Student Loan Cancellation

Executive Action on Cancelling Student Debt

Is the Cancellation of Student Debt Good Public Policy?

I have not actually heard a reasonable attempt to rationalize student debt cancellation as good public policy. If you know of one, please post it in the comment section.

The pause in student debt payments during the early stages of the pandemic could be justified as fiscal stimulus (needed at the time) or as part of a broad array of policies to cushion the individual financial impacts of the pandemic. What the White House announced yesterday is different.

More than anything, debt cancellation is now a political payoff to a special interest group that supported Biden, and the Democratic Party generally, in 2020. As a political payoff, it is no worse and no better than any other political payoff to a special interest group. It is no worse than Sen. Kyrsten Sinema getting rid of the carried interest provisions in the “Inflation Reduction Act,” in return for financial support from the private equity industry. It is no worse than Sen. Joe Manchin defending the coal industry. It is no worse than many of the special tax breaks added by Republicans to the 2017 tax act.

I am not saying that all of the things mentioned above are necessarily bad public policy. Some are, some are not. What I am saying is that they are not why these things happened. They happened as a quid-pro-quo for political support.

When viewed that way, the cancellation of student debt is just the payment of a political debt. It’s not good or bad, it’s just part of the grease that makes the political system work. It is hard to get angry about it when viewed this way, unless you believe the political system can be entirely altruistic.

Does it Lower the Cost of Higher Education?

Some might counter that the cost of higher education is too high and this lowers the cost of higher education. Student debt cancellation lowers the cost of higher education in the same way that cancelling auto loan debt for cars purchased in the last 2 years lowers the cost of cars. A lucky few have more cash, but the cars still cost the same. Cancellation does nothing to make higher education less expensive going forward. By the same token, the claim that it will cause colleges to charge more is weak, since there is little reason to expect the debt cancellation to be repeated.

If you are interested in some ways to actually reduce the cost of higher education, check out the Centrist Independent Voter’s policy position on higher education.

Is the Debt Cancellation Inflationary?

The debt cancellation is a form of fiscal stimulus. Unfortunately, stimulus expenditures are the last thing we need at this time. In defense of the cancellation, it is only mildly stimulative and therefore only mildly inflationary. To understand why, one needs to reflect on the income effects of the debt cancellation. Cancelling $10,000 of debt to be paid over 10 years only increases disposable income by about $1,000 each year. Theoretically, the impact might be slightly higher since the cancellation affects future income/wealth and therefore has a small additional impact on current consumption. More importantly, if the student owes a really large amount of debt, their annual payments may not be affected at all under the income-driven repayment plans. In those cases, the cancellation of debt just reduces the size of the debt to be forgiven in 10 to 25 years, from the date they borrowed the funds, depending on which plan they are participating in. Even that effect is potentially smaller if the debt forgiveness is a taxable event. All of that being said, student debt cancellation should have a negligible impact on inflation.

Of course, in the long run, debt cancellation will increase the size of the deficit. This could be offset by higher taxes. It is unlikely that the Biden administration will propose specific tax increases to accomplish this. To do so would make it obvious that this is simply a wealth transfer from one group of people to another.

The Bottom Line

Student debt cancellation is a payoff. If it is effective at keeping the target group aligned with the Democratic Party, and if it does not alienate others in the coalition, then it is good politics for Democrats. That is a big if.

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