This week, President Joe Biden announced debt forgiveness for up to 43 million Americans with government-issued student loans. The government is waiving up to 20.000 debt for Pell Grant recipients who owe less than 125.000 dollars per year earned, and up to 10.000 U.S. dollars for people who did not receive Pell Grants. In addition, the White House plans to cap monthly student loan payments at 5 percent of a borrower's discretionary income and forgive the balance after a decade of. The move will cost the government between $300 billion and $500 billion, according to various estimates.
Biden first committed to student loan forgiveness during 2020 presidential campaign. His announcement Wednesday was met with relief and joy from borrowers and despair from people who have already repaid their student loans. It has also sparked fear among some policy experts – not all of whom are on the right.
One of the most prominent voices to criticize the move is Jason Furman, a Harvard economist who chaired the Council of Economic Advisers during President Barack Obama's second term in office. Furman argues that Biden's plan will provide generous relief to people with high incomes or the prospect of high incomes, encourage universities and colleges to raise tuition, and burden future students with higher loan burdens. He also worries that people who have not taken out student loans – that is, most Americans – will end up paying for the plan. I spoke with him on the phone this week, and our conversation was shortened and lightly edited for clarity.
Annie Lowrey: Joe Biden just wiped out the student loan debt of about 20 million people, cutting monthly payments by an average of $250 for borrowers who still have a balance on their loans. You have criticized the move, but can you give me your best case to it?
Jason Furmann: The higher education funding system has many problems. We need to make a lot of reforms to it. Could I see a case for some form of debt forgiveness for low income people? Perhaps, but with a much lower income limit than the Biden administration has chosen.
Lowrey: With that, let's hear the case against it.
Furman: With any public policy, you have to analyze the tradeoffs. You can't just say, "This person understands this, and therefore it's good."It's always better for someone to get something than nothing. But that's not how it works.
If you give a group $500 billion, where does that money come from? One possibility is that the economy will grow much faster and spending that money won't hurt anyone. I think that's extremely unlikely, given the extremely constrained state we're in. And so I think most of the $500 billion that one group gets comes at the expense of everybody else.
That doesn't make it a bad idea. If we were closing a coverage gap in Medicaid, I would say, "You know what? If everybody has to pay $50 more and poor people get health insurance and the inflation rate is a tenth of a percentage point higher, I'm all for it." But we give couples up to 250.000 dollars, which is a lot of money, up to 40.000 $.
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Lowrey: So one concern is that this is not targeting people who really need help.
Furman: Then there's the expectation that there will be debt forgiveness again. That will lead to shifts in the higher education funding system, toward loans and away from grants. It will also increase tuition as colleges try to capture some of that spending. Our goal should be to get more people into college. It's not obvious that Biden's plan will help with that goal. It might actually hurt that goal.
Finally, I am uncomfortable with this presidential power. You know, President Trump was urged by some of his advisors to index capital gains tax rates to inflation by executive order. He finally defended himself. I think indexing capital gains is a much worse policy than that. And it's possible that the legal reasons were weaker. But he actually said, no. I'm not just going to change the tax code myself without checking with Congress. I think that's a good rule to live by, and one that we've mostly had so far.
Lowrey: That's the Biden administration, at the touch of a button, forgives debt without raising taxes. So how does the burden fall on everyone but the borrowers? Why this is problematic?
Furman: One group gets $500 billion. And they will spend more. They will buy more housing. They will be better off. The problem is that the economy is already producing as much as it possibly can. If anything, the Fed wants them to produce less, not make more. What's going to happen is they're going to spend more and drive up the prices of houses and everything else. Because of this inflation, each household will end up spending $200 more per year for what they need.
There's no free money out there. There are consequences. Once you put it in terms of 320 million people paying for a service for 30 million people, you have to think much harder. They're giving a benefit to somebody that's 200.000 dollars a year earned. How important is it to give help?
Lowrey: You said one of your concerns is that universities will raise tuition with the expectation that there will be more debt forgiveness in the future. But there is an argument that this could actually create more pressure to fix the underlying funding system.
Furman: We don't control what universities do. They make their own decisions, depending on incentives. The incentive of a diploma mill is to tell people, "Hey, you know what, it's going to be 10.000 dollars – but don't worry, Biden will do it again next year."
Lowrey: let's go back to the distribution consequences. Certainly most people graduating from college or a two-year degree put themselves on a higher income trajectory. But many people are not on an upward trend given the downward pressure on wages over the past decade. And many young people are apprehensive about taking on debt, given rising cost pressures across the economy.
Furman: I would go back to the income limits here. If you are a 24-year-old who is 125.000 dollars a year, you will probably do well in life. Even if what you just said is true, that's an argument for a different plan, not this plan. Set the limit at 62.$500 for a single person and 125.000 $ for a married couple.
I think there is evidence that the college premium is no longer going up. I haven't seen any signs that it has dropped. For the average person going to college, they get an incredible return on their debt. They borrow 30.000 dollars. But their lifetime income increases by 500.000 dollars. You just don't have to do anything for them to relieve people for whom debt is a problem.
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Lowrey: What about the black-white wealth and income dynamic? As you know, black students are more likely to have loans, and their loans tend to be larger. And black students are much, much less likely to come from family wealth.
Furman: You also have to understand what this does to the wealth of the people who end up paying for it. They will be disproportionately black because a larger percentage of them did not attend college.
Lowrey: Would something based on the family wealth of a college student be better? It would be very hard to do. But one could imagine directing relief to the children who had no parents to help them in school.
Furman: I'm not sure I agree with that. If someone graduates from law school at age 30 and in their first job out there 125.earns $1,000 a year – even if he originally went to college on a Pell Grant – that's someone who is in a good position to repay his debt. I worry about the 20 percent of students who are in a bad position. I don't think you need to worry about the 80 percent.
Lowrey: Let's say you've been tasked by the president to spend, say, $200 billion on student debt forgiveness. How would you have done it?
Furman: I really don't like the premise of this question. But I would have had much lower income limits. And I would have designed it so that not all the money was spent.
Lowrey: How concerned are you about the inflationary consequences? We had a break in student loan repayments. So is this really going to fuel a lot of new inflation?
Furman: The Plan is a $500 Billion Plan. I think the multiplier is less than 0.1 – so for every dollar you spend, you get a cent of economic activity or less. People aren't going to go out and spend $500 billion right away. But even with that small multiplier, if you apply it to this huge initiative, you get inflation of about 0.2 or 0.3 percentage points. Some people might say that's a small number. A rounding error. But for a typical family, you'll pay an extra $100 or $200 a year for everything you buy.
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Lowrey: we haven't talked about the emotional part of it yet, the human well-being part of it. Persons hate to have student loans. They hate having to pay a second mortgage, even though they know on paper it might work out for them.
Furman: People hate college debt more than other types of debt. Why is not 100 percent clear to me. We are not talking about writing off car debt or mortgage debt. I think moving to a world with more scholarships or an Australian system – where they collect those [student-loan payment] on your tax return, and if your income is too low, it just doesn't get collected – would be better. You hardly have to think about it. That would be a really good system, and it would be great to do something like that.
I will say that of all the political issues I've ever discussed, the level of petulance directed at anyone who disagrees [with the debt-relief plan] is incredibly high. There is something that is so emotional to people. It has made it difficult for analysts to enter the conversation. And I think the likelihood of bad unintended consequences imposed on those paying for the policy now, or imposed on students in the future, is greatly increased.