Biden’s student loan ‘forgiveness’ plan is a raw deal for taxpayers
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The Biden administration has extended the “pause” on student loan repayments for the sixth time. At the end of the last break, those who took out student loans will have been able to go 30 months – two and a half years – without making a single payment or accumulating new interest.
This is a raw deal for taxpayers. The Department of Education estimates that every month they lose more than $200 billion in refunds and another $5 billion in accrued interest. Since the start of the pandemic, the pause has cost taxpayers more than $130 billion in interest payments.
GREGG JARRETT: BIDEN’S PLAN TO SUPPORT MILLENNIALS BY CANCELLING THE DEBT CAN’T AND WILL NOT WORK
As if that weren’t large enough, President Biden is now considering outright “forgiveness” of a portion of all student loan balances. Here, “pardon” is a euphemism for a taxpayer-funded bailout. It is bad policy from every angle.
First, it’s incredibly regressive. The Urban Institute found that “most outstanding student debt is held by people with relatively high incomes. … [It] is disproportionately concentrated among the wealthy. While lower-income households represent a larger share of borrowers, higher-income households represent a larger share of outstanding student debt. In fact, nearly half (48%) of student debt is held by households whose borrowers have earned advanced degrees. Those with professional degrees (doctors and lawyers, for example) earn a median annual salary of $96,772, far more than those who did not attend or graduate from college.
The more generous the student loan forgiveness becomes, the more it benefits high-income earners. The Federal Reserve Bank of New York recently estimated that 30% of loan forgiveness would go to borrowers in high-income neighborhoods. The University of Chicago finds that loan forgiveness would benefit the top 10% of earners as much as the bottom 30% of earners combined.
Second, it’s expensive. Federal Reserve analysis found that a $50,000 discount per borrower would cost $904 billion; a discount of $10,000 per borrower would cost about $321 billion. Cumulative outstanding student debt currently hovers around $1.7 trillion, of which $1.38 trillion is federal. Already saddled with a debt of $30.4 trillion, America cannot afford to offer hundreds of billions more to wealthy people. It would only add to inflation.
To finish, there is moral hazard. Canceling student loans would likely encourage colleges to increase tuition even further, especially if graduates expect student loans to be forgiven again in the future. Indeed, if current student loan balances are forgiven, why wouldn’t today’s students borrow the maximum amount allowed to attend the most expensive school possible, in the hope that their debt will also be canceled in the future?
Student loan forgiveness is unfair to those who chose not to attend college, those who made their way to college to avoid debt, and those who paid off their debt as promised. Forty-four percent of students who started a four-year degree in 2009 borrowed nothing to attend, and a quarter borrowed less than $10,000. Having chosen not to go into debt, they should not be asked today to repay a loan that they never contracted.
And then there are the wider economic impacts. When it comes to inflation, both the moratorium and the broader pardon are fuel on the fire. Freeing a person from debt reduces the incentive to work and reduces participation in the labor market. This retards economic production and drives up prices. Additionally, paying off student loans would help reduce the money supply, taking the oxygen out of the inflationary fire and helping to keep prices low.
For most borrowers, student loan repayments are manageable. The median monthly payment is $222 per month. And income-based repayment plans already exist for borrowers who need help making their payments.
No other form of debt is so forgiving. Your mortgage or rent payments are not automatically reduced if your income decreases. And those with large student loan balances tend to be graduate students and those pursuing professional studies – the people most likely to earn high incomes in the future. So why should we ask Americans who didn’t or couldn’t go to college to pay the expenses of those who did?
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It’s not as if college graduates have been particularly hard hit by the pandemic. The vast majority have stayed in their jobs through remote work, and their unemployment rate is just 2%. Some 1.7 million more university graduates are employed today than before the pandemic.
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When the pause on student loan repayments ends in August, it is unlikely to be renewed for a seventh time. And the Biden administration should abandon its misguided, regressive, costly, inflationary, and morally dangerous pursuit of student loan forgiveness. The president may think it’s politically expedient, but the long-term consequences would be disastrous.
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EJ Antoni is a Regional Economics Research Fellow at the Heritage Foundation’s Center for Data Analysis.