cft

Student Debt Relief: Inflationary, Expensive and Counter-Productive

The debt burden is not as heavy as the President and his supporters say it is.


user

Michael Busler

10 months ago | 3 min read

The debt burden is not as heavy as the President and his supporters say it is.

President Biden just announced that he iscanceling $10,000 in student loan debtfor all Americans earning $125,000 or less. This action is inflationary, expensive and counter-productive. And what about current and future students who take on debt? Will $10,000 be canceled for them too?

There are 45 million Americans with student loan debt. The total is just over $1.6 trillion. That means the average debt, for graduates that have debt, is about $37,000. One-third of those graduates have a debt of $10,000 or less, meaning their entire college debt would be canceled. Supporters of this action say that it is needed because these people are suffering from the burden of this debt.

Supporters further argue that the debt burden is preventing these Americans from moving forward with their lives. They argue the debt is preventing people from purchasing a new home or even preventing them from getting married and having children.

A recentCNBC surveynoted 81% of people with student loan debt said they have delayed one or more key life milestones because of their debt.

“Student loan debt prevents family formation, it prevents people from making decisions about their life, about purchasing a home, about buying their first car, about getting married, about having children,” says Nicole Smith, chief economist at the Georgetown University Center on Education and the Workforce. “And that wasn’t the purpose of student loan debt. Student loan debt was supposed to be good debt — the type that you take out so that you can invest in your human capital formation so that you can live your life afterward — and it’s morphed into something much more insidious.”

That’s a lot of poppycock.

Theaverage student loan interest rateis 5.8%. A $10,000 debt repaid over 10 years at a 5.8% interest rate would result in a monthly payment of $110 per month. If the loan is repaid over 20 years, the payment falls to $70 per month.

For a student loan debtor with the average balance of $37,000 and repaying over 10 years, the monthly payment would be $407. Since most repay over 20 years, the payment would $261 per month. All of these monthly payments are far less than amonthly new car payment.

For an individual with $125,000 in gross annual income, the monthly take-home pay after taxes would be about $8,300. That amount can easily afford a $407 monthly student loan payment.

The program is also very costly. ThePenn Wharton Budget modelestimated “that forgiving federal college student loan debt will cost $334 billion over the 10-year budget window. About 70% of debt relief accrues to borrowers in the top 60% of the income distribution.”

This program is also inflationary. Nearly all of the runaway inflation we are experiencing today is a result of excess demand coming from the nearly $7 trillion in government deficit spending in fiscal years 2020, 2021 and 2022. The excess demand is also a result of the shockingly irresponsible Monetary Policy in 2021 and the first half of 2022, when the Fed vastly increased the money supply and kept interest rates near zero, in spite of soaring inflation.

This student loan forgiveness program will add billions in excess demand, simply because the money that would have been spent to repay loans will now be spent on buying more goods and services, increasing demand and putting upward pressure on prices.

And what about the future?

Students in college today will say that they should have $10,000 of their student loans canceled, too. And high school students will say that they are about to borrow large sums to attend college. Shouldn’t $10,000 of their future debt be canceled?

Is this fair to non-college grads and to college grads who have already repaid their loans?

People who skipped college and learned a trade or some other skills don’t want their tax dollars to be used to pay someone else’s college loans. And grads that repaid their loans want $10,000 back.

Allowing responsible people to borrow money from the federal government so that they can go to college is arguably a good idea and will provide opportunity to any qualified high school grad. But borrowing money means it must be repaid. Canceling student debt sets a bad example for young adults as they borrow money for the first time.

Upvote


user
Created by

Michael Busler

I provide analysis and solutions to economic and public policy problems consistent with the principles of freedom and Democracy.


people
Post

Upvote

Downvote

Comment

Bookmark

Share


Related Articles