The big dream for many student loan borrowers is that the 2020 election leads to their student debt being forgiven. With Elizabeth Warren and Bernie Sanders both supporting versions of massive student loan cancellation, it is hard not to get excited. Unfortunately, there is a major obstacle that would prevent either candidate from forgiving the student debt, even if they were elected.
The President of the United States can make significant changes to student loans, but the high cost of college for current and future students will make canceling student debt for existing borrowers nearly impossible.
While these issues might seem like separate problems to resolve, it would be nearly impossible to forgive student debt without first making major changes to the cost of higher education.
Handling the Cost of College Before Forgiveness
It isn’t a coincidence that both plans call for free public college in addition to debt cancellation.
Not only is a form of free college an essential part of debt forgiveness, but it has to come first or at the same time.
The reason behind this timing is fairly simple. If massive amounts of student loans are forgiven without doing anything to address the cost of college, it will create a moral hazard.
A moral hazard may sound like an ethical issue, but it is an economics term. A moral hazard occurs when someone has an incentive to take risks that others will have to pay for.
If student loans are forgiven for existing borrowers, current and future students will expect that their loans will also eventually be forgiven. This will cause increased borrowing and could cause the price of college to escalate even more than it normally would.
If cancellation came without free public college, the student debt crisis wouldn’t be fixed. It would be temporarily repaired, with a new and worse crisis on the way.
Why Does Free Public College Matter?
The significance of free public college is that it draws a line in the sand.
All future students would have the option of a free public education. Students given this opportunity couldn’t reasonably expect that their student loans should be forgiven as well.
Further, by providing all Americans access to a free four-year degree, the federal government could get out of undergraduate lending entirely. The free public option would also likely drive down the price of expensive private schools forced to compete with the state schools.
In other words, free college eliminates the moral hazard of student loan cancellation.
The Connection Between Free College and Debt Forgiveness is a Problem for Borrowers
Creating a higher education system with free public college will be far more difficult than forgiving student loans.
For starters, coming up with a funding structure that will work for the federal government, the states, and public schools will be incredibly difficult.
Secondly, funding such a program would be extremely expensive and provide little immediate benefit. Investing in higher education is a long-term investment.
Finally, creating a free public college option will require legislation getting through Congress. Many Democrats are opposed to free college at the moment, so it would be a very difficult sell.
By comparison, student loan cancellation could be more simple. The government could instruct borrowers to stop making payments on their student loans. The cost would be expensive, but it wouldn’t have to be paid in full at the beginning. The government is currently owed over a trillion dollars in student loans, but only a small fraction of this debt is paid back each year. One-time forgiveness wouldn’t be a huge one-time cost. Additionally, student debt cancellation would provide an immediate boost to the economy.
There is also some debate about whether or not a president could cancel all federal student loans without help from Congress.
To be clear, forgiving all student loans would be an unlikely event and difficult for any president to accomplish. However, free public education would arguably be more difficult.
The Debate Moving Forward
Student loan borrowers advocating for debt cancellation should be among the loudest voices shouting for free college.
It is hard to see a path to debt forgiveness without free public college happening first or at the same time. If a free four-year degree doesn’t become a reality, student loan plans like the one proposed by Joe Biden might be the best-case scenario for borrowers.