Why Student Loan Debt Relief Is A Worse Idea Than You Think

The

U.S. Supreme Court

Various arguments were heard from supporters and opposition of

President Joe Biden

Student debt forgiveness program. It is likely that the justices will rule by June. It is important to keep in mind a few issues.

Student loans are an essential tool to help maximize the number of citizens that have access to the best and most exclusive tuition. American universities are among the top in the world and high-quality tuition comes with an elevated cost. To help the disadvantaged access top universities it is important to have a thriving and affordable loan system, a solid grant program and an open market that supports the majority, including those who are not in university yet.

We must aim to make the current system better, not maintain it disguising the problem with a deficit-financed subsidy.

A student loan debt relief program does nothing to solve the cost of tuition.

It justifies it and will likely make fees rise again as universities see that the government subsidizes those that may take a difficult-to-pay loan. Furthermore, by providing a subsidy to the already indebted, banks may have an incentive to give loans to students with less probability to repay them. It is likely to create a wave of non-performing loans predicated on the view that this scheme will be prolonged and even increased. The reader may say that I am exaggerating, which I find interesting when we are living every day the result of debt accumulation excess.

A student loan debt relief program is a subsidy to take risky debt.

It penalizes those who pay their loans, as well as those who access new tuition. However, it encourages students who have not taken student loans or worked their way through college to get a risky loan. The reason is that the loan relief program is funded with a higher deficit. This means more inflation and higher taxes in the future. Because the government has a huge deficit, there is no revenue source that can finance this program. This measure cannot be considered without considering the fact that the Federal budget has an unsustainable deficit, and the fact that no budget cuts have been discussed to finance the program.

Students who cannot pay their loans on time will not be able to consume more if they are given a subsidy.

First, even if this were true, the effect on total consumption for those who receive the relief relative to the negative effects for those who are subject to higher taxes or persistent inflation is not significant. But, even for those who are eligible, the impact on consumption will be minimal. A partial bailout of citizens' debts will not result in a complete reverse of their credit scores. Although a partial release of debt will have a limited impact on one person or family, it is not enough to be considered a stimulus for an economy.

If student debt relief is a stimulus to the economy that will increase consumption, then why would the same proponents demand constant increases in taxes for those who can consume and invest?

Would it not be easier to provide a tax deduction scheme that allows all those who take student loans to benefit from lower personal income burdens?

Furthermore, would it not be better to agree with the financial system on support to help re-finance and re-structure non-performing loans in order to provide a market-oriented relief instead of a subsidy to excess debt?

The problem of the debt relief program is that it needs to be a subsidy so that the ones that receive it think that it was the government who helped them, not the taxpayers and consumers, who are the ones that pay for it in higher inflation and taxes. Any other, and more reasonable, alternatives do not create votes. If we looked for better alternatives, we would be thinking of providing support through a market-based re-structuring of debt and avoid the negative consequences of perpetuating and increasing tuition fees and elevated inflation as well as penalizing those that paid their debt. This student loan relief helps a few thousand to hurt millions.

There are many ways to help with the restructuring of high debt loads. The financial system can assist you in this process quickly and efficiently.

Of course, there must be ways of support to those students that took loans they cannot repay today. It must be a tailored, ad-hoc re-structuring that does not create negative perverse incentives for everyone else to take credit they cannot afford. It can include tax deductions for talented students.

The same students that think it is a promising idea to receive this relief will also pay for it in high inflation and higher taxes for longer.