What's the Deal with Student Loan Cancellation?

Let me tell you something . . . I’m tired of this debate. The student loan cancellation debate has gone on for years, and in my opinion neither side tackles the issue correctly. Personally, I support total student loan cancellation. Not only would I benefit greatly from the policy, but for the reasons stated below it would be a huge net positive for the country. However, I’m simultaneously frustrated by opponents using red herrings to defeat or moderate the policy and concerned that supporters lack the arguments necessary to enact the policy. Also, it is an emotional roller coaster watching the policy gain and lose steam over and over again . . . yeah, I’ve gotten very tired. 

              However, before I succumb to the tiredness and try to emotionally distance myself from this topic, I will attempt to frame this issue correctly and show why this policy should be more broadly supported. Who knows . . . if you are an opponent reading this article, maybe you’ll come around too.

In this article, we’ll establish that student loan cancellation is a functional tax cut (hang in there with me here) and discuss student loan cancellation benefits. Along the way, we’ll revisit the purpose of student loans, the many cancellation positions out there, and what the data says about how people will be impacted. Lastly, I will provide recommendations to leaders and address the common red herrings in this debate.

Student Loans as a Tax Cut

              The Moral Arguments

So, you might be the most skeptical about this point. Everyone has an intuitive understanding of what debt is, how it works, and the moral stances around it, which have little connection to taxes.[i] If you borrow money, then you pay it back. If you don’t pay your debts back, then you are untrustworthy, a mooch, or lazy (i.e., you don’t want to work to pay off your debts). We generally only feel sympathy for debtholders if there was some type of bad act in the lending (e.g., fraud, usury, or aggressive collection tactics) or if unfairness arises later. Especially when the debt is used for a noble purpose. For example, loan sharks aren’t usually the good guys in movies or television. Debt can be just as much a moral contract as it is a financial arrangement. As a result, everyone has free license to make broad character conclusions about lenders and borrowers.

The student loan cancellation debate lives in this space right now. Proponents, like Sen. Bernie Sanders, describe student debt as a punishment or a criminal sentence “for doing the right thing.”[ii] There are many additional layers and variations of this, but they all pretty much branch from this core thesis. And it fits nicely into the “noble purpose but now unfair debt” morality motif described earlier.   

However, this invites opponents to make moralistic objections to this policy as well, which can range from certain counterpoints to red herrings. Most directly, opponents will make the issue about “personal responsibility.”[iii] Students took on this risk knowingly and should pay up. Otherwise, we’re going to give out unnecessary and unwarranted breaks to people and shift the debt burden unfairly to taxpayers. This counterargument is especially effective because it more easily fits into established and common debt experiences like paying off your credit card, car loan, and mortgage. In my opinion, this moral approach further burdens proponents by requiring them to challenge or change more commonly understood debt morality tales . . . a tall hill to climb.

Democratic politicians who occupy the middle of these two moral arguments have crafted variations of total student loan cancellation to enact some version of the policy. For some Democrats, the policy is clearly too popular to ignore[iv], but those politicians don’t see the moral arguments advancing quickly enough to support total cancellation.[v] While running for president in 2020 Sen. Elizabeth Warren offered a plan that reduced debt cancellation at various income tiers.[vi] Also during the 2020 presidential campaign Vice-President Kamala Harris introduced a bewildering and much maligned student loan cancellation plan that contained very specific qualifications to get some portion of student loan cancellation.[vii] President Biden himself presented a limited student cancellation plan, which included means testing,[viii] and was revised to be more limited before launch.[ix] This plan is now being challenged in court.[x]

Finding Resolution in a Tax Cut

However, you only find yourself stuck somewhere in this moral argument if you ignore, reject, or otherwise forget that we are talking fiscal and economic policy. Now, I’m not going to advocate overlooking your morals in favor of fiscal or economic policy considerations. If you are a regular reader of mine, you know that I don’t dodge morals when considering business strategy, politics, economics, etc. But in this case we have, for some people, two equally strong moral arguments between the “noble cause but now unfair debt” motif and the simple moral narrative around paying back debt. If you find yourself seeing merit in each moral argument, then it can be helpful to reframe the topic for analysis.

From a government perspective, student loans are a future revenue stream as evidenced by a promissory note with individuals. Is this starting to sound familiar? At its core, student loan payments are government revenue. The government also collects revenue in other ways, including taxes. While taxes don’t have a promissory note attached, we all are well aware of the penalties for not paying taxes. Either way, it is government revenue whose collection is compelled by law.

. . . So, by canceling student debt, the government is essentially choosing not to collect revenue. Thereby allowing people to keep the money instead of paying it to the government. I won’t drag this out anymore . . . The government choosing not to collect revenue, in whatever form, is the functional equivalent of a tax cut.

With that established, the only thing we really need to ask ourselves is whether canceling student debt is a good tax cut . . .

Student Loan Cancellation is a Good Tax Cut

To understand this better, we must think about why we cut taxes or otherwise provide tax relief through deductions, reform, etc. While the list of specific reasons for reducing tax burdens can be lengthy, generally speaking, you decrease tax liability to incentivize specific behaviors or, similarly, provide an economic boost. You do the latter if you believe that tax rates are suppressing economic activity and the former to drive a specific outcome (e.g., charitable contribution deduction). To help assess whether student loan cancellation is a good tax cut, we need to understand the original purposes of student loans and whether we are fulfilling that purpose.

The first significant piece of student loan legislation was actually born in foreign policy. After falling behind in the space race with the launch of Sputnik, President Eisenhower and Congress became concerned that the U.S. was falling behind in available STEM and foreign language talent.[xi] The National Defense Education Act provided loans for students seeking education in these fields. In 1965, student loans would be made available to the masses through federally subsidized loans through private banks and non-profit lenders.[xii] After 1965, there was a rather long and complicated history regarding Pell Grants, Direct Lending, the FAFSA, Sallie Mae, and other aspects of expanding and managing the costs of the program.[xiii] ln 2010 Congress passed legislation requiring all federal loans to be direct loans.[xiv]

No matter how you slice it, the student loan program was designed to enable more people to matriculate through post-secondary education and reap the benefits through expanded economic opportunities and stability. Achieving this goal typically means that people will have stable employment, start a family, buy a home, open small businesses, and various other hallmarks of the American Dream. Thus, if those things aren’t happening, then policymakers should be open to solutions to ensure the American Dream is accessible to everyone.

Of course, those things aren’t happening. Millennials are purposely delaying marriage and having kids, sometimes indefinitely and potentially beyond biological limitations.[xv] Home ownership is also lagging among Millennials when compared to prior generations.[xvi] While Millennials and Gen Z (at least those of working age) make up 59% of the working population, they make up only 7.5% of small business owners, compared to the 92% owned by Gen X and Boomers.[xvii] To top it all off, college enrollment is continuing to decline.[xviii] And while there are many contributing factors, student debt is cited as a consistent reason as to why this much needed activity has slowed. Therefore, if the ~$1.6T in student debt is not promoting these goals . . . then what purpose does it serve? Additionally, these data points and trends also provide very direct evidence that we will see progress on these fronts if Congress alleviates the burden.

In brief, as a functional tax cut, total student loan cancellation is as close to a slam dunk as you’ll get. And attempts to moderate the policy or avoid this conclusion is tied much closer to policy confusion and ideology than anything else.

So, what can student loan cancellation proponents do?

Reframe the Debate and Crush the Red Herrings

Should Sen. Sanders, the Squad, or moderate Democrats find this post, I want to make my recommendations on how to get total student loan cancellation over the line:

●      Accept the fact you are pushing for a functional tax cut: I get it. Republicans have pretty much dominated the tax cut conversation, and you might be making similar points. But those pushes have been successful, and given their “trickle down” based approach, you’re still principled in opposing those cuts even while borrowing some rhetoric. Comparisons to tax cuts won’t do. This is a tax cut.

●      Make the benefits of student loan forgiveness to non-student debtholders your next big push: Tax cuts have long been defended based on potential benefits, even if all people don’t get money. Democrats and Republicans have done this, and it applies here. More home ownership strengthens neighborhoods. Population growth and education makes America safer and more prosperous, and student loan cancellation helps secure that for the long run. Essentially, you want non-debtholders of all kinds to feel like canceling student loans is a small price to pay to make all of our futures better. You can even bust out the conservative favorites of “The money is better off in the hands of the people.”, and “What will the government do with the ~$1.6T anyways?” Educate everyone on this policy's benefits. This could even flow well into “Build Back Better” and middle-class tax cut messaging for the more moderate Democrats.

●      Make the benefits personal: A lot of personalization has occurred in how the debt originated, but let’s press forward in the conversation. People should start telling specific stories about what is not happening because of student loans. The career plans forgone. The children unborn. The houses unbought. The small businesses not started. You could even crowdsource this and absolutely flood the zone until the benefits are clear. This might even circle back to creating a new moral imperative.

Next, you must stop these red herrings in their tracks. For that, I’ll rapid fire responses:

●      It won’t solve the whole problem, or we’ll end up in the same spot at some point

o  Yes, we should explore broader solutions like free public universities and other measures to lower tuition, but that shouldn’t stop us from taking this first step in addressing the crisis.

●      It will be unfair to people who take out loans after cancellation, or people will take out loans expecting cancellation (or other moral hazard arguments)

o  We’re fixing what we hope will be a once-in-a-lifetime problem. If this is your main concern, then you should join us in creating a broader solution, but we should still take this first step.

●      It’s unfair I paid off my loans

o  Nothing takes away from that accomplishment, but everyone’s situation is different. And, as policymakers, we must be honest about how student debt negatively impacts our country and get it back on track.

●      It won’t help <insert specific subgroup here>

o  Canceling student debt will benefit the whole country by helping over 43M federal borrowers.[xix] Student debt not only delays life milestones,[xx] but it adds to the wealth gap and worsens racial disparities.[xxi] The data will support that student debt cancellation will aid many historically disadvantaged demographics.

●      It will only help the wealthy

o  Total student loan cancellation opponents can only make this point by redefining what wealth is. The debt burden at this point suppresses life choices and risk taking at all income levels for borrowers, and the debt does not serve the nation well.       

This is not an exhaustive list, but it prioritizes the way in which student loan cancellation will benefit the entire country.

Conclusion

              And, with that, I return to tiredness. Though I’ll never recommend total disengagement (because that will only allow worse things to happen), for me, there’s really no more to be said on this topic. Total student loan cancellation is a functional tax cut that will yield massive benefits, and moderation will limit those benefits. Usually, in modern political debate, that’s enough to enact a policy. But, unfortunately, that’s not happening this time for reasons caused by proponents and opponents. Meanwhile, we are losing future generations to problems that won’t fix themselves while politicians and pundits hem and haw on details that won’t really matter in the long run. And with that . . . time for a nap.   

[i] George Lakoff covers these debt morality metaphors in: Lakoff, George. Moral Politics: How Liberals and Conservatives Think, Third Edition. 3rd Enlarged ed., University of Chicago Press, 2016.

[ii] https://www.cnbc.com/2019/06/24/bernie-sanders-has-a-plan-to-forgive-all-student-debt.html

[iii] https://www.forbes.com/sites/zackfriedman/2022/04/07/republicans-call-student-loan-relief-outrageous-and-an-insult/?sh=6c2f4f406063

[iv] https://www.forbes.com/sites/zackfriedman/2022/04/18/student-loan-forgiveness-new-poll-shows-64-support/?sh=76468ec2350c

[v] https://today.yougov.com/topics/politics/articles-reports/2022/05/10/most-americans-support-canceling-some-student-debt?utm_source=twitter&utm_medium=website_article&utm_campaign=student_debt (54% of survey respondents still assign some blame to students.)

[vi] https://elizabethwarren.com/calculator/debt 

[vii] https://www.cnbc.com/2019/07/31/kamala-harris-has-student-debt-forgiveness-plan-but-its-complicated.html (Oddly enough, if then Sen. Harris had taken the functional tax cut route, she could’ve have come out for total student loan cancellation as a part of her middle-class tax cut plan.) 

[viii] https://studentaid.gov/debt-relief-announcement/ (accessed on October 6, 2022).

[ix] https://finance.yahoo.com/news/remarkable-reversal-president-biden-just-174500701.html

[x]https://www.cnbc.com/2022/10/03/challenges-to-bidens-student-loan-forgiveness-plan-put-relief-at-risk.html 

[xi]https://studentloanhero.com/featured/history-student-loans/ (While providing a helpful history of student loans, this article doesn’t give in-depth analysis of student loan cancellation. If fact, it falls for a policy red herring thrown out by opponents and pushes more burden on to the student. Those arguments are handled in the main body of this article).

[xii] See note 11.

[xiii] See note 11.

[xiv] See note 11.

[xv] https://www.cnbc.com/2021/05/18/older-millennials-delayed-families-but-the-pandemic-made-kids-more-uncertain.html and https://www.pewresearch.org/social-trends/2020/05/27/as-millennials-near-40-theyre-approaching-family-life-differently-than-previous-generations/

[xvi] https://www.bloomberg.com/news/articles/2022-03-23/why-aren-t-millennials-buying-home-4-charts-explain#:~:text=Just%2047.9%25%20of%20U.S.%20millennials,and%2051%25%20for%20baby%20boomers.

[xvii] https://www.census.gov/data/tables/time-series/demo/popest/2010s-national-detail.html and https://www.guidantfinancial.com/small-business-trends/ 

[xviii] https://www.forbes.com/sites/michaeltnietzel/2022/05/26/new-report-the-college-enrollment-decline-has-worsened-this-spring/?sh=f2c84a024e01

[xix] https://www.nerdwallet.com/article/loans/student-loans/student-loan-debt

[xx] https://www.cnbc.com/2022/01/28/81percent-of-adults-with-student-loans-say-they-delay-key-life-milestones.html

[xxi] https://www.cnbc.com/2022/01/28/student-loan-holders-are-more-likely-to-be-women-and-people-of-color.html