Photo courtesy of the Wall Street Journal
On August 24, 2022, President Biden announced a student loan forgiveness plan, in which eligible Americans could have up to $20,000 in federal student loan debt forgiven. Those who have received the Pell Grant — a financial aid program issued by the federal government — would have the $20,000 of student loans canceled, while individuals whose annual income is less than $125,000 would have $10,000 in student loans canceled. President Biden stated that the mission of the plan is to provide relief to middle-class loan borrowers, especially those who took out loans, but dropped out of school prior to receiving a degree.
The intention of this mission is admirable, considering that the cost of attending a public college has risen 80% over the past two decades. As such, there will inevitably be millions of students who simply can’t afford higher-level education. However, the current plan promotes the wrong incentives. This policy sets a precedent of cancelling student loan debt, and whether it happens again in the near future or not, prospective students will take out loans in anticipation of future cancellations which may not come.
In order to understand the cause of these misplaced incentives, we must first ask the question — who is funding this project? Expectedly, the answer is taxpayers. According to the Congressional Budget Office, they will end up paying an estimated $400 billion. The taxpayers who fund this ambitious project would want the investment they made towards the lives of today’s young Americans to pay off in the future; taxpayers’s hope is that young Americans settle into community-supporting professions after completing their degrees in college.
However, the government doesn’t incentivize this. In a Brookings report by Adam Looney, a Senior Fellow at the institute, the following are the four least subsidized degrees: BA’s in mechanical, civil, electrical, and chemical engineering. The four most subsidized degrees are certificates in cosmetology, allied health medical assistant services, dental support services, and AA’s in health and medical administrative services.
This disparity means that borrowers have a greater incentive to take out loans to pursue a certificate in cosmetology than to pursue a degree in civil engineering since the percentage of debt forgiven for the cosmetology certificate is 100% while the percentage of debt forgiven for civil engineering is only 1%. Of course, the services that cosmetologists provide are important to the lives of millions; however, their contributions to the nation’s economy aren’t nearly as large as those of chemical engineers, and taxpayers would likely want their dollars to be invested in the degrees for jobs that would give the highest return on investment.
There are two potential solutions to this unintentional misalignment of incentives. The first is to selectively offer student loan relief to the majors that contribute the most to society after graduation. Alternatively, the administration could focus its efforts on solving the root cause of rising costs in attending a four-year public or even private college by placing a cap on tuition, though either will be met with severe pushback. Either way, President Biden’s vision for an America with more affordable education cannot be effectively realized by setting a precedent for student loan forgiveness.
