A Democratic Economist’s Case Against Biden’s Student-Loan Plan

Jason Furman, a former Obama economic adviser, thinks Biden’s debt-relief plan helps too many of the wrong people.

Illustration showing a black-and-white picture of Jason Furman, a black-and-white picture of a person wearing a graduation cap, and yellow rectangles.
Drew Angerer / Bloomberg / Getty; The Atlantic

This week, President Joe Biden announced debt relief for as many as 43 million Americans with government-issued student loans. The government is erasing up to $20,000 in debt for Pell Grant recipients earning less than $125,000 a year, and up to $10,000 for individuals who did not receive Pell Grants. In addition, the White House is planning to cap monthly payments for undergraduate loans at 5 percent of a borrower’s discretionary income and forgive the balance after a decade. The move, by various estimates, will cost the government $300 billion to $500 billion.

Biden first committed to student-loan forgiveness during the 2020 presidential race. His announcement on Wednesday was met with relief and joy among borrowers, as well as exasperation from individuals who have already paid off their student loans. It has also caused angst among some policy experts—not all of whom are on the right.

One of the most prominent voices criticizing the move is Jason Furman, a Harvard economist who chaired the Council of Economic Advisers during President Barack Obama’s second term. Furman argues that Biden’s plan will lavish relief on individuals with high incomes or the prospect of high incomes, encouraging universities and colleges to jack up tuition rates and burdening future students with heavier loan burdens. He also worries about people who did not take out student loans—meaning most Americans—ultimately paying for the plan. I spoke with him by phone this week, and our conversation has been condensed and lightly edited for clarity.

Annie Lowrey: Joe Biden has just erased the student-loan debt of roughly 20 million people, and decreased monthly payments by an average of $250 for borrowers who will still have a balance on their loans. You’ve criticized the move, but can you give me your best case for it?

Jason Furman: The college-financing system has a lot of problems. We need to make a lot of reforms to it. Could I see a case for some form of debt relief for lower-income people? Maybe, but with a much lower income limit than the Biden administration has chosen.

Lowrey: With that, let’s hear the case against it.

Furman: With any public policy, you need to analyze the trade-offs. You can’t just say, “This person gets this, and therefore it’s good.” It’s always better for someone to get something rather than nothing. But that’s not how it works.

If you’re giving $500 billion to one group, where’s that money coming from? One possibility is that the economy grows much more quickly, and so spending that money doesn’t hurt anyone. I think that’s extremely unlikely, given the highly constrained state we are in. And so I think most of that $500 billion that one group is getting is coming at the expense of everyone else.

That doesn’t make it a bad idea. If we were covering a Medicaid-coverage gap, I’d say, “You know what? If everyone has to pay $50 more and poor people get health insurance and the inflation rate is a tenth of a percentage point higher, I’m all for that.” But we’re giving couples making up to $250,000, which is a lot of money, up to $40,000.

Lowrey: So one concern is that this is not targeted toward people who really need help.

Furman: Then, there’s the expectation that debt relief will happen again. That will lead to shifts in the college-financing system, toward loans and away from grants. It will also raise college tuition, as colleges move to capture some of this spending. Our goal should be getting more people into college. It is not obvious that Biden’s plan helps with that goal. It might even hurt that goal.

Finally, I’m uncomfortable with this level of presidential power. You know, President Trump was being pushed by some of his advisers to index capital-gains tax rates to inflation, and do it by executive order. He ultimately resisted. I think the indexation of capital gains is a much worse policy than this one. And it’s possible the legal grounds were weaker. But he actually said, No. I’m not going to just change tax law by myself without checking with Congress. I think that’s a good rule to live by, and one we’ve mostly had up until now.

Lowrey: This is the Biden administration forgiving debt by keystroke, without raising taxes. So how is the burden of that falling on everyone but the borrowers? Why is that problematic?

Furman: One group is getting $500 billion. And they’re going to spend more. They’re going to buy more housing. They’re going to be better off. The problem is that the economy is already producing the most it possibly can. If anything, the Fed wants it to produce less, not more. What will happen is that they will spend more and it will drive up the price of houses and everything else. Due to that inflation, every household will end up spending $200 more a year on what they need.

There isn’t free money out there. There are consequences. Once you frame it as 320 million people paying for a benefit for 30 million people, it makes you think a lot harder. You’re giving a benefit to someone making $200,000 a year. How important is it to give them relief?

Lowrey: You said one of your concerns is that universities will increase tuition, with the expectation that there’ll be more debt forgiveness in the future. But there’s an argument that this might actually create more pressure to fix the underlying system of financing.

Furman: We don’t control what universities do. They make their own choices, subject to incentives. The incentive of a diploma mill is to tell people, “Hey, you know what, it’s going to cost $10,000—but don’t worry, Biden’s going to do it again next year.”

Lowrey: Let’s go back to the distributional consequences. Surely most people who finish college or a two-year degree set themselves on a higher-earnings trajectory. But a lot of people aren’t finding themselves on an upward trajectory, given the pressure on wages in the past decade. And a lot of young people have concerns about taking on debt, given the rising cost pressures everywhere else in the economy.

Furman: I’d go back to the income limits here. If you’re a 24-year-old who makes $125,000 a year, you’re probably going to be okay in life. Even if what you just said was true, that’s an argument for a different plan, not for this plan. Make the limit $62,500 for a single person and $125,000 for a married couple.

I do think there’s evidence the college premium stopped rising. I haven’t seen any evidence that it has fallen. For the median person who goes to college, they are getting an incredible return on their debt. They’re borrowing $30,000. But their lifetime earnings go up $500,000. You just don’t need to do something for them to get relief to people for whom debt is a problem.

Lowrey: What about the Black–white wealth and income dynamics? As you know, Black students are more likely to have loans, and their loans tend to be larger. And Black students are much, much less likely to come from family wealth.

Furman: You also need to understand what this does to the wealth of the people who are ending up paying for it. They are disproportionately going to be Black, because a higher fraction of them have not attended college.

Lowrey: Would something based on the familial wealth of a higher-ed student be better? It would be very hard to do. But you could imagine steering relief toward the kids who did not have parents who could help them with school.

Furman: I’m not sure I agree with that. If somebody at age 30 is graduating from law school and is making $125,000 a year in their first job out there—even if they originally went to college on a Pell Grant—that’s someone who’s in a good position to pay their debt back. I’m worried about the 20 percent of students who are in a bad position. I don’t think you have to worry about the 80 percent.

Lowrey: Say you were tasked by the president with spending, say, $200 billion on student-debt relief. How would you have done it?

Furman: I really don’t like the premise of that question. But I would have had much lower income limits. And I would have designed it in a way that didn’t spend all the money.

Lowrey: How worried are you about the inflationary consequences? We’ve had a pause on student-loan repayments. So is this really going to stoke a lot of new inflation?

Furman: The plan is a $500 billion plan. I think the multiplier on it is less than 0.1—so for every dollar you spend, you are getting a dime in economic activity or less. People aren’t going to go out and spend $500 billion immediately. But even with that small multiplier, if you apply it to this huge initiative, you get about 0.2 or 0.3 percentage points of inflation. Some people could say that’s a small number. A rounding error. But for a typical family, you’re going to pay an additional $100 or $200 a year for everything you buy.

Lowrey: We haven’t talked about the emotional part of this, the human-welfare part. People hate having student loans. They hate having to pay a second mortgage, even if they know it might be working out for them on paper.

Furman: People hate college debt more than they hate other types of debt. It’s not 100 percent obvious to me why. We’re not talking about forgiving car debt or mortgage debt. I do think shifting to a world with more grants, or an Australian-type system—where they collect the [student-loan payment] on your tax return, and if your income is too low, they just don’t collect it—would be better. You barely have to think about it. That would be a really good system, and it would be great to do something like that.

I will say, of all the policy issues I’ve ever discussed, the level of vitriol directed against anyone who disagrees [with the debt-relief plan] is incredibly high. There is something that is so emotive for people. It has made it harder for analytic people to enter the conversation. And I think the odds of bad unintended consequences, imposed on people paying for the policy now or imposed on students in the future, have gone up a lot.