Political hot potato Political hot potato http://www.federatedinvestors.com/static/images/fhi/fed-hermes-logo-amp.png http://www.federatedinvestors.com/daf\images\insights\article\graduation-caps-small.jpg August 12 2022 August 9 2022

Political hot potato

What will the White House do with student debt?

Published August 9 2022
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With the midterm elections now less than three months away, student loan debt could be a ticking time bomb. Some 45 million borrowers have amassed a total of $1.6 trillion in federal student loan debt (95% of the total student-loan debt outstanding), with an average federal debt per borrower of about $36,500. The U.S. population totals nearly 333 million, so roughly one out of seven people (13.5%) is impacted by this issue. The political implications are enormous. 

The pause that refreshes The federal government has paused student loan repayments seven times since the start of the pandemic in March 2020—most recently until Aug. 31—at a cost to the government of about $115 billion. Student loan servicing contractors have been instructed not to send any billing statements to borrowers ahead of the Aug. 31 deadline for ending the pandemic freeze on loan payments. From a political standpoint, it seems unlikely the Biden administration will resume requiring loan repayments less than three months before the November midterm elections. 

So what’s the plan? The administration would like to forgive $10,000 in student loans on a means-tested basis, perhaps excluding individuals who earn more than $125,000-150,000 annually (or $250,000-300,000 for couples filing jointly). According to the Federal Reserve Bank of New York, such forgiveness would total $321 billion for 14 million borrowers, leaving 69% of debtors with remaining balances. 

But Sen. Elizabeth Warren (D-Mass.) and Sen. Majority Leader Chuck Schumer (D-N.Y.) have urged President Biden to embrace a bolder plan that forgives as much as $50,000 per borrower, helping to provide financial relief for millions more. The president has been reluctant to extend his plan—or to consider universal student debt forgiveness—and is particularly wary of canceling debt for wealthy students attending elite private universities. According to the Brookings Institution, the wealthiest 20% of households disproportionately owe nearly a third of all student debt, while the bottom 20% owes only 8%. 

Despite the high cost, education pays off Yet, education still is the best investment a person can make in themselves to craft a successful career. According to the Wall Street Journal, the average student loan borrower with only some college education still gained a lifetime earnings increase 10 times the average debt level incurred. The ratio increases substantially from there. A borrower with a bachelor’s degree earns an average of 40 times as much, a master’s degree 53 times, a doctorate 80 times, and a law or medical degree nearly 100 times. It’s not a slam dunk, of course. A Temple University study shows that 40% of full-time undergraduates did not complete a degree within six years, despite accumulating student-loan debt they now might not have the financial resources to repay. 

In addition, the pandemic has taken a toll on college undergraduate enrollment, which has declined by more than a million students since 2020. Compared to last year, undergraduate programs in 2022 have lost 465,300 total students, or 3.1% of total enrollment. Since the pandemic started, overall college undergraduate enrollment has declined nearly 7%.

Will debt forgiveness further stoke inflation? With nominal CPI inflation already soaring at a 41-year high of 9.1% year-over-year through June 2022, Biden must weigh his policy options carefully. Even if he opts for the more modest loan-forgiveness plan of $321 billion, that will provide purchasing power equivalent to 1.6% of the second quarter’s GDP of $19.7 trillion. The more aggressive $1.7 trillion universal loan-forgiveness option equates to 8.6% of GDP. That’s reminiscent of his $1.9 trillion American Relief Plan passed in March 2021, which critics believe contributed significantly to the current spike in inflation. 

The Biden administration has said fighting inflation is its top priority right now, and that messaging could get muddled going into the midterms with an executive order that provides blanket debt forgiveness.

Moral hazards abound Many Progressive Democrats believe that debt forgiveness will be a winning policy strategy to help motivate younger, lower-income and minority voters going into the midterm elections. But what about those voters who already paid off their student loans, chose not to take on any debt or decided not to attend college at all? What about those industrious students who attended free community college for two years, finished their degrees at less expensive public colleges, lived at home to save money and worked while attending school to stay out of debt? How is it fair that, not only are these people not getting any financial benefit, but they also might eventually have to pay higher taxes to bail out those whose loans are being forgiven? What of the contractual obligation of student-loan borrowers to pay off their loans? Moral dilemmas abound, with many valid points. 

Will voter demographics decide this argument? There are another 97 million Americans over the age of 25 who have paid off their student loans and another 82 million people who never attended college. Combined, that’s 179 million voters who may potentially see this issue through a different political lens. 

Is it legal? According to Charlie Rose, who served as the top lawyer in the Education Department under President Obama from 2009 to 2011, if the administration uses executive action to cancel student-loan debts, the plan is at risk of being overturned in court. 

A better alternative for voters may be an expansion of the Public Service Loan Forgiveness Program, where graduates serve in the military, practice medicine for Medicaid patients or teach in rural areas, for example, in exchange for having debt gradually reduced. Debtors essentially trade a public service—their time and skills—for the monetary forgiveness they desire. 

Expanding apprenticeships Collegiate education is not the only path for a satisfying and lucrative career. Apprenticeships are another way for individuals to receive valuable job skills without sustaining crushing college debt. The Industry Recognized Apprenticeship Programs, initiated in March 2017, created 130 new apprenticeships in well-compensated, high-demand fields with worker shortages, such as nursing, technology, carpentry, plumbing and electrical work.

Research assistance provided by Federated Hermes summer intern Julian Oliveros. 

Tags Markets/Economy . Politics . Equity . Fiscal Policy .
DISCLOSURES

Views are as of the date above and are subject to change based on market conditions and other factors. These views should not be construed as a recommendation for any specific security or sector.

Consumer Price Index (CPI): A measure of inflation at the retail level.

Gross Domestic Product (GDP) is a broad measure of the economy that measures the retail value of goods and services produced in a country.

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