Solving the Student Debt Conundrum

It is time to consider how to make the transition out of the current payment pause as smooth as possible. And no, debt forgiveness is not a good option.

Dear Readers,

Almost three years ago, at the beginning of the pandemic, the Trump administration paused federal student loan payments. Since then, the pause has been repeatedly extended, as the Biden administration has focused on attempting to forgive up to $20 000 worth of student debt for each eligible borrower. This “solution” has left few Americans happy: Progressives would prefer to just abolish student debt & and introduce free tuition like my country (Sweden). Meanwhile, conservatives are generally skeptical to debt forgiveness in general, and in particular when enacted by executive order.

This has now become quite a conundrum. The problem with pausing payments for a long period of time is, as the administration has discovered, that people get used to not having to pay their loans. The money that used to be set aside in their household budgets for loan repayments become used for other things. This means that, when repayments start up again, they will have to cut back on other things to make room for the repayments. As the economy is dangerously close to recession territory, proponents of prolonging the pause and/or straight up forgiving the debt argue that this reduction in private consumption could be what pushes the U.S. into the red.

They have a point. But there is a “middle option” of gradually increasing repayments that ought to be explored:

Suppose that payments were to resume in April, and that you’re a borrower who, prior to the payment pause, paid $120/month. Under this option, in April, you would only pay $10. In May, you’d pay $20, in June, $30. You get the idea. Payments would increase by 1/12 of the full amount each month until, after one year, you’re once again paying the full $120/month.

This compromise would achieve two things:

First, it gives borrowers more time to find money to pay back their loan, by easing them back into it. Instead of having to scramble to immediately find (in this case) $120 in their monthly budgets, they only needs to find $10 now, and then figure out where to cut another $10 next month, and the month after etc. This is, in other words, a more “gentle” approach.

Second, the shock to the demand-side of the economy is greatly reduced. With the economy in a frail state, it should go without a saying that this would be a good thing.

Admittedly, this is the kind of compromise that is unlikely to make anyone particularly happy. Borrowers who have held out hope for debt forgiveness won’t get it. On the other hand, many (particularly on the right) are likely to feel that this gradual readjustment is too generous. It’s been three years, just make them pay already!

Why not just forgive the debt?

Debt forgiveness is a more radical proposition than I think most people give it credit for. To my knowledge, no country has ever forgiven student debt. It’s easy to see why: Forgiving student debt means reallocating wealth to the college-educated, from those who for various reasons did not or could not go to college. In the more egalitarian parts of the world (like my home country, Sweden), this is absolutely unthinkable. And yes, people do take out student loans even in countries where tuition is free. I will be paying back my own loans for decades to come. That debt forgiveness is even being considered by large segments of the Democratic party is a clear sign that the party is now one for the professional class, not one for the lower classes (whom it takes for granted). I could think of no better gift to the floundering Trump campaign than to transfer the debts of college-educated onto the tradesmen and other workers of this country. And in effect, whatever advocates may claim, that is what debt forgiveness does.

Again, however, a compromise can be reached. I am far from the first to suggest allowing student loans to be discharged through bankruptcy, thus allowing the worst-off borrowers to get a way out, while still sticking to the general principle that you are responsible for repaying any loans you take.

That’s all for now. Thanks for reading, and please don’t forget to subscribe if you haven’t already.

Sincerely,
John Gustavsson, PhD