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Fairness, Personal Responsibility and Moral Hazard Issues

Should student debt be forgiven? If so, how much should be wiped clean? This is a big issue for Democratic Presidential candidates and the country.

Bernie Sanders wants to forgive 100% of the loan debt so students now owing debt would owe zero if he gets his way. His approach would wipe out $1.6 trillion. Warren has a more complicated system but one that is more justifiable from an ethical perspective.

Warren’s plan would cap student loan forgiveness at $50,000 for those making less than $100,000 annually, and at smaller amounts for those making less than $250,000. Unlike Sanders plan, those making more than $250,000 a year wouldn’t have any debt forgiven.  This is, no doubt, fairer than Sanders’ plan since a case can be made that those who can bear the risk the least should benefit the most by forgiveness.

Both plans would be paid for by asking more of the wealthiest Americans – Warren’s plan includes a tax on individual wealth, and Sanders’ has a tax on Wall Street transactions. My concern is with either plan those funding the free debt will find ways around the law. After all, it seems that corporations and wealthy people are good at dodging financial responsibilities.

The Fairness Issue

Most of the student debt is owned by the U.S. government so guess who would be on the hook. That’s right; you and me. It’s our money that funds the government so it’s our loss if the debt is wiped out.

I’m deeply concerned about the idea of wiping out student debt in any amount. Sure, these amounts have become astronomical and create a heavy burden on millennials and generation Z, and that’s troubling. It could affect economic growth going forward.

I’m also concerned that by forgiving student debt today and into the future, we ignore the effects on students in previous years who paid off their debt perhaps by getting a job or even two. Is it fair to Sally and Joe who incurred $200,000 in debt, paid it off, and now see other students the recipient of loan forgiveness? Maybe Sally and Joe put off buying their first house to save enough to pay off the debt? There is no way this is fair to them, in my opinion.

Moral Hazard

The problem, as I see it, is “moral hazard.” Moral hazard occurs when one party knows they can get away without paying off  debt by either transferring the obligation to another party or the debt is just wiped out. Under either approach, it seems as though the class of 2023 can rest assured that their student debt would be wiped out fully or in great part assuming they go to a public college or university.

I do support the idea of free tuition for community college. In most states the tuition for these institutions is already quite low so forgiving the rest of the debt doesn’t cost the public as much. Moreover, it helps to create marketable skills that enable a student to get a job after graduation without completing years three and four at an institution of higher learning.

Who Should Be Blamed for the Student Debt Problem?

According to Seven Pillars Institute, about 1 in 6 borrowers default on their student loans. Why does this occur? Some of the factors identified by the Institute include tuition inflation, high risk of defaults, financial illiteracy, and prioritizing payments other than student loans. These are, for the most part, personal choices and students should bear personal responsibility for them.

Universities are to blame to the extent there is a bloated administration. How does this occur? I believe there are at least three examples: (1) overpaid university executives; (2) standalone “centers” to support faculty activities; and (3) out of control student fees. In the interest of brevity, I’ll address the last two.

Centers of Learning

Having taught full time at six different universities, I’m always amazed how many “centers” are established to support faculty activities that should be handled by the academic unit itself. For example, the College of Business, the College of Engineering, and the College of Math and Science could sponsor associated activities without setting up separate administrative centers that requires a head of the unit, staff, and administrative support for faculty. Here are few examples of centers:

• Center for Service in Action
• Center for Teaching, Learning, and Technology
• Center for Applications in Bio-Technology
• Center for Excellence in STEM Education
• Center for Expressive Technologies
• Center for Leadership and Service

Student Fees

Public colleges and universities have turned to raising student “fees” for designated services that should be considered part of their tuition. In one public institution, students pay $3,718 each year on fees, which is more than one-half the annual tuition. Why are fees so high? It’s attributable to the fact that raising student tuition is more difficult than raising fees because of the greater scrutiny given the former by state legislatures. Here are a few examples of those fees:

• Campus academic fee
• Associated students fee
• Instructionally-related activities fee
• Health service fee
• Health facility fee
• Student ID card fee
• University union fee
• Student success fee
• Professional program fee.

Ethical Issues

We can and should debate whether any or all of the student debt should be forgiven and the mechanism to do that. It should be an important issue in the 2020 Presidential race. However, let’s not lose sight of the following ethical issues in deciding what to do:

• The increase in the national debt by forgiving student debt (i.e., much of it is held by government entities) is unsustainable.
• The mounting debt forgiven disproportionately harms those graduates who have already paid off their debt.
• Will the debt forgiveness program incentivize those who might not otherwise have a desire to go to college to enroll?
• Are we sending a message that it’s all right to get in deeper debt than one can afford because someone or some institution will pick up the pieces?
• Will the debt forgiveness program incentivize colleges and universities to admit more students so they can hire more faculty, open more centers, and start new programs with student fees?

There is no easy fix for the high level of student debt. Yes, something has to be done about it. But, let’s remember that students decided to incur the debt to go to college and a case can be made that they have a personal responsibility to pay it back just as they would a house that is overpriced.

By Steven Mintz at Ethics Sage, on August 27, 2019. See original article here.