Canceling Student Debt Is Wrong on Every Level

by | Aug 25, 2022 | Biden Administration, Blog Articles, Finance, Inflation, Politics, USA, Why America Matters Book

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One of the first things a toddler learns to say is “That’s not fair!”  It turns out that the idea of fairness, a concept related to justice, is intuitive from an early age. Even 3-year-olds understand that merit is fundamental to fairness. Merit is the idea that “rewards should be distributed according to how much someone contributed to a task.” According to Harvard researchers, “merit seems to be an essential part of the earliest forms of fairness that children display.” This understanding allows children of an otherwise ego-centric age to reward the work of others, surprisingly, even at a cost to themselves.

Reports indicate that the Biden administration is poised to announce a plan to eliminate up to $10,000 per person in student debt for those making less than $125,000 per year. This equates to over $300 billion in aggregate. Rather than going through the legislative process, the Biden administration is expected to undertake this action by executive order, and as such may be more vulnerable to congressional or legal challenge.

For context, according to the Federal Reserve, there is approximately $1.75 trillion dollars of student debt outstanding in the United States, owed by some 48 million borrowers. This figure represents nearly forty percent of all consumer debt in the United States and a sum larger than the $1.37 trillion of auto loans outstanding.

While $300 billion represents less than a fifth of total outstanding student loan debt, a point picked up on by political progressives and economic radicals who demand Biden do more, the cost and consequences of this unprecedented action will be enormous.

There is no shortage of reasons why this action is foolish. Here are a few examples.

The first issue is moral hazard, a term drawn from the insurance world. The concept implies that someone has incentive to assume additional risk because he or she won’t have to bear the cost or consequences of this risk. The phrase entered broader use in the global financial crisis to describe an environment in which unscrupulous banks and other lenders made mortgage loans to people who could ill afford them, knowing that when the music stopped, the government would bail them out. Moral hazard is akin to the “free rider problem,” the taking advantage of a public good without having to pay for it.

Debt forgiveness will distort the market signaling mechanism that uses prices to help inform individual decision-making. Many Americans would be better off to not waste their money on four years of college. Their talents would be better and more productively spent elsewhere, i.e., if they enter the workforce and learn a practical trade or business that they enjoy. But if there is no longer an economic cost to the decision, poor choices are made, and time and resources are wasted.

Similarly, debt forgiveness removes the market constraints for universities and colleges to limit raising tuition. For no good reason, the cost of higher education has risen five times faster than inflation in this generation. Specifically, the cost of higher education in the United States has increased by 1200 percent since 1980, while CPI inflation has increased by a mere 236 percent over the same period. One contributing factor is that the government already subsidizes student debt by pricing interest rates below market prices that reflect actual default risk. This has enabled a multi-decade confiscation of national wealth by private universities, which have seen their endowments soar in recent years. If demand is artificially inflated through debt forgiveness, this extortion will continue unabated.

Debt forgiveness is inflationary. The estimated $300 trillion of canceled debt becomes a general obligation of the U.S. government, increasing an already bloated national debt burden and thereby further weakening U.S. financial conditions. This will add inflationary pressure in the same way that runaway government spending has done over the past eighteen months.

Debt forgiveness will teach a generation of Americans that they are oppressed victims who needed to be rescued by a paternalistic state. They will be entitled with a conviction that they are owed something, and it won’t stop there. Once these handouts are viewed as within reach, broader looting will begin. The Biden administration’s actions will only strengthen the resolve of a movement that wants to undermine the values of independence, hard work, and personal responsibility in favor of the nanny state.

Finally, debt forgiveness is unfair. It’s unfair to the millions of middle- and working-class taxpayers who are subsidizing it. It’s unfair to the millions of students who took out student loans and slowly but fully repaid their debts through hard work and the sweat off their brows. It’s unfair to every American whose savings is being devalued by the debasement of the U.S. dollar through the inflation that debt forgiveness will promote, and who will assume their pro rata portion (roughly $2,000 per household) of $300 billion of new national debt. It’s unfair to future students who will make poor life choices based on an expectation that these hand-outs will continue. And it’s unfair to the recipients, who will learn the wrong lessons about individual decision making, economic agency including the value of work, savings and investment, and the importance of “bearing the yoke in one’s youth;” that is, learning to struggle and persevere, to be frugal and to delay gratification, which is to make trade-offs between consumption today and a better life in the future.

One of the important distinctions between childhood and adulthood is to recognize that even if free candy tastes good, choosing it over nutritious food comes with hidden costs that will manifest only years later.

Read this article on The Epoch Times

 

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