Eugenio Magdalena
5 min readDec 15, 2020

--

At first, the popular measure seemed a no brainer to me …

Cancel Student Debt?

… however, I asked myself, who would really be benefited from it?

The easy answer, of course, would be to say that, if the student debt is ‘cancelled’ by the U.S. government, the obvious beneficiaries would be those whose debts are ‘pardoned’ that way.

But the ‘cancelling’ of the U.S. student debt, approximately $1.57 trillion of it, must be financed somehow, as it is not going to magically disappear, no. More likely than not, student debt ‘cancellation’, if ever performed in the U.S., must be financed through a tax increase on all Americans.

Even the Democrat’s Senate Minority, Chuck Schumer, supports the measure, this being traditionally one of the party’s left wing’s-supported flags, although the article attributes his support to the highly popular measure, to him facing an upcoming Senate election.

“Tweeting a hashtag in support of a policy is one thing, but for a right-wing Democrat like Schumer to actually float a plan for Biden to use his power (executive orders) on such an important issue (student debt ‘cancellation’) is admittedly not what I expected.”

In fact, Senator Schumer has partnered with some progressive Democrats to offer some relief to debtors under student loans:

The loudest demands (for ‘cancelling’ student loans) have come from progressive legislators such as Rep. Alexandria Ocasio-Cortez and Rep. Ilhan Omar. Meanwhile, prominent senators such as Elizabeth Warren and Chuck Schumer, are imploring Biden to “cancel” $50,000 in student debt via executive order.”

In Brad Polumbo’s article “The Democrats’ Push to ‘Cancel’ $50k in Student Loan Debt, Completely Ignores the Real Reason College Is So Expensive”. @ Foundation for Economic Education.

Suffice it to say that, to varying extents, student debt ‘cancellation’ is at the top of the Democratic party’s agenda.

But, who is going to really pay for it?

I recently read a couple of articles, pro and against the new U.S. Government of President Biden, approving the ‘cancellation’ of student's debt.

Right-wingers don’t think that ‘cancelling’ student’s loans (since they have to be financed by all Americans — through a tax increase —), would really benefit the underprivileged:

That’s right: Taxpayer-financed student debt relief is actually a regressive policy, which means that it disproportionately benefits the wealthy.”

In Brad Polumbo’s article “The Democrats’ Push to ‘Cancel’ $50k in Student Loan Debt, Completely Ignores the Real Reason College Is So Expensive”. @ Foundation for Economic Education.

The author mentioned above & below, Brad Polumbo, base the logic of his reasoning on the fact that most Americans do not hold a college degree, and of those who do, and recurred to student loans to finance their studies, only 12% (the lowest Quartill, in the graph below) could be classified as coming from a poor household.

A Graph published along with Brad Polumbo’s article “The Democrats’ Push to ‘Cancel’ $50k in Student Loan Debt Completely Ignores the Real Reason College Is So Expensive”. Published @ https://www.schoolinfosystem.org/2020/11/25/the-democrats-push-to-cancel-50k-in-student-loan-debt-completely-ignores-the-real-reason-college-is-so-expensive/

In any case, even if we extend to $52 K (top annual income of the second quartile of households who took student loans), we see that almost 2/3 of the households holding student loans, have more than $52 K of annual income, and more than 1/3, or 34%, have $97 K or more.

* “… it’s overwhelmingly Americans under 40 who are paying off exorbitant educational debts, not the boomers who dominate Congress and were much less likely to have to borrow money to pay for school. The overwhelming majority of members of Congress haven’t experienced these challenges and aren’t part of a generation for which these issues are both pervasive and definitional. And as a result, the biggest problems young people face remain largely unaddressed”

* In Brad Polumbo’s article “The Democrats’ Push to ‘Cancel’ $50k in Student Loan Debt, Completely Ignores the Real Reason College Is So Expensive” Published @ schoolinfosystem.org

The real problem seems to be the exorbitant cost that college education has reached in the U.S., almost simultaneosuly coupled with stagnant, or even decreasing real wages since 1973.

Graph: https://educationdata.org/average-cost-of-college

Really, ‘cancelling’ the student’s debt seems to be then more a political measure, than one driven by social justice.

But, because ‘cancelling’ student debt is so popular among U.S. voters, some sort of partial o total relief measure, is expected to be taken by Biden’s administration.

However, we need to understand that for it to represent a real transfer of wealth benefitting the poorer classes of the U.S., the resulting tax increase must affect ONLY those households with income above $52K, otherwise, as the cited Economist, Brad Polumbo, states in his article mentioned above:

“ (otherwise) It would mean forcing Steve, the landscaper, to pay more in taxes so Jenny, the marketing executive, can have some of her student loans written off.

But the plain ‘cancelling’ of student debt would not resolve the problem going forward. You see, Government intervention (successive Governments over the years), by incentivizing any prospective student to take up ‘bland’, long term credits, with advantageous conditions, increased demand for colleges, which increased admission prices as a result).

All that resulted in an immense amount of student loans, and the exorbitant cost of colleges in the U.S. (which require even higher loans, thus perpetuating the problem).

But student’s debt, while the largest (after mortgages) debt item held by U.S. households, it is not the only debt item American families have to worry about.

Credit card debt, and debt with banks, carmakers or car dealers, and financing companies, from which the households received loans to purchase new and used cars, were and are similarly encouraged by successive U.S. Governments (by keeping interest rates low, very low), as consumer spending is essential to economic growth.

However, stagnant wages forced the U.S. consumer to resort to cheap loans, offered everywhere, and facilitated, as we said, by successive American governments.

So, are we going to see similar (to student debt) ‘cancellation’ of those debts too, in the future?

Are then, the resulting huge tax increases inevitable?

--

--

Eugenio Magdalena

Eugenio is a disabled Economist (UCAB, Caracas), cursed a post-graduate Diploma in Marketing (Strathclyde University, Scotland, UK), and an MBA (England, UK).