Rumblings that the Biden administration plans to “forgive” some student-loan debt for potentially millions of upper-class people earning up to $125,000 a year doesn’t sit well with many Americans.
It will drive up inflation and create an unfair subsidy from the working class to the most educated people, many on track to earn the most money over their lifetimes.
The untold story Biden ignores is that the US government helped fuel this student-loan debt balloon to begin with.
College tuition vastly outpaced inflation in the past two decades alone, and universities kept raising tuition because they knew government-backed student loans would keep pace.
By continuing to back loans without any accountability over schools’ pricing or the usefulness of degrees, the federal government allowed universities to recklessly shell out more loans to hapless students.
A 2017 study from the Federal Reserve Bank of New York confirmed that one dollar of government student-loan expansion correlated with a tuition raise of some 60 cents per dollar.
That means Student Union centers become elaborate lounges, fancy rock-climbing walls abound and school administrative bureaucracies sprawl.
Yet despite all these amenities, employers say their new college graduate hires are ill-prepared for the workforce.
And quite often, there’s no demand for the degrees students pursue like that “feminist theory” or “philosophy of dance” degree.
A new study by education scholar Preston Cooper at The Foundation for Research on Equal Opportunity examined earnings potential, or the “Return on Investment” (ROI), of more than 60,000 post-secondary degrees and certifications.
Cooper estimates “28% of bachelor’s degrees have negative ROI, meaning the degree does not increase students’ earnings enough to justify the costs of college and the risk of dropping out.
Moral hazard
Historically, one powerful check against this wasteful government and educational bloatedness was the fact that in America, you had to responsibly pay for your own higher education.
In economics, this principle is called preventing a “moral hazard,” e.g., when someone has no incentive to protect themselves from risk because they have no consequences.
And now instead of taking away the punchbowl from the rich kids, Biden wants to make poor kids pay for the booze.
Who will benefit most from Biden’s magic wand?
The top richest 40% of households, according to the Brookings Institute, have “almost 60% of outstanding student debt and make almost three-quarters of the payments.
Inflation accelerator
By magically “forgiving” potentially billions of dollars in loan debt, Biden ignores the fact that these loans won’t disappear.
The cost of the loans will be socialized to more people, e.g., many poor and working-class taxpayers, essentially more new government spending, just like another COVID package or some iteration of the inaccurately named “Build Back Better” bill.
Record COVID-related government spending already fueled painful inflation for households; “forgiving” student loans will accelerate it. Biden’s plan is bald-faced political pandering. As this unpopular Democratic president is six months out from a competitive midterm election, Biden may believe that canceling college debt is good politics. But it’s horrible policy, and it could very well backfire at the ballot box.
