On August 23, Joe Biden is expected to announce that taxpayers will foot the bill to write off over $300 billion in student loans. “Reportedly, the White House will announce plans to forgive up to $10,000 in student debt for Americans earning up to $125,000 this year,” says Reason Magazine. That would cost $330 billion, according to Bloomberg News. “The average cost per taxpayer comes out to nearly $2,100,” says Andrew Lautz of the National Taxpayers Union. The cost will be paid for through higher taxes, or — more likely — more government borrowing, increasing a national debt that is already far bigger than our economy.
As the College Fix notes, “An analysis from the Texas Public Policy Foundation concluded that an executive order bailout is likely illegal. Alan Dershowitz, professor emeritus at Harvard Law school, has also said that a student bailout through executive action would be illegal.”
It is also profoundly regressive. As Greg Price notes, “Only 37% of Americans have a 4-yr college degree, only 13% have graduate degrees, and a full 56% of student loan debt is held by people who went to grad school. Biden’s plan to cancel it would be like taking money from a plumber to pay the debt of a lawyer.”
The National Review’s Charles Cooke says writing off student loans is both regressive and illegal: “The people with the lowest unemployment rate in the country” — college graduates — “took out the loans, spent them, and received a product for the money. Joe Biden intends to violate his oath of office to transfer the liability for repayment to the people who didn’t do any of that.”
Even Democratic economists and academics have expressed skepticism about writing off student loans, saying that it will increase inflation and economic inequality. Yesterday, former Treasury Secretary and Harvard University president Lawrence H. Summers noted that “Student loan debt relief is spending that raises demand and increases inflation. It 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.” “Every dollar spent on student loan relief is a dollar that could have gone to support those who don’t get the opportunity to go to college.”
As the College Fix notes,
Summers is the latest economist to warn about the problems with student debt bailouts. Two finance professors wrote in July that it would be “bad policy” and “bad economics” to provide an expansive bailout to borrowers. Mitch Daniels, the president of Purdue University and the former Office of Management and Budget director under President George W. Bush, called the idea “fatally flawed.” “This is another very regressive suggestion, they’re going to give money to people making three times the national median average,” Daniels told CNBC on May 31.
It’s “a giveaway to people who don’t need it and who freely took these obligations on,” Daniels said.
Writing off student loans will encourage colleges to raise tuition, by making it more attractive to take out big loans to cover college tuition. When students are willing to borrow more to go to college, colleges respond by increasing tuition. The Daily Caller notes that “each additional dollar in government financial aid translated to a tuition hike of about 65 cents,” according to the Federal Reserve Bank of New York.
In addition to writing off $10,000 per person in student loan debt, Biden is also expected to once again suspend student loan repayments for everyone else. Student loan repayments have been suspended six times since 2020, and this would be the seventh time.
The suspension of student loan repayments costs taxpayers over $52 billion per year. And it bothers not just conservatives, but even some progressives. Summers calls suspending student loan payments the “worst idea” because it transfers wealth to “highly paid surgeons, lawyers and investment bankers.”
Inflation and inequality are getting worse due to the suspension, says Matthew Yglesias, who co-founded the progressive website Vox, and wrote for Slate and The American Prospect.
In the Washington Post, Yglesias notes that the long pause in student loan payments since 2020 has disproportionately benefited the wealthy, at the expense of taxpayers who mostly don’t have college degrees, and don’t have student loans:
“Between canceled interest and the erosion of principal due to inflation, the prolonged pause has already saved student debtors a bunch of money. But the benefits are awfully lopsided. As Marc Goldwein of the Committee for a Responsible Federal Budget shows, medical doctors have received $48,500 in relief versus $29,500 for people with law degrees, $4,500 for people with bachelor’s degrees, and a measly $2,000 for those who didn’t finish their degree and are objectively most in need of help.”
Yglesias says that Biden’s suspension of student loan repayments will drive up the inflation rate:
“Most Americans say the most important problem facing the country is inflation — and President Joe Biden just made it worse. His administration announced last week it would extend yet again the emergency suspension of student loan repayments, even as his frenemies on the left are urging a program of complete forgiveness of all student debt.”
Rapid inflation is already occurring due to massive government spending, he says, and student loan forgiveness will make matters worse:
“That gigantic fiscal infusion [Biden’s $1.8 trillion stimulus package] supercharged demand in 2021…putting inflationary pressure on the economy. Pressure then got superdupercharged by Russia’s invasion of Ukraine and the ensuing sanctions…..The economy no longer needs stimulus — in fact, it needs to restrain demand….So to the extent that it’s possible to reduce inflation by directly curtailing consumption, that can be helpful. And the most progressive approach is to curtail the consumption of the affluent….Non-collection of student loans, meanwhile, has the opposite effect…restarting loan payments would drain some demand out of the economy, and would do so by disproportionately targeting those most able to pay….Restarting student debt collections would restrain inflation at the expense of a disproportionately high-income minority of the population. Broad debt cancellation, by contrast, would boost inflation.”
Inflation is much higher in the U.S. than in many other countries. The U.S. inflation rate is 8.5%, and wholesale price inflation has reached double digits in the U.S. By contrast, in Japan, the inflation rate is only 2.6%. In Switzerland, it’s 3.4%.
Andrew Gillen of the Texas Public Policy Foundation argues that it is illegal for Biden to write off student loans or cancel student loan obligations, because that is beyond what Congress authorized presidents to do, and relies on a loophole that doesn’t apply to post-2010 student loans. Financial aid expert Mark Kantrowitz also argues that student loan forgiveness by executive order is illegal.
An economic adviser to President Obama said Joe Biden’s anticipated $10,000-per-borrower student loan bailout would be a “huge mistake.” Katherine Abraham was on Obama’s Council of Economic Advisers, and is currently an economics professor at the University of Maryland. For 8 years, she served as Commissioner of the Bureau of Labor Statistics. In May, she co-authored a critique of Biden’s anticipated bailout in Politico. In it, she and Michael Strain, an economist at the American Enterprise Institute, wrote:
Blanket forgiveness of student loans, as President Joe Biden appears poised to offer, would be a huge mistake. It’s regressive and unfair. Over time, it could well increase the number of people struggling with student debt. And while billed as a “one time” policy, it would set a terrible precedent. This is not to say there aren’t student borrowers who need help. But there are better ways to support them than a giveaway that would primarily benefit well-off professionals.
Making taxpayers pick up the tab for $10,000 in student loans per borrower is “extremely regressive,” explained the two economists. “Relatively few low-income households have student debt and, among those who do, outstanding loan balances are smaller than for higher-income borrowers.” Writing off student loans would also violate fundamental principles of fairness:
One of the bedrock principles of sound economic policy is that similarly situated people should be treated similarly. Student loan forgiveness would take a hatchet to this principle. It would be a slap in the face to individuals from modest backgrounds who attended college but never took on debt or have already paid it off. What would the administration say to a person who struggled for years to pay off her student loans, finally becoming debt free last month? Or to the people who chose to attend their local community college rather than a more expensive four-year college because they did not want to borrow? Or to the people who avoided debt by serving in the military to qualify for GI Bill benefits?
The bailout by taxpayers would also create a moral hazard, where future borrowers would expect to be bailed out, too: “Student loan forgiveness sets a terrible precedent as well. Because future students might reasonably expect their debt to be forgiven too, there is a real risk it would encourage excessive borrowing.”