Pebble Finance

View Original

How To Think About The US Student Loan Forgiveness

Well, it finally happened. After being heavily rumored for months President Biden's constitutionally questionable student loan forgiveness giveaway has been formally rolled out.

It is an election year, after all, so giveaways and foolish policies are to be expected but it was pretty dispiriting nonetheless.

It might not have been a shocking development but it was another black week for fiscal responsibility and progressive policies in the US.

Progressive policies because, as we note below and have before, this isn't actually that progressive a program. It is, in fact, deeply elitist.

More problematically still, this action will likely make our student debt problem worse, not better.

All in all, this whole debacle demonstrates that in reality neither political party wants to solve the real problems that afflict us - and excessive student debt is certainly one of them - but instead just want goodies for their supporters.

Let's dive in.

*******

We have written on the topic before but as a gentle reminder the present approach to student loan cancellation does the following:

  1. It is a deeply regressive, not progressive, policy. It rewards higher earners who are more likely to have (more) debt.

  2. It is a deeply unfair policy. It punishes those who repaid loans or worked to pay for their education.

  3. It is inefficient and sends the wrong price signal and creates a perverse incentive. Rather than encourage lower costs of higher education, it subsidizes the cost further, and does so in an unfair manner.

More broadly, as we have repeated ad nauseum this decision does nothing to deal with the significant cost inflation in higher education and directly subsidizes further demand as the market reacts to expecting more debt forgiveness in the future.

Here is the inflation in college tuition over the last 40 odd years. Do we think this chart will go down or up after this?

Terrible.

The above might surprise you considering that student debt was a deeply held progressive (liberal) policy and that it may be but that is where the rhetoric doesn't really match the actual reality of what some of the progressive wish list policies accomplish.

Taking a step back from the broader questions and looking just narrowly at even the medium term outlook the most frustrating aspect of this decision is simply that it does absolutely nothing to resolve the very real problem of higher education costing too much and loading up students with debt:

And keep in mind this chart is put out by the government itself.....

On the very controversial question of whether this policy will increase inflation and by how much our response will be:

  • It is difficult to say with any confidence but it certainly won't be deflationary!

It is likely too early to tell what the inflation consequences will be. It is a very complex issue and will no doubt eventually be the subject of some econometric doctoral work that we hope we get to read and perhaps even understand.

However, here is a great tweet thread for those interested and one written by a very thoughtful, Democrat economist formerly of the Obama administration, to boot:

For us, the big takeaway and most frustrating aspect of this is simply the fact that excessive student debt IS a major issue. And solving it - even including some sort of forgiveness - would be very welcome.

But we aren't doing that. In many ways this loan forgiveness debacle just makes the problem worse, now and in the future. It is symptomatic that we are neither that capable nor even really that interested in tackling what ails us.

Keeping a lid on higher education costs would - could - deal with a whole host of problems and set up many more Americans to succeed in the decades ahead but instead we are sending a signal to the industry to raise costs further and to students to load up on yet more loans because they will simply be bailed out.

Who knows how colleges will react but it might be worth remembering that we have now spent more on student loan forgiveness than we have on climate change...

That shows not only where our priorities lie but also belies a lot of our rhetoric about what, exactly, is an existential question for our society.

No bueno.

As we have said before: rather than dealing with the lack of cost control and quality of supply we are instead just subsidizing demand.....

*******

Have questions? Care to find out more? Feel free to reach out at contact@pebble.finance or join our Slack community to meet more like-minded individuals and see what we are talking about today. All are welcome.