By: David James

In 2012, internal polling alerted the Obama campaign to a modest threat: Romney’s selection of Paul Ryan was peeling off disaffected young voters who found Ryan’s commitment to budget reform reassuring—after all, young voters would one day shoulder the country’s remarkable debt.

The longer the young delay in disciplining the country’s finances, they harsher the future they face in decades of slow growth, crushing taxes, and pared-down public services.

Rather than address the issue at hand, the administration expediently promised another layer to the problem. Obama revealed an attractive student-loan program to cap the amount students repay to 10% of their income, previously 15%.  After 20 years the remaining debt is paid by a generous taxpayer.

I wonder if students realized they would likely be that taxpayer. If this political decoy succeeded, it suggests the degrees for which students are indebted did  little to improve their thinking.

For what it’s worth, economists are not keen to forgive student debt, for a number of reasons.

First, it’s regressive. It’s a government subsidy for the upper-middle class paid by the natural distribution of tax payers. It makes no sense.

Second, it exacerbates inflation in higher education. Subsidies for college are driving prices up in higher education (Columbia’s Leslie Turner has a great paper here describing how federal payments simply drive up college prices for everyone).

Third, debt forgiveness is “windfall”: Many, apparently without thinking, have argued that debt forgiveness encourages education among beneficiaries.  However, retroactive forgiveness offers no incentive–it rewards only those who pursued education with or without incentives.


Fourth, there may be an education bubble: Peter Thiel, who predicted the two most recent bubbles, argues that higher education is a bubble–people are paying in excess of education’s value.

Education is a bubble in a classic sense. To call something a bubble, it must be overpriced and there must be an intense belief in it. 

…People are not getting their money’s worth, objectively, when you do the math. And at the same time it is something that is incredibly intensively believed; there’s this sort of psycho-social component to people taking on these enormous debts when they go to college simply because that’s what everybody’s doing.”

If this is a bubble and government invests in it, it only makes things worse—the 2008 Financial Crisis had much of this element.

Fifth, many degrees provide no value: Economists are increasingly skeptical of higher education. Some universities appear to provide no value, and more commonly, many degrees appear to endow their graduates with worse outcomes, primarily in the humanities.

In particular, the humanities have become a hive of bad thought. Once, the humanities taught classics, epistemology, and civilization. They have since shed these useful features in favor of social “justice”, a euphemism that obscures the core doctrine. Now, they teach little more than how to nurse grievances and perceive offenses where none is intended.


Moreover, expensive private colleges appear to be no better than state schools. Alan Krueger (Obama’s chairman of the Council of Economic Advisers) has a neat paper following people admitted Princeton, who didn’t go.  What’s fascinating is they are no worse off.  Those attending a state school earn as much as those who attend Princeton. (here) The results suggest that most differences between different college outcomes are due to selection effects rather than the impact of a particular school.

And more recent work by economists at Yale, Northwestern, and Chicago shows that there is a large effect for high achieving students (18% return per year).  These effects for low-achieving students induced to college attendance are small (2%) which is smaller than the effect of work experience.  Certainly once you include the expense of college and the opportunity cost of earning money, there’s little argument left that everyone should attend a four-year university.  (here)

Sixth, prices help the right people sort in and out of higher education: People make wiser decisions regarding their education when they bear the cost.  This encourages those who expect lower returns to education to opt out and those with higher returns to education to opt in, which is socially optimal.

Seventh, there’s no economic stimulus in debt forgiveness: Some in the Occupy movement argued that debt forgiveness would have a “tremendous” “stimulative” effect.  Economist Justin Wolfers explains why this is not the case:

“If you want stimulus, you get more bang-for-your-buck if you give extra dollars to folks who are most likely to spend each dollar. Imagine what would happen if you forgave $50,000 in debt. How much of that would get spent in the next month or year? Probably just a couple of grand (if that). Much of it would go into the bank. But give $1,000 to each of 50 poor people, and nearly all of it will get spent, yielding a larger stimulus.” (here)

In the end, debt forgiveness, like many things, is a political narcotic: A gift for no public purpose but the garnering of needed support, an intrinsic problem of accumulated promises which plague modern democracies.