Why Forgiving Student Loans is Bad Public Policy
The Biden administration’s recent decision to forgive $4.28 billion in student loans for 54,900 borrowers under the Public Service Loan Forgiveness (PSLF) program has reignited a heated debate on the economic and social implications of student debt forgiveness. While this policy may seem compassionate on the surface, it sets a troubling precedent that undermines fiscal responsibility, fuels inflation, and fosters moral hazard. Here, we explore why student loan forgiveness, as public policy, is both economically unsound and socially inequitable.
The Inflationary Impact
Student loan forgiveness injects billions of dollars into the economy without corresponding increases in productivity or output. By erasing debt obligations, beneficiaries gain additional disposable income, which often leads to increased consumer spending. While this might sound beneficial, it exacerbates inflation, particularly in an economy already grappling with rising prices.
The cost of education has skyrocketed in recent decades, in part due to easy access to federally backed student loans. Forgiving these loans removes any incentive for educational institutions to rein in tuition fees, perpetuating a cycle of escalating costs. Meanwhile, taxpayers—many of whom have either paid off their student loans or never attended college—shoulder the burden of this inflationary policy.
Encouraging Moral Hazard
Loan forgiveness policies send a dangerous message: financial obligations are negotiable if you lobby effectively. This creates moral hazard, incentivizing future borrowers to take on excessive debt with the expectation that it may be forgiven. Such a dynamic undermines personal accountability and distorts the fundamental principles of lending and borrowing.
Moreover, forgiving loans selectively, as in the case of PSLF, exacerbates inequity. Borrowers who diligently repaid their loans or chose more affordable educational paths receive no compensation, creating resentment and eroding trust in public institutions.
Misaligned Incentives for Education
By forgiving student loans, the government inadvertently encourages students to pursue degrees without considering their return on investment. This fosters a mismatch between educational choices and labor market needs, further inflating the bubble of underemployment and degree inflation. The emphasis on blanket forgiveness diverts attention from meaningful reforms that could address the root causes of the student debt crisis, such as predatory lending practices, unchecked tuition hikes, and lack of transparency in higher education.
The Burden on Taxpayers
Loan forgiveness shifts the financial burden from borrowers to taxpayers, many of whom derive no benefit from higher education subsidies. This regressive redistribution penalizes blue-collar workers and those in lower-income brackets who either did not attend college or financed their education without taking on debt. At a time when fiscal deficits are mounting, such policies exacerbate the national debt and crowd out funding for essential services like infrastructure, healthcare, and public safety.
Alternative Solutions
Instead of forgiving student loans, policymakers should focus on systemic reforms that address the root causes of the student debt crisis. These include:
Promoting Financial Literacy: Educating students about the costs and benefits of higher education and the implications of taking on debt.
Encouraging Alternative Pathways: Expanding access to vocational training, apprenticeships, and certifications that align with labor market demands.
Reforming Higher Education Financing: Capping tuition increases, increasing institutional accountability, and promoting income-share agreements as an alternative to traditional loans.
Incentivizing Employer Contributions: Encouraging private sector participation in financing education through tax-advantaged employee benefit programs.
Conclusion
Forgiving student loans may offer short-term relief to a select group of borrowers, but it creates long-term economic and social costs that far outweigh its benefits. It fuels inflation, rewards poor financial decisions, and perpetuates systemic inequities. A more prudent approach would focus on structural reforms that make higher education more affordable and align it with the realities of the labor market. By addressing the root causes of the student debt crisis, we can ensure a more equitable and sustainable future for all.
Not financial or legal advice, for entertainment only, do your own homework. I hope you find this post useful as you chart your personal financial course and Build a Bitcoin Fortress in 2024.
Thanks for following my work. Always remember: freedom, health and positivity!
Please also check out my Bitcoin Fortress Podcast on all your favorite streaming platforms. I do a weekly Top Bitcoin News update every week on Sunday, focused on current items of interest to the Bitcoin community. Please check it out if you haven’t already. Also now on Fountain, where you can earn Bitcoin just for listening to your favorite podcasts.
Follow me on Nostr:
npub122fpu8lwu2eu2zfmrymcfed9tfgeray5quj78jm6zavj78phnqdsu3v4h5
If you’re looking for more great Bitcoin signal, check out friend of the show Pleb Underground here.
Lightning tips appreciated here.