Former Treasury Secretary Larry Summers “skeptical” of student loan cancellation

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Larry Summers “skeptical” of blanket loan cancellation being discussed amid President-elect Joe Biden’s transition to power, arguing that debt cancellation would benefit the rich, not the poor.

“I would be rather skeptical of general and massive student debt reduction programs because I think many of these programs would benefit the wealthy who have invested in themselves. [and who] get a high return on investment, ”the former Treasury Secretary (1999-2001) and director of the National Economic Council during President Obama’s first term (video above) told Yahoo Finance Live.

“I’m more worried about Americans who don’t go to college than Americans who do,” Summers added. “So I’m afraid that unless it’s done carefully, it could be upward redistribution of income, rather than downward redistribution of income. “

US Vice President-elect Joe Biden (right) listens to National Economic Council Director Larry Summers during a briefing on economic developments and the upcoming economic stimulus package in Washington, December 23, 2008. REUTERS / Jim Young ( UNITED STATES)

Marshall Steinbaum, a senior researcher at the Jain Family Institute, told Yahoo Finance that Summers’ take on debt cancellation lacks the nuances needed to address the issue.

“Larry Summers doesn’t understand the economics of student debt,” Steinbaum told Yahoo Finance. “I’m absolutely serious because like his whole reputation he’s the smart economist in the room… he just doesn’t get it. He misinterpreted the data.

Steinbaum, author of a new report showing that “non-repayment by student loan borrowers is getting worse over time, especially for non-white debtors,” pointed out that the student loan system “is fundamentally unsustainable” and bold steps such as the cancellation of some student debts will be required.

“You are stuck in over-indebtedness forever”

Outstanding student loans amounted to $ 1.550 billion in the third quarter of 2020, up $ 9 billion from the last month New York Fed reported this week. In particular, serious delinquencies fell, due to the abstention adopted and expanded by President Trump and the revival of the CARES Act amid the coronavirus pandemic.

In 2017, the average undergraduate student loan borrower had about $ 7,200, which is a 10% increase from 1995, the The Congressional Budget Office noted in a recent report. For graduate students, the average increased 47% to $ 25,700. Parents with PLUS loans borrowed an average of about $ 16,600.

(Graphic: David Foster)

(Graphic: David Foster)

Summers is correct in that Americans with relatively higher incomes have more student debt: The top 40% of households (that is, those with income over $ 74,000) owe about 60% of all unpaid debts. At the same time, however, low-income borrowers bear heavier repayment burdens, so any debt relief would directly benefit these borrowers.

Using demographics and economics from the American Community Survey, Steinbaum found that more than half of the people who took out student loans in 2009 had not yet paid off everything. Digging deeper into postal codes, he uncovered a major disparity between races: While more minority-majority neighborhoods had access to higher education because of student loans, their share of student debt is steadily increasing.

“We already have a lot of unpaid student debt that is not being repaid and will not be repaid,” Steinbaum wrote in the recent Jain Institute report. And while this piling up of debt will not cause a macroeconomic crisis, he added, “it just means you are stuck in debt distress forever.”

(Graphic: JFI)

(Graphic: JFI)

Amid the circumstances, both in terms of student debt levels and moving to a Democratic president, 236 organizations wrote a letter to Biden and Vice President-elect Kamala Harris to push for executive action to write off some of the student loan debt.

President-elect Biden made a campaign proposal for erase $ 10,000 for about 37 million Americans who have federally guaranteed student loan debt. Democratic leaders are calling for the president-elect to forgive $ 50,000 for each borrower by decree once he takes office.

Natalia Abrams of the Student Debt Crisis advocacy organization stressed that there is “so much at stake”, stressing that “this is the most urgent opportunity to help the country recover from the health crisis, to heal economic damage and heal the history of racial disparities.

Summers acknowledged that the system clearly needed work and that some lightening will be required.

“There are clearly cases where relief is needed,” he said. “There are clearly cases where it is not possible to restructure student debt, and it should be.

Aarthi is a reporter for Yahoo Finance. She can be contacted at [email protected] Follow her on Twitter @aarthiswami.

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