An alternative to student loan forgiveness
Students fortunate enough to take an introductory economics course can glean insights that help them better understand alternative answers to the question about student loan forgiveness. They learn there are three factors of production: land, capital and labor. Land is defined as the raw materials used in manufacturing products such as petroleum, wheat, lumber and lithium. Capital refers to the money invested in enterprises as well as the plant, equipment and technological improvements which lead to economic growth. Labor represents all the human resources needed to create products and bring them to market.
To entice these factors into the productive process, businesses pay for them. Raw materials are purchased by manufacturers. Capital is often paid for by investors who purchase stock and bonds in private companies in return for a share of the company’s earnings. Labor is, of course, induced to work in a productive enterprise by wages.
The price of the factors of production are determined by the demand for that factor. When there is an increase in the demand for oil, the price that companies must pay for it increases. Those increased costs are passed along to the consumer. Prices for capital are revealed in many ways, such as Initial Price Offerings (IPOs) for new stock, the amount of interest paid on corporate bonds and the interest companies must pay when they borrow to buy new capital. These are all factored into the price of capital goods. When there is a labor shortage, as we have experienced recently, the cost of wages increases and again those costs are passed on to consumers.
Like other factors of production, the cost of a worker’s preparation for the workforce has a price. It includes the cost of an individual’s education, and/or training and the intangibles such as the development of good work habits, drive and creativity. All these attributes should be “priced into” the salary an employee receives. However, because labor markets do not adjust to cost changes as quickly as do the markets for new capital and raw materials, salaries usually do not capture the full cost of the training and education graduates receive in college or technical schools. Instead, new employees must bear the cost of the degrees or certificates.
Enlightened companies seem to agree that some salaries, particularly for new, skilled employees, do not fully reflect the cost of their skill development. Today, 17% of large employers surveyed by the Employee Benefit Research Institute say they offer student loan assistance to help employees cover the cost of their training and education. An additional 31% said they were planning to do so. Besides the obvious financial benefit employees receive from help in student debt repayment, the goodwill of a company/firm leads to greater allegiance to their employer.
Student loan assistance is, of course, a benefit and it is a taxable one. Today the IRS only allows $5,250 of a student loan payment benefit paid by an employer to be tax exempt for the employee. With $1.6 trillion in outstanding student loan debt today, and with fevered arguments about the fairness and equity of proposed loan “forgiveness,” isn’t it time to consider increasing the tax exemption for loan payments to pay off student debt? An adjustment in that tax-exemption from $5,250 to perhaps $12,000 a year would make a substantial difference to young employees.
This policy change would have several benefits. It would encourage employers who benefit from the education/training their new employees have received to help pay for some of the increased productivity that new hires bring to the job. It would have the additional benefit of making clear to current and future college students, which jobs and/or occupations are valued by employers, and which are not. It would also make clear that the responsibility for student debt repayment should fall upon the graduate and the organization that benefits from the training and education they bring to the job. Conversely, their debt should not be foisted onto the public purse through blanket forgiveness.
Michael A. MacDowell is president emeritus of Misericordia University and a director of the Calvin K. Kazanjian Foundation. He lives in Estero.
This article originally appeared on Fort Myers News-Press: An alternative to student loan forgiveness
