Available at: . Available at SSRN: https://ssrn.com/abstract=5216239 or http://dx.doi.org/10.2139/ssrn.5216239
Abstract:
We study student debt relief as the product of probabilistic voting by an electorate that includes both college graduates and non-college laborers. While politicians favor the most homogeneous group in a probabilistic voting setup, we identify conditions under which politicians forgive student debt even when laborers are more homogeneous than graduates. This political asymmetry in favor of student debt relief gives rise to a double equilibrium that is driven by strategic complementarities among a pivotal mass of citizens: When laborers are not sufficiently more homogeneous than graduates, either this pivotal mass banks on student debt relief, thus going to college, and forcing politicians to forgive student debt, or they reject college, thus preempting politicians from forgiving student debt. Income-driven repayments make politicians forgive fewer students' debt but under a wider range of parameters. We finally identify conditions under which student debt relief and a redistribution in favor of laborers act as strategic complements or substitutes from politicians' perspective.
Commentary:
As usual, I admit my inability to analyze the statistical basis of this research, especially as it is so beyond my skills that I merely skip over all but the first six pages of the paper. Further, as always, I turn my focus not more generally about how politicians respond to voter pressures around student debt forgiveness. But instead consider how bankruptcy fits into this model.
Bankruptcy relief operates differently: it provides individualized, legal remedies rather than broad political redistribution. If Congress expands dischargeability of student loans in bankruptcy (or the Trump Administration continues to proceed under the more tolerant SLAP guidance), this reshapes the political landscape in several ways.
Bankruptcy relief could:
- Reduce political pressure for blanket forgiveness by offering borrowers a fallback, lowering the need for politicians to act as last-resort fixers.
- Reshape voter coalitions, as only some borrowers (those in distress) need political help, making graduates a less unified political bloc.
- Be less polarizing: unlike forgiveness, which many see as directly redistributing taxpayer resources, bankruptcy balances relief between debtors and creditors, looking at both a debtor's income and assets, avoiding visible harm to non-college laborers.
- Appear more fair to non-college laborers as it imposes some costs, burdens and stigmas on student borrowers by minimizing the perception of a moral hazard for the undeserving.
- Act as either a substitute (reducing need for political forgiveness) or a complement (offering both legal and political relief avenues).
In short, bankruptcy reform may offer a durable, less politically volatile solution that shifts the incentives politicians face. Combining it smartly with forgiveness policies could create a more balanced and sustainable student debt system.
An impediment to this, however, is that there is often an impression among many student borrowers (and some of the organizations that represent them) that bankruptcy relief is to be avoided due to its social stigma and the perception that it marks financial failure. This over-estimates the long-term negative impacts on those who file bankruptcy. It also reinforces the often class (and race) distinction between student borrowers and their "good debt" with the "bad debt" of those (often non-college laborers) who file bankruptcy. This lack of debt solidarity plays into the very polarization that this paper identifies.
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