The Biden Administration’s student loan forgiveness program executive order would generate significant current and future liabilities for taxpayers, and cause college costs to soar. Brian Wesbury, First Trust Advisors L.P.
Biden Administration announced a student loan forgiveness program in late August that is creating significant political and economic debate. And, the more economists and the public learn about the details of the pending Presidential executive order, the worse it looks and smells.
The executive order would generate huge costs and future liabilities for taxpayers, and cause college costs to soar, which already generates negative marginal value-added for both students and our country, writes Brian Wesbury, Chief Economist, First Trust Portfolios L.P.
The Biden Administration says the changes would cost $240 billion in the next ten years. The Committee for a Responsible Federal Budget says $440 – 600 billion. A budget model from Wharton says $1 trillion. But even that $1 trillion figure might be way too low. The key factor driving the extraordinary costs is the cancellation of some student debt that already exists is only a small part of the policy change.
The much bigger change, and the one that the market has finally begun to absorb, is limiting future payments on debts to 5% of income, but only after the borrower’s income rises above roughly $30,000 per year.
For example, if someone makes $70,000 per year, then no matter how much they borrow they’re limited to paying $2,000 per year (5% of the extra $40,000). After twenty years, any remaining debt would simply disappear.
The perverse incentives for the vast majority of students, choosing this “income-based repayment” system would be a no-brainer. And once they pick it, they wouldn’t care at all whether their college charges $35,000 per year (tuition, room, board, and fees), $85,000, or even $150,000.
In fact, students would have an incentive to pick the priciest college with the best amenities they could find and pay for it all with federal loan money, because their repayments are capped, states Wesbury.
Meanwhile, students would have the incentive to take out loans greater than what they need because they can turn the excess into cash for “living expenses.” Then they could use it to buy crypto, throw parties, or pretty much anything else. The government would limit their future repayments.
And here’s what might be the worst part: colleges would have an incentive to enroll students even if they have horrible future job and earning prospects. By enrolling people no matter how poorly prepared they are, a college can charge whatever they want and get huge checks from the federal government. And the unprepared students won’t care because they really don’t have to pay it back. In effect, colleges could create massive and perfectly legal money-laundering schemes.
Although, no one can be certain if the new proposal will be implemented fully. But, if it is: college costs are poised to skyrocket and academia is courting a political backlash of enormous proportions. Meanwhile, the financial market is attempting to digest just how far from economic reality Washington politicians have become. The political allocation of capital is a sure recipe for economic disaster, states Wesbury.
And, don’t forget that a Presidential executive can be expediently reversed by the next president,quickly erasing the benefits of student loan debt forgiveness.
- Brian S. Wesbury – Chief Economist
- Robert Stein, CFA – Deputy Chief Economist
References:
- Brian S. Wesbury and Robert Stein, Biden’s Student-Loan Fiasco, First Trust Economic Blog, August 29, 2022. https://www.ftportfolios.com/blogs/EconBlog/2022/8/29/bidens-student-loan-fiasco
