what the actual cost for college is? It's not me paying for it. Give me the best. Cost be damned. So costs continue to rise as colleges continue their student and taxpayer funded arms race.
It is the government destruction of price signals that ultimately led toward the unsustainability of college tuition across the country. Making colleges free to the end-user not only does nothing to address any of these costs, it continues to exacerbate them. All making them "free" would do is to further hide the visibility of costs, the economic equivalent of plugging our fingers in our ears, yelling, and hoping the problem would go away.
What is the Solution?
When we're dealing with issues of cost, we need to deal with...the actual costs.
Mind-blowing revelation. I know. But this means that government paid colleges are no solution at all. It just shifts costs around.
Although the solution may seem counterintuitive to many, it's pretty clear. Subsidies and loose requirements on student loans need to end. That is the only way to get people to really consider the real cost of college and figure out if it's really worth it to them. Maybe a better route for their money is trade school. Or perhaps an apprenticeship. Or an internship. Or just a good old fashioned job and build their skills while working. Maybe college really is the best path. The person can then work a job for two years, buckle down and save up, then go to college afterward. Tech firms have been starting all kinds of training programs in house. Online courses have been becoming much more feasible with a plethora of options. Many subjects can even be learned for free on YouTube. If direct interaction is desired, online platforms have sessions with people in the field for a tiny fraction of the cost of college.
There may still be poor people whose best path to success is college and still can't afford it even when prices recede. We currently already have a plethora of scholarships for this very purpose, that are tailored and targeted through a vetting process to get the funds to those that need it the most while also showing the most promise to put it to good use. As costs recede, fewer people will need the scholarships and the same scholarship amounts can help more people. The key here is a careful, limited, and targeted use of scholarships, by people that have the most to benefit from this judicious process. In other words, by donors and foundations, not by politicians. A scalpel under the watchful eye of a surgeon is what we need. Not a nuclear warhead in the hands of a war-mongering head of state.
This isn't to say this will be an instant fix with nothing but rainbows and unicorns. It will be painful for a lot of people. Many won't be able to afford college during the transition. Many will still have large loans with no real job prospects. College prices will start going down, but it won't reset to something resembling market levels for years. For this reason, it may be politically untenable. Why would someone who is up for reelection in two years push for a policy that may cause pain for five years? It may be their successor that sees the benefits of the policy.
But this is the only solution that has any kind of sustainable method to rein in costs. We've acted like heroin addicts for decades now. The solution isn't more heroin until we OD. It's to go into rehab. We can either do this and feel some pain now or continue with disassociating costs from the end-user and feel much more pain later when the inevitable crash happens, possibly on top of our children. It would be amusing if it weren't so disastrous, watching millennials (correctly) point fingers at boomers for the system getting to this decrepit state, only to push for the exact type of policies that boomers passed to create this quagmire in the first place. If millennials are successful, they will be the new boomers that push ever-increasing burdens onto Gen-Z and beyond.
