There is a lot wrong with student debt forgiveness. It fails to consider signaling theory, it creates bad incentives and it’s an unjust redistribution of resources.
Signaling: some of this turns on the degree to which we believe that higher ed improves human capital vs. is primarily about evaluation and signaling. If it is primarily about improving human capital, then more education would result in more productive workers who create positive externalities for everyone else. On the other hand, if the main role of higher ed is to verify that students have the qualities needed to be productive workers and students value their degree for its ability to signal those qualities to employers, more education benefits the individuals who receive it and the companies that benefit from de-risked hiring.
The argument for subsidizing higher education (which of course we already do) relies on believing it’s substantially improving our human capital such that the equilibrium level of education without government support would be lower than the optimal rate for society. I think the arguments that it’s at least 30%+ about signaling are very strong.I also don’t find it intuitive that society would be better off if more people had university degrees given it’s already the case that many jobs that clearly don’t need that level of training require college degrees. And I think both of these together significantly weaken the case for government subsidies.
Incentives: But putting aside the signaling part for now, these sorts of programs also create bad incentives. Imagine that on average a university degree significantly improves human capital and is something we want to subsidize to raise the equilibrium level of degree getting. We should expect that to hold much less strongly if students train in areas that do not have any clear labor market relevance, or which are already very overcrowded, or are a bad fit for their natural skills etc. We want students to at least consider these things when choosing a major, and having some link between what they choose to study, where they choose to study, and how they’re rewarded monetarily (including how easy it is to pay off their debt) makes this naturally salient to them.
Imagine a student who got into two colleges, similarly strong academically within his chosen discipline, but the first one had better name recognition. But the second option offered this student a significant tuition discount - and so he, being prudent, decided it was worth losing a bit of the name recognition for the savings he’d get (after all, he’s been told education is about building his human capital and believes either school will do that effectively). His less forward thinking friend was in the same situation but made the other choice. Now his friend is getting his debt forgiven (or adjusted, whatever) while he gets no benefit because he didn’t rack up any debt. And yet another friend went to the expensive private school and also decided to study some discipline that’s not rewarded on the market but is cool and fun and now has even more debt (and is getting even more of a benefit from forgiveness). Why shouldn’t young people be rewarded for having made tough choices about what would best help them in the future?
Fairness: finally and most obviously, people with degrees are much wealthier on average than people without degrees, even if they have debt! I mean, isn’t that the argument for why we need to make this more accessible in the first place? So that more people can benefit from the higher lifetime earnings? How a policy which redistributes money to a mostly upper middle class and white group became a major left wing focus is mind boggling.
and I talk about education and signaling in a recent podcast:
