Personal Finance

More Analysis In The Debate To Forgive Student Loans

Brookings non-resident senior fellow Adam Looney, also a professor of finance at the University of Utah and executive director of the Marriner S. Eccles Institute for Economics and Quantitative Analysis, weighed in in mid-January and again today, in response to reader questions, about student loan forgiveness.

In the first piece, Looney argued that “usual measures of financial wealth, however, is a misleading indicator of the economic status of student loan borrowers.” For example, someone who went to medical school is likely in debt to the tune of $200,000 to $250,000. Having an M.D. after your name means a heftier income after school and for years in the future. Even people with a bachelor’s degree will on the whole earn more than someone without one, as he notes in the second piece:

People invest in a college, graduate, or professional degree because it helps them earn more, avoid unemployment, and enjoy a higher quality of life. For young Americans aged 25-34, the increase in pay a college graduate earns compared to someone without a degree is at an all-time high (as I discuss more below).

Indeed, the value of postsecondary degrees in the labor market is a key reason why Americans line up at good-quality colleges. Harvard collects roughly $1.9 billion each year in tuition, mostly from high-income families. Those parents could have passed along that money to their kids, but instead, they bought something many times more valuable.

A car is an expensive purchase, but one people make for the ability to travel, including to and from a job. There is interest to pay on top of the principal, but millions do so without suggesting that they should be relieved of the expense.

Are there people put into a tough position because, perhaps, they need a car but don’t make enough for payments on something relatively new and reliable? Absolutely. The same is true with student debt.

The problem with many of the analyses—and Looney seems to make the same point in a different way—is that they focus on average or median experiences—a general look at how debt and economic future affect some representative person and their experiences.

I took that into account in my analysis by grouping individuals based not only by race and educational attainment, but also by income: some college students (or high school graduates or professional degree recipients) have lower-than-average-income careers, and some higher. As a result, some individuals are assumed to have gotten very little from their college careers (other than debt), but others gained a lot. (Indeed, the highest income high school graduates earn more than some of the lowest-earning better-educated groups.) But, on average, most individuals with a college or graduate degree earn much more than individuals without a college degree. College graduates are high in the income and wealth distribution, and so are student loan borrowers.

Appealing toward such generalizations through the focus on a mean or median is crude and mathematically inaccurate. The Bureau of Labor Statistics data on physician and surgeon incomes shows median wages of $208,000 per year. But average wages for pediatricians are $184,570, while that of anesthesiologists is $272,1440. Quite the spread, depending on seniority, type of practice, and geographic area.

Then look at the income of many with a Ph.D. who, enticed into joining the ranks of academia, only to learn of the adjunct’s dreary existence and abysmal pay, no matter how many degrees they’ve accumulated and at what cost.

Furthermore, Looney notes that not all colleges are the same and “many more lower income students and nontraditional students are attending college without the same resources as ‘traditional’ students.”

Which really is the main point. To eliminate all student debt, when most of it is held by people from better-off families because it is exactly those people who have dominated college attendance, would be an enormous upward wealth transfer. In that sense, it is similar to the traditional income tax deductions for owning a home, in which most of the benefit went to the wealthiest because relative few people are able to get an advantage from itemizing their deductions.

As Looney put it, “Forgiving all student debt would be a transfer larger than the amounts the nation has spent over the past 20 years on unemployment insurance, the Earned Income Tax Credit, or food stamps.” And the bulk of the benefit would go to those with higher incomes, who also happen to be whiter, than these other programs.

There isn’t an easy answer, including “eliminate all student debt,” when the result is more of the socioeconomic same. Argue perhaps for more targeted programs that really help people who need it. Public policy is complicated and, as the country has seen time and again, it’s all too easy to reap unexpected consequences.

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