Larry Summers is “skeptical” about general loan cancellation being discussed amid President-elect Joe Biden’s transition to office, arguing that debt forgiveness would benefit the rich and not the poor.
“I'd be rather skeptical of across-the-board, massive student debt reduction programs because I think many of those programs would benefit the well-off who made an investment in themselves, [and who] are earning a high return on that investment,” the former Treasury Secretary (1999-2001) and director of the National Economic Council during President Obama’s first term told Yahoo Finance Live (video above).
“I'm more worried about the Americans who don't go to college than the Americans who do,” Summers added. “So I worry that, unless it's done carefully, this could be upwards redistribution of income, rather than downwards redistribution of income.”
Marshall Steinbaum, a senior fellow at the Jain Family Institute, told Yahoo Finance that Summers’ view on debt cancellation lacked the nuance needed to solve the problem.
“Larry Summers doesn't understand the economics of student debt,” Steinbaum told Yahoo Finance. “I'm absolutely serious because like his whole reputation is like, he's the smart economist in the room... he just doesn't get it. He has misinterpreted the data.”
Steinbaum, who authored a new report showing that “non-repayment by student loan borrowers is getting worse over time, especially so for non-white debtors,” stressed that the student loan system “is fundamentally unsustainable” and bold action such as cancelling some student debt will be needed.
‘You're stuck in a debt overhang forever’
Outstanding student loan debt is at $1.55 trillion in the third quarter of 2020, up $9 billion from the last, the New York Fed reported this week. Notably, serious delinquencies have plummeted, due to the forbearance enacted and extended by President Trump and the CARES Act stimulus amid the coronavirus pandemic.
The average undergraduate student loan borrower, as of 2017, had about $7,200, which is up 10% from 1995, the Congressional Budget Office noted in a recent report. For graduate students, the average was up 47% to $25,700. Parents with PLUS loans on average borrowed about $16,600.
Summers is correct in that relatively higher income Americans hold more student debt: The highest-income 40% of households (i.e., those with incomes above $74,000) owe about 60% of all outstanding debt. At the same time, however, lower-income borrowers bear bigger repayment burdens so any debt relief would directly benefit these borrowers.