One of the major things that the incumbent president has been doing since he took power was to cancel student loans. The Biden administration recently announced that it will begin canceling student loans again for some borrowers, a month ahead of schedule as the President accelerates signature relief plans to tackle soaring levels of student debt.
For many existing borrowers, this is obviously tremendous news because it takes off their shoulders a significant financial burden that has a negative impact on their overall well-being. For these borrowers, wiping these student loans off their balance sheet paves the way to homeownership, especially for young adults who are, for the most part, first-time homebuyers.
It was also argued that student loan debt disproportionately burdens low-income borrowers and minorities, who have higher debt-to-income ratios and face greater difficulty repaying their loans. Thus, proponents of student loan cancellations believe that wiping out these loans contributes to reducing wealth inequality and enabling economic mobility.
While these arguments may be emotionally fulfilling, the cancellation of student loan debt does not address the actual problem. Beyond not addressing the actual issue, these cancellations have serious negative consequences on the economy that existing borrowers and the proponents of student-loan cancellation, ignore.
The real problem is the unaffordability of college tuition. Canceling student loan debt does not reduce the cost of college tuition. On the contrary, it incentivizes universities to prop up the cost of tuition because they will assume that: 1) students will borrow, and 2) the government will eventually cancel these loans. These, while canceling these loans help existing borrowers, it does not help prospective borrowers who will incur a much higher debt-to-income ratio.
The biggest misleading statement ever made was to claim that cancelling student loan debt stimulates the economy. Not it does not. It hinders growth. It carries a massive fiscal cost. Cancelling the current $1.7 trillion in outstanding student loans would be a significant expense for the government, which will increase the national debt by a vast amount. Doing so would necessitate a tax increase on taxpayers or the government borrowing more money from the Federal Reserve and other lenders. The large upfront cost of debt forgiveness could divert resources from other investments, potentially slowing long-term economic growth.
Injecting a large sum of money into the economy through debt forgiveness will surely contribute to inflation, especially if borrowers used the freed-up funds for immediate consumption rather than investing or saving. It will erode purchasing power and negatively impact businesses and consumers.
It is worth noting that student loan cancellation creates a moral hazard. It encourages future students to take on more debt with the expectation of future forgiveness. This would lead to rising tuition costs as was aforementioned, and further inflate the student loan bubble. And individuals who already diligently repaid their student loans may feel unfairly treated if those who haven’t paid their loans are forgiven. This will create social resentment and calls for compensation.