Student Debt Cancellation Debate Shows The Need For An Economics Of Humanity

An argument that I certainly didn't expect on Twitter brought up the proposal to cancel student debt. Presidential candidate Bernie Sanders wrote, "We’re going to cancel every penny of student debt, and we’re going to pay for it with a modest tax on Wall Street. Wall Street doesn’t like that, but to hell with Wall Street."

In response, Richard Thaler, Nobel laureate, professor of behavioral science and economics at the University of Chicago, and one of the founders of behavioral economics, wrote, "Because those who paid off their loans or worked while in school in order to borrow less are clearly less deserving. Logic."

A harsh and bitter logic of a fashion. Damned be those who didn't do what was prudent early in their lives. Except, I wonder why such knowledgeable people are content to make biting remarks when they are clearly ignorant of context.

There was a time that people could work their way through college. I and everyone I knew had to work summers. Plenty took on jobs during the school year. I knew one person who repeatedly volunteered as a subject of medical experiments to bring in some extra money.

That was many years ago, at a name school, where the first year's salary you could expect coming out would be worth a third more than four years of tuition. The loans you took out were perhaps a quarter to a half of that year of salary. For those who came from lower economic ranks, federal aid was a much higher percentage of the costs that had to be covered.

Newly minted working people would have leverage.

Those days are long gone. Before dismissing the idea of debt forgiveness—even if the reason is that economics says the action is inefficient and the reward perverse—one should understand the financial and social context in which students and their families operate.

As I mentioned a few years back, a student from a wealthy family is 4.7 times more likely to graduate than someone from the lower economic ranks once they're in college and 8 times more likely if you look at all kids, whether they attend college or not.

Let's focus on the first case, where students enter college, because it shows the correlation between family income and successful completion of studies for a bachelor's degree. For those in the top quartile ($108,650 or more), 99% graduate by age 24. If the family is in the next quartile ($63,600 to $108,650), it's 51%. The next group down ($34,160 to $63,600) sees 29%. For the bottom economic quartile (less than $34,160 annual income), 21%.

It takes money to get through college. I've seen kids enter and drop out, promising themselves that they'd get back to their studies after making enough for another semester because it becomes such a grind. They're chewed up by the process. And that's a lot more than the side job a Thaler would suggest.

A Georgetown University Center on Education and the Workforce study shows that as the working hours increase, the negative effect on grades piles up. Looking at higher-income students working less than 15 hours a week, 65% earn grades of at least a B. But almost 60% of lower-income students working more than 15 hours a week get at most a C.

Realistically, as well, how much could some extra work cover? The average annual four-year university cost with tuition, room, and board, according to the National Center for Education Statistics, is $26,593 ($19,488 for public schools and $41,468 for private institutions, both for-profit and non-profit). Have the student work an extra 20 hours a week, even though it sounds like it could become academic disaster and undercut the social and economic mobility that higher education is supposed to bestow (among other worthy ends).

Pay the person $9 an hour on average (optimistic, given that many jobs for students will be minimum wage and that can be as low as $7.25) for 20 hours a week. Take out at least 17% in federal income and payroll taxes, leaving $149.40 a week. Put all of it into school for each of nine months, 4.3 weeks a month. That is just under $5,782 a year. Absolutely that could help cut down the loan balances on the average. But the average doesn’t tell the story.

For students from 18 to 29 years old getting a bachelor’s, 60% acquired debt to finance their education, according to the Federal Reserve. Among those 60 or older, it was 29%. The costs have forced increasingly high levels of debt, with a fifth of all adults behind on their payments on average. First-generation college students under 30 were more than twice as likely to be behind as those with a parent with bachelor’s degree.

Looking more broadly, according to the site Student Loan Hero, the class of 2018 had average debt of $29,800, including both federal and private loans and 14% of their parents had an additional $35,600 in loans. Yes, $5,800 or so a year would help significantly. But then, chances are the academic results would undercut their future ability to pay.

Lower-income students work that much not for a challenge but because financial help isn't enough for most of them. In 1975, a single Pell grant could cover more than two-thirds of average college cost. By 2012, that was down to 27%. Those are the grants intended to help the neediest of students.

The other choice is to take out loans. These young people aren't stupid. They see the statistics of how their fiscal futures are likely to be, depending on the amount of education they receive. They also know in a visceral way how quickly the cost of education outstrips earning power of most families. As Camilo Maldonado wrote here last year, the cost to attend college has grown eight times as fast as wages.

And, again, the amount of loans that students need increases and stays around for decades, as federal figures show in the table below (figures as of the first quarter of 2019).

This is a picture of how student debt becomes a lifelong dour companion for many. (Remember that many parents have taken out loans to finance their children’s educations—something that many younger people who bemoan student loans forget.) This is debt that generally cannot be discharged. Does wholesale student debt forgiveness for everyone make sense? Perhaps, although I think an argument that help should be concentrated among those who need it most has a point. But there is a clear problem and one that a bit more frugality and work on the side aren't necessarily going to solve.