A recent proposal to cancel all student debt, as if by waving a magic wand, has become a big discussion lately. President Biden has signaled a limit of $10,000 of debt forgiveness, while others are shooting for $50,000 or more. Of course, Senator Bernie Sanders is a proponent of cancelling all debt and making college free! These are all such great ideas to help regular folks get ahead… or are they?
Attached is a study about the real effects of cancelling student debt by Constantine Yannelis, from the University of Chicago Booth School of Business, working with Sylvain Catherine, from the University of Pennsylvania. The conclusion- student debt relief, at least that which isn’t targeted, mostly benefits the elites and not the working folks. It primarily helps the wealthy, the soon to be high earners (think surgeons or executives who accrued large student loan debt from advanced degree programs), and the high earning families of the elites in America.
In fact, the study finds that a student debt forgiveness program that isn’t targeted will provide more than five times the relief to a person in the top decile of earnings as compared to a person in the bottom decile, and provide almost half of all relief to people who represent the top thirty percent of earners. This surely is not the original intent of the proposal.
This is for certain- a student loan relief program will transfer the debt to the taxpayers and there would be distributional effects across society- that’s economist speak for every taxpayer is on the hook.
Calls for various forms of student debt forgiveness will continue. The idea has some merit, but there is an obvious need to devise a plan that targets relief where needed most. Otherwise, this well-meaning idea could become a Trojan Horse that uses politics to tug at the heart strings of middle class and working class folks, while really acting as a scheme to transfer debt from their own families and friends straight to the taxpayers.
Have a read- and let me know what you think!
~ Brian Kasal- The Leadership Matrix
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