The Biden administration is currently leaning towards cancelling $10,000 in student loan debt for borrowers. This plan would be disastrous. It would cost an immense amount of money, drive inflation, and create a moral hazard.
According to a CNN report from yesterday, the White House is strongly considering using executive action to give $10,000 in student loan forgiveness to each borrower making less than $125,000.
Because the student loan moratorium is set to expire at the end of the month, an announcement of their decision could come as soon as tomorrow.
Student Loan Debt Cancellation Would Exacerbate Out-of-Control Spending
The plan to cancel $10,000 in debt for borrowers would cost around $300 billion at a time when the national debt is already out of control.
The moratorium on student loan repayments – which has been extended by President Biden four times – has already cost taxpayers $135 billion.
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 July, inflation remained high at 8.5 percent. Inflation is costing American households an extra $635 a month. Even if prices stopped increasing altogether, the average American household will spend over $7,600 more this year due to inflation.
This is radically unsustainable. Certainly, spending hundreds of billions of dollars without paying for it would exacerbate inflation.
Not only is inflation harming consumers by increasing household costs, but it is also eroding purchasing power and wages are decreasing. In July, real average hourly earnings dropped by 3.6 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).
For those in poverty, who often didn’t go to college, any increase in inflation is devastating.
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 primary 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 a disaster waiting to happen.
While Democrats insist that we need to forgive student loans and extend the pause on payments to alleviate the negative effects of inflation on borrowers, the policies themselves worsen inflation. The United States cannot sustain this level of wasteful, negligent spending.