Is Student Loan Debt Forgiveness a Good Idea?

Daniel Lin,

Release Date
March 8, 2013



Student loan debt has reached an all-time high, putting a heavy burden on many recent graduates. This has led some to propose and support student debt forgiveness as a way to alleviate the problem. Professor Daniel Lin argues that forgiving student loans would do little to address student debt in any meaningful way. Student debt forgiveness:
–          Would provide only a temporary solution to help currently indebted students
–          Would not address the underlying problem
–          Would not prevent future debt problems
–          Would not reduce pressure for rising tuitions
–          Would benefit one of the more privileged groups in the country
–          Would only add to the already enormous national debt
Professor Lin suggests that instead of forgiving student debt, student loans should be dischargeable in bankruptcy. This would encourage lenders to be more careful about the recipients of student loans, causing interest rates to rise and fewer loans to be given out. While these may sound like bad things for borrowers, such outcomes would actually provide important incentives to students. Students would be encouraged to consider how they will repay their loans before they amass more debt than they can handle. As an added benefit, such reforms would also put greater pressure on colleges to control their costs. Making student loans dischargeable in bankruptcy would actually address the fundamental causes of student debt and rising tuition costs.

1. Drowning in Debt: The Emerging Student Loan Crisis[article]: Kevin Carrey dissects the current student loan crisis, discussing its impact on students and the education sector as a whole
2. The Student Loan Crisis(video): This FEESeminars videos explains the underlying factors of the current debt crisis
3. Bankruptcy, Not Forgiveness, for Student Loans [article]: An Inside Higher Ed piece arguing that bankruptcy, not forgiveness, creates the proper incentives for fiscal prudence
4. Dude, Where’s my Student Loan Bailout?[article]: This Forbes article breaks apart the state of the student loan crisis, citing important data about how the administration is handling it 
5. Household Debt and Credit: Student Debt[report]: Donghoon Lee of the New York Federal Reserve Bank reports some key figures on student loans, delinquency

Is Student Loan Debt Forgiveness a Good Idea?

FEMALE 1: Going to college has become part of, like, a necessity for everyone, that the government should be able to pay their part in order for everyone to be able to go.
FEMALE 2: The idea of taxpayers, sort of, forgiving the debt is a good one in principle, but in practice I’m not really sure how they’d carry that out.
PROFESSOR DANIEL LIN: Student loan debt has reached an all-time high, placing a great strain on many young graduates. This has led some to propose debt forgiveness as a way to help the needy. Would debt forgiveness achieve this goal?
I’d say no, for two reasons. First of all it would only be a temporary solution to help currently indebted students. It wouldn’t change what got those students into debt in the first place. It wouldn’t prevent future students from taking on even more debt. And it wouldn’t reduce the pressures causing tuitions to rise. Second, forgiving the debt doesn’t magically make it go away: the government, meaning taxpayers, would be forced to pay it. With our enormous national debt, that’s pretty hard to justify, especially since college graduates, on the whole, are one of the more privileged groups in the country.
After all, college graduates have higher wages and a lower unemployment rate than the national average. Plus, they have already benefited from government subsidies in the form of grants, tax credits, subsidized tuition, and subsidized loans. Forgiving the debt of college graduates would be giving money to a group that’s already relatively well off.
Of course, many college graduates are still struggling to find jobs and pay back their loans. But instead of debt forgiveness there’s another reform that would give relief to those carrying large amounts of student debt. Under current law, all student loans, public and private, are nondischargeable. This means that unlike all other types of loans, borrowers cannot get rid of their student debt through bankruptcy. The government will get it back by taking your tax refund, denying federal benefits, and garnishing your paycheck.
This makes lenders less careful about who receives student loans. There are no credit checks, no underwriting, and no collateral, as there would be for virtually any other loan-approval process. Students are offered loans even if they use the funds for a degree with little market value. Why be choosey if a loan is guaranteed?
One way to fix this is by allowing student loans to be discharged in bankruptcy. Lenders could no longer use the government as a collection agency. Bad loans would become a problem for the lenders, who would then have better incentives to be careful with their loans. This would lead to fewer loans or loans with higher interest rates. This may sound bad for borrowers, but it’d be important for giving borrowers the right incentives as well. Instead of taking on debt before thinking through the repercussions, they’d have to have a plan for paying them back.
Finally, with fewer loans being given out, colleges would have less fuel for tuition increases and feel greater pressure to control their costs. Student debt forgiveness may be a tempting idea, but it would just shift the burden onto taxpayers while doing nothing to address the fundamental causes of tuition increases and mounting student debt. Making student debt dischargeable in bankruptcy is a good first step toward reform that would better address the concerns of students both now and in the future.