Convergence on Student Debt

San Francisco / December 22, 2019
The Wall Street Journal reported that the Trump Administration is considering proposals to reduce student debt (link). Debt forgiveness may be unpopular with Republican voters and conservative strategists in the White House. But the size of the problem and its impact on the population will require a policy response. Better if the Trump Administration acts now, rather than wait for student debt to trigger more damage later.
The scale of student debt in the United States is massive. Forty-two million Americans owe $1.5 trillion in student debt. This is the second largest pool of consumer debt after mortgages. Also, many parents and grandparents are involved in financing loans for higher education. The problem affects a wide range of Americans.
Policymakers should intervene to reduce this debt. Under the present trends, the pool of consumer debt will not diminish on its own. The macro economic trends under President Trump are positive, but the gains are not allocated evenly. Most of the gains are going to the highest income brackets. Large pools of consumer debt create risk in an economy. If there are negative shocks, a large pool of consumer debt can amplify those shocks in ways that will surprise everyone. We saw this in 2008.
The Trump Administration is considering proposals where the government would not contest borrowers' requests before judges to have their loans cancelled. The Administration may also allow borrowers to refinance student loans at special rates. Both strategies are better than no intervention.
The change in Republican thinking moves the GOP closer to the Democratic Party. Senator Bernie Sanders wants to eliminate all student debt (and make college free, by the way). Senator Elizabeth Warren would cancel up to $50,000 in student debt for those earning less than $100,000 and less for those making between $100,000 and $250,000.
The specifics of the appropriate debt forgiveness program depend on your norms of fairness and estimations about economic growth. The more you think student debt constrains career development, the more generous terms you will write into your forgiveness program.
Historically, many societies have periodically written off debt. In ancient Babylon in 1792 BC, King Hammurabi famously forgave the debt that all citizens owed to the government. There are records of people destroying the tablets on which the debts were recorded and celebrating. Many societies have adopted debt writeoffs in the interest of promoting opportunity and broader economic growth. It would be a wise move today.