Student loan debt - The result of a well intended but badly designed predatory government program

From Who Really Benefits From Student-Loan Forgiveness? by Jerusalem Demsas.  The subheading is The proposal’s prominence has less to do with its merits than with college graduates’ agenda-setting power.

Much of interest in the article and I do not dispute the main conclusion - that student debt forgiveness is being mooted in the Democratic Party, not because it is good economic or social policy, but because it disproportionately benefits members of five key constituencies in the Democratic coalition; the upper middle class, journalists, government employees and teachers unions, and academia.  

Regrettably, Demsas never tackles the most central and relevant issue.  Does the federal student loan program(s) as currently constituted deliver on its mission which is to equitably make higher education accessible to all Americans and thereby increase the financial prosperity of the recipients?  That is a noble mission even when sensibly caveated by concerns related to declining returns on education, attrition, etc.

I am uncertain that the answer is yes.  There is evidence that the number (and percentage) of people attending university and receiving degrees has indeed risen, in part owing to the loan programs, but there are also many indicators which suggest that the degrees earned are not delivering increased prosperity to the recipients and the costs for most recipients are not commensurate to the benefit.

If, hypothetically, in a given age cohort, 25% will earn a college degree and will increase their otherwise anticipated familial income by doing so, that is the benchmark to use.  If a federal student loan program allows 30% of the cohort to attend university and earn a degree but the additional 5% of degree earners do not actually increase their income, then the program is a failure.  It has cost the nation a lot, it has cost the 5% a lot, and it has not added to the national prosperity.  I suspect that that is where we are.

I have heard the federal student loan programs as appearing to be the result of a predatory design committee made up of drunken sociopathic high school students who aspire to be loan sharks.  Virtually every rule of common sense and fairness is insulted by the programs as they are actually executed.  

The way the program is designed, it is easy for too many naive people to end up taking on too much debt pursuing degrees of too little value and then ending up with ever ballooning interest payments.  The old notorious company store except run by the government.  

It appears to me that the 25% (or whatever the benchmark number might be) will always attend university and benefit from doing so.  The extra 5% facilitated by these loan programs will incur costs and attain no benefits and their life arc will be materially degraded.  By the government.  By design.

Demsas identifies five reasons why this has happened and all of those five have some merit.  I think the biggest reason remains unstated.  The programs are ill-designed and deliver bad results for everyone despite their good intentions.  To reform the programs and redesign them to deliver better results will expose too much, gore too many oxen, and deprive too many interests of their sinecures.  

We have gotten ourselves, as a nation, into a very bad and very deep hole ($1.7 trillion deep).  We need to reform the whole program or it will keep wasting scarce national resources and immiserating too many naive young adults, probably disproportionately concentrated among the poor and marginalized.

Instead, our unspeakably immoral and ignorant political leaders want to make a bad program worse by wiping out $1.7 in national assets while leaving the program in place to immiserate the next generational cohort.  

This is reprehensible in the extreme.

From the article.

Some items end up on the agenda because a towering majority of Americans demand change—the most obvious recent example is rising gas prices. Student debt feels different. After all, just 13 percent of the country carries federal student debt. Gallup frequently asks Americans what they believe is the most important problem facing the country today. According to the Gallup analyst Justin McCarthy, the pollster is unable “to report the percentage of Americans who have mentioned student debt or student debt cancellation because it hasn’t garnered enough mentions to do so.” In 2022 so far, he told me via email, Gallup has conducted four polls on the question and “just one respondent mentioned this as the most important problem facing the nation.”

Why, then, is student-debt cancellation having such a moment in the national political conversation?

Demsas identifies five reasons and overlooks the main reason (that it is embarrassing to reform such a bad  program because it will reveal just how bad it is).  Reason five has some merit.

Reason five: The power of college graduates

According to Catalist data, roughly 43 percent of the 2020 Biden electorate graduated from a four-year college or university. Compare that with 2012, when, according to Pew, just 36 percent of registered Democrats had completed a four-year degree or more. Given that trend, student-loan forgiveness may seem like the classic tale of a political party transferring a valuable benefit to a crucial constituency.

Although college-educated voters are an important segment of the Democratic Party, no one identity group is completely dominant. The party has long been a coalitional organization stitched together loosely and lacking a clear ideological core. Daniel Schlozman, a political scientist at Johns Hopkins University, explained a coalitional shift within the party in recent years. “Democrats are becoming more consistently liberal in a variety of ways, and they’re becoming more upper-middle-class all at once,” he told me. “And that creates some awkwardness.”

Awkward indeed that so much energy has been spent on a policy proposal that would affect just 13 percent of the population, and that would send the most dollars to high-income earners and those with graduate degrees. The fervor with which student-loan advocates argue that these policies are in fact racially and economically progressive may be an attempt to resolve the awkwardness that Schlozman describes—advocates of debt cancellation are trying to build a coherent narrative for why a diverse coalition, many of whom have never attended college, should be in favor of forgiveness.

College-educated voters are not just dominant within the Democratic Party; they also dominate the media and, naturally, academia—two institutions that have significant power over what issues are brought to the fore. Importantly, academia and media have also become notoriously unstable work environments lacking sufficiently well-paying jobs. The demographics and precarity of these fields are likely playing a role in the prominence of the student-loan-forgiveness debate.

Interestingly, Demsas also overlooks one final aspect of the Democratic coalition.  Women.  They are 56% of the Democratic Party voters.  Women are 60% of college students but they also have a strong inclination towards earning the least monetarily valuable degrees.  They would be among those to benefit the most from debt forgiveness.  

The Democratic Party has ended up in a position where they are arguing to maintain a program which does not achieve the goal of increasing access to financially beneficial higher education and which does harshly penalize people whose devalued degrees are not worth the debt incurred to receive them.  

They are also arguing that already preferentially treated upper middle-class and women (who disproportionately end up as government workers) should be granted loan forgiveness by a nation of middle class and blue collar workers facing much greater financial burdens and much more uncertain  economic prospects.

Student loan forgiveness is important to the Democratic Party and its needy constituents but at the expense of the rest of the nation.