Biden’s very bad decision to cancel student loans – The Morning Call

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There are bad economic policies, there are awful economic policies, and then there is President Joe Biden’s decision to bypass Congress and unilaterally cancel up to $1 trillion in college debt. If so, it will be the worst economic policy of my life, and I’m old enough to remember when Jim Bunning was the Phillies ace.

I am happy for the people who will have their loans forgiven and I do not underestimate the burden these debts can place on young adults. But I don’t think the gains for the people whose loans are canceled come close to offsetting the losses that Biden’s plan imposes on everyone else.

To start, think about this: suppose that before Biden announced the plan, you were asked the following: “If the president is determined to spend $1 trillion, what should he spend it on?” Would you have answered that the money should be spent on canceling college loan debt rather than, say, (if you’re right) improving the US military to deal with the threat from China or (if you are on the left) to increase the child tax credit or green energy subsidies?

Thinking in these terms focuses on the key problem. Apart from economists, almost everyone is now unaware of the fact that government policies involve trade-offs. In particular, most government policies take from one group and give to another. Take Social Security and Medicare. Most people currently participating in these programs will receive more in benefits than they pay in taxes. Taxes on current workers pay the difference. In this sense, social security and health insurance programs are a transfer to the elderly from young and middle-aged people.

The cancellation of Biden’s loan will result in a transfer from the 87% of the population who have no student debt to the 13% who do. Who is part of the 13%? For people aged 25 and over, 75% of Asians and 63% of whites have attended college compared to only 57% of blacks and 43% of Hispanics. As these figures indicate, academic research has revealed that Asians and whites benefit disproportionately from college loan forgiveness.

High-income earners will benefit because they are more likely to have attended college and have loan balances at or above the Biden plan’s $10,000 and $20,000 limits. According to University of Pennsylvania Wharton Budget Model, the top 60% of the income distribution will receive roughly twice as many benefits from the Biden plan as the bottom 40%. This analysis actually underestimates the benefits for high-income earners.

Consider, for example, a medical student. Her current income is probably low enough to pay off between $10,000 and $20,000 of her undergraduate student debt. But once she begins her career as a doctor, her earnings will likely put her near the top of the income distribution. Biden’s plan is another example of Democrats favoring the educated college over the working class.

How do people who don’t have student loans lose out on Biden’s agenda? First, people whose loans are canceled will have more income, so they will buy more goods and services than they would otherwise. Since the US economy is currently operating at full capacity, from an arithmetic point of view, if the share of goods and services consumed by people with forgiven loans goes up, the share of everyone else must go down. And increased spending resulting from loan cancellations increase the inflation rate, which has already been high for decades. Inflation hurts llow-income people the most.

Second, loan cancellations will increase the federal budget deficit and add to the national debt. Rising interest payments on the debt will eventually force Congress to either raise taxes or cut government spending. The pain of tax increases and spending cuts will be felt by everyone.

Biden’s proposal puts more pressure on students to take on more debt and colleges to raise tuition. Although it received less publicity than the cancellation of existing loans, Biden’s proposal includes a change to the federal government’s income-based loan repayment program. Borrowers will now have their loans canceled after 10 years, instead of the current 20 years, while lowering their annual payments to 5% of their income, instead of the current 10%.

These changes make college loans a much better deal for borrowers — and a much worse deal for taxpayers — because borrowers will end up with a greater portion of their loans forgiven than under current law. If students and their parents are less concerned about the cost of borrowing for college, they will be less responsive to tuition increases.

Biden’s plan wastes $1 trillion, the feds don’t have to help relatively few people, while encouraging colleges to raise tuition even further. Quite an accomplishment.

Anthony O’Brien is Emeritus Professor of Economics at Lehigh University. The opinions expressed are those of the author and not of the university.

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