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Morehouse’s student loan forgiveness is an incredibly useful economics experiment

But it’s also a reminder of the limits of billionaire philanthropy.

Dylan Matthews is a senior correspondent and head writer for Vox's Future Perfect section and has worked at Vox since 2014. He is particularly interested in global health and pandemic prevention, anti-poverty efforts, economic policy and theory, and conflicts about the right way to do philanthropy.

Robert Smith, a private equity executive worth an estimated $4.47 billion, is donating approximately $40 million of his fortune to pay off the student loan debt of the graduating class of Morehouse College.

Morehouse, an elite, all-male historically black college in Atlanta, had a graduating class of 396 this year. Graduates of historically black colleges and universities (HBCUs) like Morehouse have historically faced higher debt burdens, a burden whose repayment is made more difficult by income disparities faced by black Americans.

I’m usually not a huge fan of massive donations to elite colleges. Smith donated $50 million to his alma mater Cornell a few years ago; given the school’s $7.2 billion endowment, it felt a lot like Smith was throwing more money at an already rich institution.

But Morehouse’s endowment of $140 million is much more modest. It amounts to about $66,000 per student, compared to $340,000 for Cornell and $2.8 million at Princeton. The school also does a much better job than places like Cornell or Princeton at reaching poor and middle-class Americans: 9.4 percent of the student body comes from the poorest fifth of the income distribution (compared to 3.8 percent at Cornell) and only 1.5 percent comes from the top 1 percent (the share is 10 percent at Cornell). If Smith is going to be giving to elite colleges, Morehouse at least seems like a better recipient than his alma mater.

There’s one more big reason I’m cautiously optimistic about the donation, even as someone who thinks too much philanthropy goes to elite colleges and universities. Smith is, in addition to helping individual students, funding the biggest test of the effects of student loan forgiveness we’ve seen to date.

But I still have some doubts, specifically about whether Smith’s commitment to lowering debt will translate into support for changing public policy. So far there’s little indication that’s the case.

The Morehouse grant as quasi-experiment

If you want to know if having zero student loan debt causes certain outcomes in the future — like higher salaries, greater household wealth, more graduate degrees — a very simplistic approach would be to compare outcomes for people who took out student loan debt to people who didn’t.

But that’s a pretty bad approach. People who need to take out debt are likely to come from poorer backgrounds than people who can pay for college outright. Just comparing the two isn’t going to tell you what the debt itself did. You can try to control for various factors, like family income upon entering college, but even that’s not good enough. There might not be enough people from middle-class backgrounds who took out no debt to make a real comparison feasible, and you can’t control for “unobservables,” ways in which indebted students are different from debt-free students that you can’t measure.

What you want is some kind of experiment, where you can compare otherwise identical groups students: one set with student debt, one without. As Congress member and economics degree-holder Alexandria Ocasio-Cortez noted on Twitter, Smith’s donation sets up just that kind of natural experiment:

Smith is not randomly assigning debt relief to students; “if your student ID number ends in 2, 5, or 7, your debt is paid!” would have made for a less rousing commencement address.

But you would not expect there to be profound differences between the composition of the Morehouse graduating class of 2019 and that of the class of 2018 before them, or the class of 2020 after them. These are groups of students who applied to and chose to attend the same college, at roughly the same period in history. They’re not identical groups, but they’re extremely similar.

That enables economists (like those at Morehouse, perhaps) to conduct an analysis 10-15 years from now comparing the incomes, indebtedness, graduate attainment, etc. of members of the class of 2019 to those of the classes of 2018 and 2020. If incomes are markedly higher for 2019ers a decade after graduation than they are for 2018ers, that’s a strong indication that debt relief increases incomes later in life.

Such a study wouldn’t be definitive. There would still be concerns about external validity: Are the effects of debt relief for Morehouse College graduates the same as the effects for graduates of other schools? They might be, but they might not be: a highly selective all-male historically black college in Atlanta is not exactly representative of American higher education as a whole.

Still, the Morehouse gift could serve as a very useful piece of evidence for economists of higher education, much like the Mariel Boatlift in Miami has become a hugely important case study for immigration economists.

Philanthropy or justice?

There is one aspect of Smith’s gift that should prompt some concern. While Smith is a generous philanthropist, he has predictable class interests for a private equity billionaire.

As philanthropy watchdog Anand Giridharadas notes, Smith opposes imposing regular income taxes on his profits as a private equity fund manager, preferring to keep the current system in which “carried interest” that he and other managers earn is taxed as capital gains income, subject to a top federal income tax rate of 20 percent (compared to 37 percent for regular income).

It’s not hard to see why that is; Smith’s fortune would be considerably smaller if he faced federal taxes that are almost doubled his current prevailing rate. And his fortune would be smaller still if the US adopted, say, Elizabeth Warren’s plan to wipe out student loan debt for all but the richest Americans. Warren proposes offering $50,000 in cancellation to all Americans making less than six figures, and creating a $50 billion fund for historically black colleges and universities like Morehouse. She wants to pay for this by imposing a 2 percent tax on wealth over $50 million, and another 1 percent tax on wealth over $1 billion.

Using the most recent Bloomberg estimate of his wealth, this would cost Smith $123.1 million a year. That’s triple his Morehouse donation — every single year, to pay for debt forgiveness for students across the country, with special focus on HBCUs.

There’s a debate to be had as to whether a wealth tax is the best way to raise that money and whether student loan forgiveness should be a spending priority. But granting that Smith, himself, apparently thinks it’s very important, and thinks it’s worth tapping his own fortune to pay for, a fair question is whether or not he thinks a plan like Warren’s that would ask even more of him and help even more students would be a good idea. Given his take on the carried interest tax provision, I’m not optimistic about the answer.

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