President Biden is currently deciding whether to cancel $10,000 in student loan debt for borrowers. This plan would be disastrous. It would cost an immense amount of money, drive inflation, be fundamentally unfair, serve affluent elites, and create a moral hazard.
In late May, the Washington Post reported that the White House is strongly considering using executive action to give $10,000 in student loan forgiveness to each borrower. This handout would go to 43 million people, about 13 percent of the U.S. population.
This move would likely come in August, when the moratorium on student loan repayments is set to end. The moratorium has been extended by President Biden numerous times, costing taxpayers $124 billion to $130 billion so far.
Student Loan Debt Cancellation Would Exacerbate Out-of-Control Spending
The plan to cancel $10,000 in debt for each borrower would cost a whopping $373 billion at a time when the national debt is already out of control.
In 2020, the U.S. government spent over $6 trillion. In 2021, the U.S. spent $6.82 trillion, or 30% of the economy. The U.S. now holds about $243,000 of debt per taxpayer. The CBO projects that U.S. interest costs will triple within the next decade — from $331 billion this year to $910 billion in 2031, accounting for 12 percent of the entire federal budget. In 2021, U.S. interest payments on its debt alone costed roughly $2,600 per household.
Democrats often try to justify the immense cost of this plan by claiming it would stimulate the economy, as borrowers would have more money to spend. In reality, this plan would cost the government far more than it would provide stimulus.
The Committee for a Responsible Federal Budget conducted an analysis finding that for every dollar the government would spend in student loan forgiveness, only about 3 cents to 27 cents of economic activity would be produced.
Student Loan Debt Cancellation Would Drive Inflation
This kind of spending would inevitably make inflation even worse than it is.
The federal government is already flooding the economy with so much money that demand is growing too fast for production to keep up. In April, inflation remained high at 8.3 percent. Inflation is now costing American households an extra $341 a month.
Not only is inflation harming consumers by increasing household costs, but it is also eroding purchasing power and wages are decreasing. Real average hourly earnings dropped by 2.6 percent on an annualized basis.
Low-income households are disproportionately harmed by inflation. Low-income Americans spend a much higher percentage of their income on basic goods. Under high inflation, higher income households cut back on luxury goods, while low-income households can’t cut out much of their spending, as their spending is primarily on necessities like housing and groceries (which high-income households can “stock up” on while prices are cheap).
Between November 2020 and November 2021, inflation caused low-income households to spend about 7 percent more, while higher-income households spent about 6 percent more.
Student Loan Debt Cancellation Would Be Unfair and Serve Affluent Elites
Not only would this policy hurt low-income Americans by exacerbating inflation, but it’d also be fundamentally unfair to them. Many low-income Americans decided not to go to college or took a cheaper route via community college due to the high cost of tuition.
It is unfair to the millions of Americans that were responsible and did not rack up tens of thousands of dollars of debt. It is unfair to Americans who served in the military to receive free education, or those who have worked long hours to put themselves through school instead of going into debt. This policy is also unfair to those who were proactive in paying off their debt. All these sacrifices were made by people who could only work with the information they had: if they took out loans, they would be held to their contractual obligations.
Not only were these Americans deprived of a certain amount of upward mobility that comes with high education, but now they’re being told that their sacrifices were futile.
Who benefits, then? Primarily, the elite.
The Brookings Institution described those who would benefit most from student debt forgiveness as “higher income, better educated, and more likely to be white.” The top 20 percent of households currently hold $3 in student loan debt for every $1 of debt held by the bottom 20 percent of earners. About 75 percent of student loan repayments come from the top 40 percent of earners, as the Committee for a Responsible Federal Budget notes.
Student Loan Debt Cancellation Could Make Tuition Prices Worse, Create Moral Hazard
Even after spending billions to cancel debt and deeply harming the economy in the process, this policy may actually worsen the student loan crisis for future generations. For starters, the primarily driver of absurd tuition prices has been the federal government’s subsidization of college. If the government decides to further subsidize education costs, this will motivate colleges and universities to charge student even more in tuition.
Further, cancelling student debt will signal to future borrowers that their debt, too, will be canceled at some point. In this way, college students will take on as much debt as they wish, as they expect no consequences of taking it on. Existing borrowers with remaining balances may stop making payments in hopes that more of their debt will be canceled in the future. A marketplace of 18-year-olds taking on tens of thousands of dollars of debt with no intention of ever paying it back is radically unsustainable.
To be clear, the Biden Administration’s plan would give wealthy elites thousands of dollars each, while ensuring low-income households, many of whom missed out on college due to high costs, would face even more difficulty paying for their basic necessities. It’s hard to imagine a more foolish, negligent plan. The Administration should abandon it.