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Hillary Clinton’s Absurd Student Debt Forgiveness Plan

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Hillary Clinton’s Absurd Student Debt Forgiveness Plan

June 29, 2016

Democratic presidential nominee Hillary Clinton has released a new “Initiative on Technology and Innovation” that consists mostly of throwing money at various programs that she imagines would be good for the economy. Notably, however, Clinton would add yet another way for the federal government to lose taxpayer money on student loans: loan deferment and forgiveness for young entrepreneurs.

The plan would allow young entrepreneurs, along with their “first 10 or 20 employees,” to put their loans into deferment for up to three years. Deferment allows a borrower to temporarily stop making payments on his loan; interest may accrue during this period depending on the type of loan. Currently, borrowers may put their loans into deferment for limited reasons, such as graduate school, military service, or unemployment.

After five years, Clinton would forgive up to $17,500 in loans for borrowers who “launch new businesses that operate in distressed communities, or social enterprises that provide measurable social impact and benefit.”

The most obvious problem with this plan is its cost. Allowing the owners of new businesses and several of their employees to defer student loans would exacerbate the $170 billion in losses the federal student loan program is expected to incur over the next decade. For subsidized loans, deferring repayment for three years means the government will spend nearly $1,200 for each $10,000 in debt the borrower owes, and more if interest rates rise. (Interest does not accrue during deferment for subsidized loans.) If, as Clinton claims, “millions” of borrowers will take advantage of this program, costs could quickly reach billions of dollars. And that does not even take into account the proposed $17,500 in loan forgiveness for qualifying entrepreneurs.

Money is not the only issue, though. It is also the unequal treatment of borrowers. Clinton has evidently decided that some classes of borrowers—startup founders and their employees—are more worthy of relief on their obligations than are the rest of us. Entrepreneurs are certainly an important part of our economy, but entrepreneurship is not for everyone, nor should it be. Why should one career path receive preferential treatment?

Government policy should not try to shoehorn the economy’s labor force into one particular line of work. Workers should pursue the careers in which they feel they can be most productive, whether that means starting one’s own business or working for an established company with thousands of employees. Privileging one career path over others through financial incentives such as loan deferment distorts the allocation of human capital, and may lead some to make career decisions they would not have otherwise.

If Clinton is serious about helping entrepreneurs, she should propose cutting the federal government’s tangled web of regulations, the complexity of which disproportionately harms small businesses. She should also encourage states to roll back occupational licensing laws which lock many would-be entrepreneurs out of their desired careers. Both would go much further toward promoting entrepreneurship than student loan deferment.

Additionally, Clinton’s  suggested condition for loan forgiveness—founding a business that provides “measurable social benefit and impact”—is  extremely vague. Everyone’s view of what constitutes a social good is different. What makes Clinton’s definition of “social benefit and impact” more valid than mine or yours? In all likelihood, this provision would be used subjectively by Washington bureaucrats to reward the owners of favored businesses, while implicitly punishing those who fall outside the privileged category.

It is also unclear why the new provisions are even necessary to help borrowers in distress. The government offers an array of repayment options on student loans, including plans which vary the monthly payment according to the borrower’s income. These plans have their problems (mostly for taxpayers, not borrowers), but Clinton has not given any justification as to why her new borrower relief proposals are needed when a variety of repayment plans are already available.

Clinton’s plan could be more about wooing millennial voters who supported her primary election rival, Senator Bernie Sanders, than it is a serious policy idea. But it is distressing that so many proposals to deal with student debt rely on ever-more-creative ways to discharge loan obligations at taxpayer expense rather than focusing on the root of the problem: high tuition for degrees that are worth less than they should be. Until we address these issues, loan forgiveness should wait.

Preston Cooper is a policy analyst at the Manhattan Institute. You can follow him on Twitter here.

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