By Rudy Barnes, Jr., August 27, 2022
President Biden is running significant risks in forgiving $ trillions in student debt. It will increase an already exorbitant national debt and current inflationary pressures; and it favors debt for higher education over debt for more critical needs such as medical costs. It also raises expectations for more debt forgiveness, and will likely change public perceptions of debt.
Timing is everything. Biden’s debt forgiveness comes just before the midterms and is obviously about votes; but even among Democrats there is opposition to the plan--not over debt forgiveness, but the amount of debt to be forgiven. Liberal Senators Chuck Schumer and Elizabeth Warren have argued that the amount forgiven should be much more: $50,000 rather than just $10,000.
The forgiveness plan is not limited to low income borrowers, and there’s no provision to reimburse those who have paid off their student debts. Debtors with annual incomes up to $125,000 ($250,000 for a family) are eligible for loan forgiveness, and there’s no incentive for students to minimize their debts or for colleges to reduce soaring tuition costs.
An alternative to debt forgiveness is student aid that doesn’t involve debt coupled with a reduction in the cost of higher education. As it is, Biden’s executive order appears to be a crass political ploy for votes in November. The big question is how it will play out with voters. Those who receive debt forgiveness will likely support it, while fiscal conservatives will likely oppose it.
The American economy depends on debtors paying their debts, and college students are notorious for ignoring their debts. Biden’s debt forgiveness program will send the wrong message to those just beginning to experience the real world of financial responsibility. The message is, don't worry, be happy--Uncle Sam will assume your burdensome education debts.
The debt forgiveness program would be a flawed program in the best of times. But with a massive $30+ trillion national debt threatening future generations and current runaway inflation with higher interest rates pushing America toward a recession, a debt relief program that provides a cash windfall for student debtors is a terrible idea.
There are many legitimate reasons to provide financial assistance to lower income Americans. Increasing income disparities now threaten the middle class needed for the stability of American democracy; but Biden’s boondoggle doesn’t address that problem. If anything, it will make income disparities worse by subsidizing debtor couples who make $250,000 a year.
The government should not be making (or forgiving) student loans. Given the vast sums of public money that flow to higher education, making and managing student loans should be at the institutional rather than the student level. That will require an overhaul of public funding for higher education to ensure effectiveness and public transparency and accountability.
Notes:
The White House debt forgiveness program “rejects the warnings of centrist Democratic economists — such as Larry Summers, the former Democratic treasury secretary — who have said it will increase inflation and add to the federal deficit. Republican lawmakers are also expected to blast the White House over the move, arguing it offers unnecessary subsidies to Americans who made bad decisions while doing nothing for those who did not go to college.
Previous estimates have found that canceling $10,000 in student debt per borrower could cost the federal government roughly $230 billion, but that number will be higher with the larger amount for Pell Grant recipients. ‘Canceling student debt is expensive, inflationary and unfair to those who paid their student loans and most likely illegal,’ said Brian Riedl, a policy analyst at the Manhattan Institute, a center-right think tank. ‘It does nothing to prevent universities from raising costs and students from borrowing more money in anticipation of future loan forgiveness.’”
A report of the Government Accountability Office requested by Representative Virginia Foxx (R. N.C.) “shows the government is on track to lose $197 billion in revenue from the lending program due in part to the suspension of payments and interest. Foxx said ‘This is a slap in the face to those who never went to college, as well as borrowers who upheld their responsibility to taxpayers and paid back their loans. It’s a signal to every freshman stepping foot on campus to borrow as much as they can because taxpayers are picking up the tab.’” See https://www.washingtonpost.com/education/2022/08/24/biden-student-loan-cancellation/?utm.
Reuters has reported that Biden’s plan “could boost support for his fellow Democrats in the November congressional elections, but some economists said it may fuel inflation and some Republicans in the U.S. Congress questioned whether the president had the legal authority to cancel the debt. Debt forgiveness will free up hundreds of billions of dollars for new consumer spending that could be aimed at homebuying and other big-ticket expenses, according to economists who said this would add a new wrinkle to the country's inflation fight. Borrower balances have been frozen since the beginning of the COVID-19 outbreak, with no payments required on most federal student loans since March 2020. Many Democrats had pushed for Biden to forgive as much as $50,000 per borrower.
‘President Biden's student loan socialism is a slap in the face to every family who sacrificed to save for college, every graduate who paid their debt, and every American who chose a certain career path or volunteered to serve in our Armed Forces in order to avoid taking on debt,’ Senate Minority Leader Mitch McConnell said Wednesday.
American university tuition fees are substantially higher than in most other rich countries, and U.S. consumers carry $1.75 trillion in student loan debt, most of it held by the federal government. The administration will extend a COVID-19 pandemic-linked pause on student loan repayment to year end, while forgiving $10,000 in student debt for single borrowers with annual income under $125,000 a year or married couples who earn less than $250,000, the White House said. Some 8 million borrowers will be affected automatically, the Department of Education said; others need to apply for forgiveness.
A New York Federal Reserve study shows that cutting $10,000 in federal debt for every student would amount to $321 billion and eliminate the entire balance for 11.8 million borrowers, or 31% of them. Former U.S. Treasury secretary Larry Summers said on Twitter that debt relief "consumes resources that could be better used helping those who did not, for whatever reason, have the chance to attend college. It will also tend to be inflationary by raising tuitions." Similarly Jason Furman, a Harvard professor who headed the Council of Economic Advisers during the Obama administration, said debt-cancellation would nullify the deflationary powers of the Inflation Reduction Act. "Pouring roughly half trillion dollars of gasoline on the inflationary fire that is already burning is reckless," he said.” See https://www.reuters.com/world/us/biden-expected-cancel-student-loans-millions-us-borrowers-wednesday-2022-08-24/.
Megan McCardle has opined that Biden’s student loan “fix” is perfect for making the problem worse. “The Biden administration announced that it would forgive up to $10,000 in student loan debt (up to $20,000 for Pell Grant recipients), using a little-known provision in the post-9/11 Heroes Act, which allows the Education Department to waive or modify student loan payments in times of national emergency. Any debtor making less than $125,000 a year, or $250,000 for a family, will be eligible. The income-based repayment program will also become far more generous; required monthly payments will be capped at 5 percent of debtors’ discretionary income, and smaller loans can be forgiven after 10 years instead of 20. How many ways can a single policy be bad? This one could cost the federal government somewhere between $400 billion and $600 billion, completely unpaid for. Its legality is at best an abuse of the law to address the “national emergency” of upcoming midterm elections. It will pour “roughly half [a] trillion dollars of gasoline on the inflationary fire that is already burning,” says Jason Furman, formerly the top economic adviser to President Barack Obama. And with the income caps set so high, it remains an extremely regressive policy, heaping benefits on the most affluent demographics, while leaving everyone else to pay the cost through some combination of higher taxes, lower benefits, or higher inflation and interest rates.
Worst of all: What do Democrats do for an encore? Students who start college next year will get the benefit of the more generous income-based repayment program. But they will look longingly at recent graduates who got better repayment terms and $10,000 knocked off their debt. They will correctly point out that this is unfair — after all, tuition is still rising, so they’re even worse off than their predecessors! They will badger Democratic politicians to help them out, too. This first action will beget demands for a second and a third. Because this isn’t going to cure the underlying drivers of excessive tuition growth, any more than the “doc fixes” fixed the problem of soaring health-care costs.
The student loan program itself represents an attempt to solve the problem of rising college costs, and the theory seems sound enough. After all, kids who went to college would eventually earn a lot more money than they would have otherwise, and loans let them monetize some of that future income to pay their tuition. But, of course, tuition prices were already partially based on the expectation of higher future incomes, and all that future income shifted backward in time meant colleges could charge even more. One study suggests that when Congress raised the caps on subsidized federal loans, as much as 60 cents of every extra dollar lent got eaten up by tuition increases. Which in turn ballooned loan balances, and in turn created political pressure to make student loan programs more generous to borrowers — as the government has over the years, undoubtedly putting further upward pressure on tuition.
When you’re doing something destructive, your best bet is to stop. But if you can’t manage that, you should at least refrain from making the problem worse.” See https://www.washingtonpost.com/opinions/2022/08/24/biden-student-loan-forgiveness-plan-worsen-college-costs/?utm.
On August 25 WIS TV reported that there are 700,000 student debtors in S.C. eligible for loan forgiveness, and that the average student loan is just under $37,000.
