Canceling student loan debt
It is widely anticipated that President Biden will announce a plan today to forgive a considerable portion of student loan debt in the U.S. Early reports indicate that:
- Individuals earning under $125,000 with federal student loans will receive $10,000 in loan forgiveness.
- Married couples earning under $250,000 with federal student loans will receive $20,000 in loan forgiveness.
- The plan purports to completely eliminate student loan debt for approximately 15 million Americans and reduce loan balances for another 30 million Americans.
The President’s executive order comes on the heels of a multi-year build up around alleviating the burden of over $1.7 trillion in student debt. The plan is likely to draw mixed reactions:
- Those who benefit directly from the forgiveness are expected to view the move favorably, though some are already contending that the amount of the forgiveness is insufficient. The average student loan debt holder owes over $37,000.
- There is real concern that President Biden lacks the constitutional authority to simply wave away student loan debt through an executive order. The decision will almost certainly be challenged in court.
- Conservatives warn of the “moral hazard,” of eliminating a contractual obligation entered into by a student in exchange for a service.
Both the burden of student loan debt and the consequences of absolving it are worth exploring. There is genuineness in the cries of young people who feel duped. There is also merit to the idea that people who did not attend college, but who pay taxes, should not be asked to share the load of student loans taken out by people who did attend college with an agreement to repay the loans.
But the President’s action and the responses to that action will largely miss the elephant in the room. Forgiving a portion of student loans is putting a band-aid on an infection without treating the underlying infection.
For the last 18 months Americans have been learning the hard way that cheap money is very expensive. Floods of federal dollars rained down during the COVID pandemic, in concert with widespread disruptions of our economy, have created a generational inflation event.
What we see unfolding on a grand scale with national inflation has been occurring even more intensely on college campuses for decades because of a student loan racket bolstered by Uncle Sam.
In the real world, loans are given out based on assessment of an individual’s ability to repay. For the lender, this involves assessing the income and assets of a borrower and collateralizing a loan to mitigate against the risk of default.
Most students have little income and even fewer assets to offer as collateral. But because student loans are backed by the government, they are readily available, with no regard to the student’s ability to repay. Student loans do not account for whether a student’s chosen degree has any likelihood of making the student more or less marketable in the working world.
This system creates perverse incentives, is deceptive to impressionable students, and creates false demand that only drives up the cost of higher education:
- With access to an endless supply of student loan dollars, colleges and universities are not required to be focused on delivering efficient, highest value education to students. Instead, they can expand their mission and scope—making college more about entertainment and experience—in an effort to attract students and their “free” money.
- Students are led to believe that incurring debt will increase their marketability regardless of their field of study. Why else would someone underwrite something so expensive?
- Cheap money also increases demand for college services. In a world in which demand outstrips supply, prices rise quickly. This requires more cheap money to keep funding the system, which in turn creates more demand.
- The end result is a death spiral that has seen the cost of attending college rise at a rate 5x national inflation over the last 50 years. College has become more and more expensive, and less and less valuable, relative to that expense.
So what’s the solution?
First, it seems important to recognize that the idea that everyone should go to college is simply a lie, sometimes perpetuated by well-meaning people and sometimes perpetuated by a complex that benefits financially from the current system.
Second, and of equal importance, the system should be designed for shared accountability. Yes, students who take out loans should pay them back, but colleges should stop treating students like marks. Injecting some economic thinking into the process could help by ensuring that student loans are authorized on a cost-benefit basis that is tailored to individual majors. No more $200,000 in debt for a job path that fetches $30,000 a year.
An education system that actually focuses on preparing kids for life instead of preserving the system itself is one worth getting behind.