Evan Vucci/AP Photo
American University student Magnolia Mead puts up posters near the White House promoting student loan debt forgiveness, April 29, 2022, in Washington.
President Biden says he will announce a decision on whether and how to cancel federal student debt, and how much to cancel, in the “next couple of weeks.” During the 2020 presidential campaign, he promised “at least” $10,000 in debt forgiveness per borrower, and reports indicate that’s the range he’s looking at now; he has ruled out canceling $50,000 or more.
There are also indications that this forgiveness will be means-tested, with an ineligibility threshold between $125,000 and $150,000 for individuals and $250,000 to $300,000 for couples. New college graduates generally don’t make that kind of money, and nor do the 40 percent of student debt holders who dropped out of college. But all of them will have to navigate the often punishing bureaucracy of confirming their earnings level. It means a massive headache for millions to cut out a minuscule proportion of borrowers. And if the history of means testing in America is any guide, bureaucratic snarls will prevent vulnerable populations from receiving relief to which they are entitled.
Presumably, the White House is desperate to avoid headlines about “undeserving” borrowers of means who are getting a free ride on higher ed from the government. This is the typical talking point expressed by Republicans: that rich, educated elites are being bailed out.
The first thing to say about this is that it’s wrong. The percentage of all university students taking student loans is quite a bit lower on the wealth scale than the percentage of all university students; kids born to rich families just pay for college. Even if richer families do take out loans, they pay them off more quickly. Even a $10,000 forgiveness would reduce the share of those with student debt in the lowest 20 percent of wealth holders by one-third; it would not reduce the share of debt holders in the upper 10 percent of the wealth scale at all.
This finding, from a recent letter from researchers at Princeton and the University of California, Merced, grows more dramatic as more debt is forgiven. The same authors wrote last year that the idea that higher-income borrowers receive twice as much benefit from forgiveness is a myth, because it doesn’t account for wealth and often combines federal and private student loans (only federal loans are eligible for cancellation through executive action, and private loans are disproportionately held by higher-income borrowers).
Perhaps more important, trying to sidestep the “undeserving” narrative with an income test won’t work, because it doesn’t account for family income. Remember that in attempting to dismiss the idea of tuition-free college, Hillary Clinton stated that “I don’t think taxpayers should be paying to send Donald Trump’s kids to college.” This will be the same argument made to disqualify student debt relief recipients whose parents happen to fall above whatever income scale is deemed appropriate. If a debt holder with well-off parents gets relief, it will stand in for the whole program, which will be framed as a giveaway to the wealthy.
Once you start down the road of trying to differentiate between deserving and undeserving recipients, you can’t win.
If it’s not parents, it’ll be a rich uncle, or a grandparent, or some other familial relation. Or the conversation will move to lifetime income, and future prospects of wealth for borrowers getting their debt canceled. In other words, once you start down the road of trying to differentiate between deserving and undeserving recipients, you can’t win. You’re playing on the other team’s field.
This is absurd enough when the demarcation line on the means test cuts out a large subsection of borrowers. But even the White House admits that a student debt forgiveness threshold of $150,000 for individuals will cut out almost nobody. The main practical effect will be the government hurriedly building out another janky system for everyone with student debt to verify their income.
That’s because there is no free exchange of information between the Department of Education and the Internal Revenue Service. Right now, if you want to apply for student financial aid, you have to supply federal tax information yourself, even though you’re just giving one federal agency the information generated by another federal agency. Without a statutory change, the system cannot be automated.
Worse, a substantial number of Americans file no tax returns, because they do not make enough above the standard deduction to have any federal tax liability. It’s unclear how many of those people might have student debt, but there are certainly situations with college dropouts making little money, or borrowers with under-the-table income that isn’t reported, or students with one loan due while they pursue postgraduate education, or people who have lost their job and are long-term unemployed, who might fall into this category. Those people now have to figure out some way to verify their annual income to get debt cancellation.
This is precisely the issue people faced with Biden’s expansion of the Child Tax Credit. The IRS created what, after a couple of missteps, became a decent portal for non-filers to file a return and become eligible for the CTC. But that pop-up portal went away when the enhanced CTC expired. Some other solution would have to be fashioned, and with student debt forgiveness being done through executive action, Congress is unlikely to be able to take that up.
So you have a host of non-filers who will have to scramble to verify income. And others will have to upload forms, slog through a not-so-user-friendly series of federal websites, and hopefully make their way to the other side. As I’ve said before, this serves as a tax on a citizen’s free time, putting the bureaucratic responsibility in the hands of the individual rather than the government. As Cory Doctorow writes, “It’s a way to turn users of universal programs into ‘burdens on society’ instead of participants in it.”
Mechanisms for means-tested programs are almost by definition more expensive to provide than for universal programs. Benefits like the food stamp program require ten separate documents to verify assets, for example. It’s also just without question that some people will find this too burdensome or get trapped in some snafu, and lose out on debt forgiveness, and those people are likely to be the ones who badly need relief. The hurdles put up to ensure only the “right” people get relief ultimately hurt the most vulnerable people.
Once again, this particular means test will weed out almost nobody. It adds this layer of bureaucracy purely for political optics. Indeed, means tests in actuality are just taxes placed at the benefit administration level rather than after the fact. You could “means-test” by simply increasing progressive taxation on income or wealth annually. Or you could do it by restricting benefits, which is burdensome, costly, and ultimately catches eligible beneficiaries in a net. The White House knows this is wrong, which is why they’re trying to improve benefit delivery systems across the government, even as they threaten to add another pointless income test to the suite of federal programs.
There’s the other question of how much individual relief to offer. About one-third of all borrowers would see their student loans fully canceled if $10,000 was offered. Going up to $20,000 would raise that to total cancellation for half of all borrowers, and $50,000 would extinguish debt for three-quarters.
It’s also completely unclear how enrollees in income-based repayment, who pay based on earned income and get the balance forgiven after a certain period, will fare with a $10,000 debt cancellation. Will their income-based repayment numbers go down at all, or will they simply have a lower balance that gets forgiven after the end of the IBR period anyway?
There aren’t solid answers to these questions. Trying to constrain and tweak and perfect student loan forgiveness so everyone who gets it is a saint and everyone who doesn’t is a sinner shows an unrealistic faith in means testing to make such determinations, not to mention the capacity of the threadbare American state. Ultimately, means testing denies relief to the deserving, and doesn’t necessarily shut out the “undeserving,” by whatever shifting definition of the word. It just erects the architecture that makes people hate the federal government, and makes relief programs more likely to be disfavored by the public.
We have a severe problem with how we finance higher education. If the program that tries to finally spur the political class to action on fixing it ends up a failure, the problem will just metastasize. Those are the stakes for getting student debt relief wrong. And means testing is a perfect way to do that.
