If you’re a young person, you may have noticed a petition making the rounds on various social networks calling for support of the Student Loan Forgiveness Act of 2012. The bill, introduced by Rep. Hansen Clarke of Detroit, Mich., aims to “make student loan repayment both simple and fair,” and it aims to do so by writing down a substantial portion of federal student debt by forgiving outstanding balances after a decade of payments at a certain percentage of income.
The bill presents itself as a way to stimulate the economy by offering near immediate debt relief to those who have been paying their bills for the last ten years, and future debt relief for those who are just beginning. Clarke’s bill proposes that anyone with federal student loans simply needs to pay back at least ten percent of their discretionary income every year for ten years and the remainder of their debt will be forgiven. It would also cap interest rates on federal loans and offer strong incentives to work in public service: teachers, firefighters, etc.
Clearly, the bill will be quite popular among young people, many of whom feel as though they had the rug pulled out from under then in 2008. (There is another proposed bill that aims to restore the bankruptcy provision for private student loans.)
The cost of going to college has increased well above inflation for the last couple of decades while the incentive to get a college education has gotten stronger, too. For those with crushing student debt graduating into this economy, life has not been kind.
Crunching the numbers
The Federal Reserve Board of New York released a report last Monday detailing the situation. The total outstanding student loans balance is $870 billion, by their estimates (by comparison credit card debt is $693 billion and auto loans account for $730 billion). The average outstanding balance is $23,300, but the median is $12,800 — suggesting a minority of borrowers who owe mind-blowing sums of money for their education. Indeed, according to the study, about 0.5 percent of borrowers owe more than $200,000 for their education (one’s mind immediately goes to all the trend pieces about accredited lawyers unable to find associate-level positions; three years of post-secondary education is not cheap!). A plurality of about 43 percent, however, owe less than $10,000; slightly less than 30 percent owe between $10,000 and $25,000.
By the New York Fed’s calculations, about 47 percent of borrowers “appear to be in deferral or forbearance periods,” and 27 percent are past due on their loans. This affects all age groups, not just recent graduates; 12 percent of those past due are between age 50 and 59. Famously, President Obama only paid off his loans relatively recently, after writing a pair of best-selling books.
Discretionary income, as defined in this context, is “the amount by which adjusted gross income exceeds 150% of the poverty line.” If the average individual income in the United States is about $39,000 and the poverty line for an individual is almost $11,000, then we can infer that “discretionary income” for the average American (at least in this sense) is around $22,500. Divide that by ten and multiply it by ten, and you’re back where you started: $22,500 over ten years, which is only about $700 short of the average outstanding balance! It might have looked crazy on the face of things, but Rep. Clarke’s math is actually sound.
Additionally, the bill considers the tax implications of the plan. Typically, debt forgiveness is considered taxable income. Receiving a tax bill for $23,000 in income you didn’t technically receive would be a tough blow for anyone, even if it wiped out their loan debt. So, write-downs would not be considered taxable income.
What about the others?
Like the mortgage deal the Obama administration recently completed, if this proposal has any legs it will likely meet cries of moral hazard — essentially that this sort of intervention allows risk-takers to pass on the costs of their own risk-taking to those who did not take risks in the first place. This is a legitimate concern — how would you feel if you avoided a private school education because of the costs only to find out that had you gone, it would have been paid for? It seems potentially unwise to effectively subsidize college education after the fact, instead of doing so upfront, thereby evening the playing field.
In the interest of fairness — and realism — Clarke’s bill includes provisions to cap loan forgiveness in the future. Only $45,520 would be forgivable in the future, which would “incentivize students to be mindful of education costs and for colleges and universities to control tuition increases.” Instead of providing more funding up-front, the federal government would have to do so afterwards, to those willing to take on substantial risk.
Would this solve anything?
While this would certainly lift the weight of crushing student debt off the back of Americans who need it most, it would not get to the heart of the problem: that there is a college education bubble that has been growing over the last few decades because of the way we pay for college. The New Republic’s Kevin Carney explains it best:
Imagine you’re in the business of selling apples that cost $1 on the open market. Then the government decides that more people should have the opportunity to buy apples and society would benefit from a net increase in apple consumption. So it decides to drop the price of apples to 60 cents. Sometimes it does this by giving you 40 cents for every apple you sell, on the condition that you start selling apples for 60 cents. Sometimes it gives people vouchers worth 40 cents that can only be used to purchase apples from approved vendors.
At first, the policy works splendidly. Apples are effectively less expensive so more people buy them and the nation is suffused with apple goodness. But then you, the apple vendor, look at the situation and say “Hey, the market price of an apple is still $1. Wouldn’t it be great if I could charge $1 for apples, but still get 40 cents from the government for every apple I sell?” Raising the price all the way from 60 cents back to $1 in a single year would be too obvious and jeopardize political support for the apple subsidy program. So you start raising prices by three, four, or five percent above inflation annually. When annoyed public officials begin asking why, you explain that apple production is an expensive, labor-intensive business, and that all of the extra money is being used to produce the very best apples money can buy. Since apple quality is substantially a matter of taste, this is a hard claim to refute.
As things stand now, this bubble cannot burst. Clarke’s bill, attractive as it is — the petition supporting it has 158,000 signatures just a few days since the bill was introduced — doesn’t do much to address this problem, long-term forgiveness obligation notwithstanding. It also doesn’t stand a snowball’s chance in hell. It has no co-sponsors and it was introduced to the overwhelmingly Republican House of Representatives during an election year.