The student loan debt cancellation trap

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In a recent New York Times op-ed, Massachusetts Senator Elizabeth Warren put forth some suggestions as to how the Democrats could salvage some sort of momentum heading into the midterms, which are currently shaping up to be a potential catastrophe for them. Most of her ideas, as with the majority of Democrats, involve lots more “free money” for people. One of her proposals is to make good on something that Joe Biden campaigned on in 2020, along with many others in his party. She suggests that they simply “cancel” some student loan debt, an action Warren claims Biden could do “entirely on his own.” This prompted Matt Lewis to respond at the Daily Caller, pointing out the many bad things about this idea, including the fact that it would do nothing to address the underlying problem and would only kick the can down the road for a few more years.

I don’t expect that Democrats and the liberal commentariat want to hear this—but that’s a bad idea, both substantively and politically.

Let’s start with the substance. Academic research suggests that canceling student debt helps the rich more than the poor. Some people owe a lot of money—not because they are poor—but because they were wealthy enough to make bad bets. That is to say, they took out a loan to purchase what they believed would be a valuable investment that would pay dividends later (about half of all student debt is for graduate school).

As The Brookings Institution’s Adam Looney noted, “Medical school graduates typically owe six-figure student loans but that doesn’t mean they are poorer than high-school graduates who did not go to college.”

Should the person with the big medical school loan (for a degree that will make them millions over the course of his life) be forgiven, while the community college student who worked nights and weekends to pay for school gets nothing?

That’s only the first of many points he makes, no doubt generating significant fury among the Daily Caller’s audience. But it’s still entirely valid. Even if the government actually had the half-trillion dollars of “free money” you would need to make a significant dent in the total student loans out there (that wouldn’t even cover a third of it), are people with graduate degrees really the most needy demographic you could find to shower that money upon?

The fact is that we have a broken and bloated student loan system precisely because the government created that system without considering the consequences. By making nearly limitless loans available to young people who might never be able or just get around to paying them back, colleges and universities were incentivized to raise tuition rates massively. To paraphrase a scene from Goodfellas when the mob was “busting out” a business owner, who cares how many checks you have to write? It’s not like anybody is going to pay the money back anyway.

With those underlying factors being ignored, even if you managed to “forgive” all of those loans, the next class entering college would simply start the process all over again and in five to ten years we’ll be right back where we are now. The solution to the underlying problem is to find a way to make the university system more competitive, drive down tuition rates, and decrease the need for such large loans to begin with. How that can be accomplished, I’ll leave up to the experts, assuming you can find any.

Matt is also correct about the awful political optics of this. The loan forgiveness under discussion would go almost entirely to college graduates. That is going to leave a lot of working-class Americans even more convinced that the system is rigged in favor of the elite. And while it should go without saying, Warren’s proposal does nothing for all of the people with mortgages, car loans, or business loans. They will all rightly be saying ‘what about me? When do my loans get forgiven?‘ That’s not going to create an army of happy voters.

Finally, let’s remember yet again that there is no such thing as “free money” and that’s particularly true of the education system. People like to point out that K-12 public schooling is “free,” but it’s obviously not. The teachers and staff all get paid. There is maintenance to be done on the buildings, utilities to cover, and books and other resources to purchase. All of that has to be paid for and it is… by the taxpayers. If you try to cancel all of that student debt, the same will be true, only on a national level. And in the end, you will wind up filching the money from the people who managed to pay off their own loans and earn a living to cover the costs of those who didn’t. That doesn’t really make for a very good thirty-second campaign advertisement, does it?