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Forgiving Student Loans Is Not The Great Idea You Think It Is

✪ President Biden has decided against the most radical of Democrat demands regarding student college debt (canceling it all, or nearly all of it), but apparently loan forgiveness of the first $10,000 of a student loan is still an option. Is it a good or bad idea?

The current political movement to “forgive” student loans (translation: stick taxpayers with the bill) has picked up steam since Joe Biden’s election and inauguration. A decade ago, the economist Justin Wolfers called government student loan forgiveness the “Worst. Idea. Ever.” and nothing is markedly different or has changed now in 2021. Here are only a few reasons why student loan forgiveness is a really terrible idea:

1. Perceived Legitimacy. We’re just under two months removed from 2021’s first real “hold my beer” moment: a claim about whether or not the raid on the US Capitol Building was technically a coup. Fairness aside, we need to seriously ask ourselves what student loan forgiveness would do to people’s already-tenuous faith in the American version of liberal democracy. Note that this is not a concern about how people should react. It’s a concern about how people will react.

2. Downstream Incentives/No Accountability. Why shouldn’t I finance my kids’ schooling entirely with borrowed money if I reasonably expect the loans to be forgiven? Or why shouldn’t I eat, drink, and be merry now if I reasonably expect other people to pay off my kids’ student loans? Instead of taking advantage of the tuition deal locally at Samford, why not send them to get a degree in Boutique Studies at Luxury College and then on to an expensive Master’s Degree in Boutique Studies at Opulent University if I can stick taxpayers with the bill? Not everyone responds to incentives the same way, but we’ll definitely see more of this abuse of the student loan program encouraged by debt forgiveness.

3. The Distributional Consequences Are Perverse. The labor market rewards college graduates, which means student loan forgiveness is a transfer to relatively affluent college graduates. In addition, the return to higher education becomes increasingly private rather than public. This means there is no compelling public policy reason to subsidize higher education. And yes, I realize that I am biting fiercely at the hand that feeds me.

4. It’s Actually a Genuine “Trickle-Down” Theory. I’ve seen people claim that student loan forgiveness will stimulate the economy because it will mean people will be able to buy other stuff with what they are no longer paying on their student loans. The problems are many, but here are the two biggest ones. First, if we want to go full Keynesian, high-income college graduates have a lower marginal propensity to consume than people of more modest means. Second, someone has to pay. I know some commentators have invoked the “Modern Monetary Theory” to explain why student loan forgiveness is a free lunch. The reviews of contributions to Modern Monetary Theory in the Wall Street Journal and Journal of Economic Literature have been devastating, and Scott Sumner’s analysis of Modern Monetary Theory suggests it leaves much to be desired.

5. If Schooling is Largely Signaling, Subsidies Are Largely Wasteful. If Bryan Caplan is right and the return to schooling is something like 80% a reward for acquiring a costly signal, the dollars we are spending on higher education are wasted on an arms race between people trying to display their beautiful plumage in the labor market.

6. A Lot of the Purported Non-Financial Benefits of Higher Education Are Largely Wishful Thinking. There’s no longer much evidence college has a very strong long term effect on learning and retention. It’s also no longer considered a slam dunk which improves hiring prospects of particular job applicants. Of course, that’s not strictly true of everyone and college can be a transformative experience for some people. Even then, it’s hardly clear why students should have their transformative experiences at the taxpayer expense. ✪