Issues & Insights

Biden’s Student Loan Bailouts: Bad Economics, A Regressive Tax, And A Moral Hazard

Students graduating from college. Photo: Kit, under the Creative Commons Attribution 2.0 Generic license.

Joe Biden has so many bad ideas that dealing with them all is a little like swatting flies in a molasses factory in July. One bad idea that’s getting media coverage right now is student loan forgiveness, a favorite among progressives. It’s a classic Democratic proposal: It helps the rich and the elites, and then hands the bill to working Americans.

An alliance of 236(!) leftist groups and teachers’ unions — or do we repeat ourselves? — recently urged Biden to erase student debt as one of his first acts as president, assuming of course he wins. Both Sen. Elizabeth Warren and Rep. Alexandria Ocasio-Cortez, thought to have significant clout in Biden’s inner circle, want government to wipe away as much as $50,000 of debt per student.

So-called progressives are no doubt concerned that recent polling shows surprising support among millennials for Republican ideas. What better way to get them back on board than to show your socialist bona fides and win future elections than by forgiving student debt?

As Warren recently tweeted, “Student loan debt is holding back a whole generation from buying homes, starting small businesses, and saving for retirement – all things we rely on to grow our economy. Executive action to #CancelStudentDebt would be a huge economic stimulus during and after this crisis.”

She’s dead wrong on both counts. And debt forgiveness does nothing to address the underlying problem: People who get worthless-but-expensive degrees that don’t lead to good jobs. In short, their schooling was a bad investment.

Let’s stipulate here that student debt is at nightmare proportions. The Federal Reserve says student loan debt stood at $1.6 trillion last year, and no doubt is higher today. Meanwhile, a survey by U.S. News and World Report found that among 2019 graduates who borrowed money, the average amount of student loans $30,062, which is up 26% from 2009.

And among those who have left school with student-related debt, fully 20% are behind on their payments, Fed data show.

Yet, surprisingly, apart from those with lots of student debt and the political far left, student loan forgiveness has few supporters, especially among economists. And not just conservative ones.

President Barack Obama’s former top economist, Jason Furman, recently tweeted that “Student loan debt forgiveness likely has a multiplier close to zero.” In short, the economy wouldn’t benefit at all. Worse, he called forgiveness “Arbitrary/regressive,” meaning the benefits would go mostly to those with upper incomes.

President Bill Clinton’s treasury secretary and economist Larry Summers also says he’s “skeptical” of the idea.

The liberal Urban Institute noted in a recent research paper that “debt forgiveness plans would be regressive — providing the largest monetary benefits to those with the highest incomes.”

As the Washington Free Beacon noted recently, “More than half of (student) debt is held by the top 40% of wage earners. Among Americans ages 25 to 40, half of debt is held by the top 40% of asset holders — meaning that the wealthiest young adults also have the most debt.”

Most Americans, believe it or not, do not have a college degree. Census Bureau data show about one-in-three adults over 25 having a four-year degree.

Members of this group will, on average, earn much more over their lifetimes than those without a degree, as much as $1 million more, studies show.

“Using billions of federal taxpayer dollars to help this relatively better-off slice of society amounts to a redistribution of wealth from the working class to educated professionals,” writes Brad Polumbo of the Foundation for Economic Education. “It would mean forcing Steve the landscaper to pay more in taxes so Jenny the marketing executive can have some of her student loans written off.”

Not fair at all, especially coming from a political party that styles itself as fighting for “the little guy.”

What’s most worrisome is the notion that someone taking out as much as six figures in debt is always justified, no matter what the educational purpose. Sorry, dance and ethnic and gender studies majors, but you’ve made a very bad financial miscalculation. Your degree isn’t worth that much.

Or, as Newsweek, of all publications, recently put it: “It is possible that no propagated belief in modern American history has been more intellectually, experientially and fiscally ruinous than the notion that a four-year bachelor’s degree-bestowing bender is a necessary rite of passage for entering adulthood.”

Which raises a deeper question: What kind of moral lesson do we give young people if we, first, encourage them to waste time and money on a useless education and, then, bail them out for their foolishness? It’s the worst possible way to foster responsible adult citizenship.

There’s a word for this in economics: moral hazard. Forgive one debt, others suddenly want theirs forgiven, too. Why not credit card debt? How about second mortgages? Why not cancel all the bond debt owed by cities and states for infrastructure? Or, heck, why not wipe out Social Security’s trillions of dollars in liabilities?

Meanwhile, those who worked and scrimped and saved to put their kids through college will be turned into chumps. All their sacrifices were for nothing. Those who didn’t sacrifice got bailed out.

Once you climb on, it’s a very slippery slope, both morally and fiscally, and one with no end. Who would lend money in an economy where you weren’t guaranteed it would be paid back?

There are a number of possible solutions for this morass. Give colleges and universities some skin in the game by making them rebate money to graduates who find they can’t get jobs after leaving. Stop “guaranteeing” loans for those in majors that have few prospects for gainful employment.

Institutions of higher education have failed to control costs, unlike almost every other sector of the U.S. economy. They have bloated administrative staffs, while skimping on quality instructors and emphasizing leftist group-think in their course offerings.

This has been known for some time, but no one does anything about it.

“The number of employees hired by colleges and universities to manage or administer people, programs and regulations increased 50% faster than the number of instructors between 2001 and 2011,” the Wall Street Journal noted all the way back in 2012. “It’s part of the reason that tuition, according to the Bureau of Labor Statistics, has risen even faster than health-care costs.”

It’s still true today. The point is, the worst solution to the student-loan crisis is debt forgiveness. Unfortunately, it’s also the most popular among progressive Democrats, who might just control the White House for the next four years.

— Written by the I&I Editorial Board

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3 comments

  • As a North Carolina State Representative I plan on introducing legislation next year to require all in-state colleges and universities that accept student loan money to have a program to make sure their students who have student loans are academically successful for the first two years of full time study. If a student drops out because of poor academic performance the institution shall reimburse the loan lender for the unpaid balance of the loan. Depending upon the level of wailing from these institutions we will see if they are more concerned for the student or the money?

    • Great idea! Now you will have underachievers signing up for ethnic transgender studies and partying for two years while their schools keep them in a B+ GPA just to prevent losing their tuition money.

  • Will my son and his wife get reimbursed for being responsible and paying theirs off? I doubt it. I guess they will be paying irresponsible peoples off with their taxes.

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