Showing posts with label Levy Economics Institute. Show all posts
Showing posts with label Levy Economics Institute. Show all posts

Friday, October 25, 2019

Education Department official says he will resign and calls for massive student-loan forgiveness: Does he have a good idea?

Mr. A. Wayne Johnson, the Department of Education's "chief strategy and transformation officer," announced his resignation this week and called for massive forgiveness of student-loan debt.

 Johnson, who was appointed to his DOE position by Education Secretary Betsy DeVos, proposes to forgive all federal student loan debt up to $50,000 per student. And he's also calling for a $50,000 tax credit for people who have already repaid their loans.

Senators Bernie Sanders and Elizabeth Warren, both presidential candidates, are also calling for wholesale forgiveness of student loans. Johnson's plan is more generous than Senator Warren's proposal, which puts income caps on student-loan forgiveness. On the other hand, Senator Sanders'  plan is even more generous than Johnson's. Bernie calls for forgiving all student-loan debt--about $1.6 trillion dollars with no income cap. Johnson's proposal would cost taxpayers less--an estimated $925 million.

Is massive student-loan forgiveness a good idea? I think it is. Johnson is right; the student loan program is "fundamentally broken." Even Secretary DeVos compared the program to a looming thunderstorm and admitted last year that only 24 percent of student debtors are paying back both principal and interest on their loans.

Indeed, virtually no one in the government's income-based repayment plans (IBRPs) will pay back their student loans because their monthly payments are not large enough to pay down accumulating interest on borrowers' underlying debt.  About 7.3 million people are in IBRPs, and millions more have defaulted on their loans or have them in deferment.

We know that massive student-loan indebtedness is hindering young people from getting married, having children, and buying homes. Researchers at Bard  College's Levy Economics Institute concluded that student-loan forgiveness would actually stimulate the national economy by freeing up money for student debtors to purchase houses and consumer goods.

Personally, I'm OK with all three student-loan forgiveness proposals: Johnson's, Warren's and Sanders'. Let's face facts; most of these loans will never be paid back.

But I think a better option would be for Congress to remove impediments to discharging student loans in bankruptcy, which it can easily do.  Congress just needs to pass a law that would remove the words "undue hardship" from the 11 U.S.C.  § 523(a) of the Bankruptcy Code.

Amending the Bankruptcy Code would allow federal bankruptcy judges to decide, on a case-by-case basis, which student-loan borrowers are truly insolvent and deserving of relief. These judges have the experience and the authority to weed out fraudulent claims and restrict debt relief to worthy candidates.

Massive student-loan debt relief without regard to individual circumstances would allow all 45 million student-loan borrowers to shake off their student debt--even those who obtained good value from their educational experiences and have the financial means to pay off their loans. I don't think that is good public policy.

Nevertheless, if the choice is between massive student-loan relief and the present system, I'm in favor of the plans put forward by Mr. Johnson, Senator Warren, and Senator Sanders. As I said, most of these loans will never be paid back and forcing millions of distressed student-loan debtors into 20- or 25-year income-based repayment plans just subjects them to a lifetime of stress, anxiety, and needless suffering.

A. Wayne Johnson will resign from Department of Education: Bye-bye, Betsy











Tuesday, February 13, 2018

For the sake of the economy, let's forgive all student-loan debt

Forty-four million people are burdened by student loans--totally about $1.5 trillion in outstanding debt. What would happen if the federal government just forgave all those loans?

Researchers at the Levy Economics Institute of Bard College asked that question, and their answer might surprise you. Forgiving all this debt, they say, would boost the Gross National Product by $86 billion to $108 billion a year over a ten-year period. Released from their student loans, millions of people would see an immediate increase in their disposable income, permitting them to buy homes, save for retirement, purchase consumer goods, and start families.

Moreover, as Eric Levitz pointed out, Congress passed a $1.5 trillion tax cut last year, with most of the benefits going to the wealthy. Wouldn't it have made more sense to have forgiven $1.5 trillion in college loans instead? Most of the benefits would have gone to low-income and middle income Americans--not the rich.

Of course, our government can't simply forgive $1.5 trillion in student loans and continue the federal student loan program. The thing to do, then, is to replace the student-loan program with free undergraduate education at a public college or university.

But wouldn't that be prohibitively expensive? No it wouldn't. As Ryan Cooper argues, the total cost of tuition at public institutions was only $58 billion in 2014.  Our government invests twice that amount each year in the federal student loan program. It would actually be less expensive to American taxpayers if we simply shut down the student loan program and gave everyone a free college education at a public college.

Theoretically, it is true, the federal government is only loaning students money to attend college; it expects to get that money back at interest as students pay off their student loans. But in fact, about half of the nation's outstanding student-loan balance will never be paid back. It's just going down a rat hole for educational experiences that are overpriced and that often don't lead to well-paying jobs.

Of course, forgiving everyone's student loans and providing a free college education would have some major collateral consequences. If Americans could get a free college education at a public institution, they would stop enrolling in private colleges and for-profit schools.  If the federal government actually implemented this plan, small liberal arts institutions all over the United States would close their doors and the for-profit college industry would collapse.

But the private liberal arts colleges will be closing anyway. Harvard professor Clay Christensen predicts that half of them will close within the next 10 to 15 years as Americans figure out that it makes no sense at all to spend $200,000 to get a liberal arts degree from a nondescript college in the upper Midwest.  As for the for-profit schools, they are a cancer and should be closed down anyway.

But, critics might ask, what about the moral hazard of forgiving all that debt? Is it fair to allow people to borrow $100,000 or more to get an MBA and then not pay it back?

First of all, the student borrowers who are suffering the most have been people who borrowed a relatively small amount of money. People who have borrowed the least are most likely to default. It is true that some people whose student loans are forgiven would receive a windfall, but the vast majority of people who would benefit from wholesale student-loan forgiveness would be people who paid too much money for postsecondary education and did not get fair value.

Furthermore, whatever moral taint can be found in student-loan forgiveness is as nothing compared to fraud committed by the for-profit college industry, the exploitation by the student-loan debt collectors, and the venality of university presidents making million-dollar salaries while students are forced to borrow more and more money to pay escalating tuition rates.

And if massive student-loan forgiveness still sticks in the nation's craw, then let's just reform the bankruptcy laws and allow deserving debtors to obtain relief from their student loans in the bankruptcy courts. If the "undue hardship" provision were removed from the Bankruptcy Code, literally millions of Americans would file bankruptcy and get relief.

But the Bard College researchers have gotten to the heart of the matter. We should forgive all student loans and simply allow people to study for free to get an undergraduate education at a public university.



References

Ryan Cooper. The case for erasing every last penny of student debt. The Week, February 8, 2018.

Doug Lederman. Clay Christensen, Doubling Down. Inside Higher Ed, April 28, 2017.

Eric Levitz. We Must Cancel Everyone's Student Debt, for the Economy's Sake. New York, February 9, 2018.

Scott Fullwiler, Stephanie Kelton, Catherine Ruetschlin, and Marshall Steinbaum. The Macroeconomic Effects of Student Debt Cancellation. Levy Economics Institute of Bard College, February 2018.