Biden Student Loan Forgiveness Scheme Fixes Nothing

President Joe Biden recently announced a student loan forgiveness program. While it will provide some people a small amount of relief from student loan debt, this $300 billion taxpayer-funded scheme does nothing to address the underlying problem. In fact, it will exacerbate it.

The underlying problem is the high cost of a college education.

And why is college tuition so expensive?

The cost is directly linked to the widespread availability of student loans.

Forgiving a little bit of student debt doesn’t change the underlying dynamics. Even as some people will see their debt balances decrease, new students are borrowing money even as you read this article.

And of course, the federal government signaling that its willingness to forgive debt won’t do anything to deter more borrowing. It will only incentivize more student debt. As Peter Schiff pointed out in a recent interview, loan forgiveness increases moral hazard. Moral hazard means a lack of incentive to guard against risk because people are protected from the consequences.

Remember, the only reason we have all these student loans is because the government provided them or guaranteed them. The only reason college is so expensive is because the government provides so much money in the way of loans. But now that they start forgiving loans, students are going to borrow more money than ever before. Because the colleges are going to tell the students, ‘Hey, who cares how much you borrow for college? You’re not going to have to pay any of it back anyway. So, we’re going to double your tuition, and don’t worry. Maybe we’ll throw in a free car.”

Schiff alludes to the root of the issue. The government is trying to solve a problem that it created to begin with.

Somewhere along the line, the powers that be decided everybody needed to go to college. So, the government created the federal student loan program to make college “accessible for all.” But as with most government programs, it failed to deliver as promised. The result wasn’t more people going to college. It simply increased the cost of tuition for those going to school. In effect, colleges and universities were able to base their prices on the fact that students can easily borrow money.

This isn’t merely theorizing. A paper published by the National Bureau of Economic Research (NEBR) in 2015 found that a large percentage of the increase in college tuition can be explained by increases in the amount of available financial aid.

Economists Grey Gordon and Aaron Hedlund wrote their paper for the NBER after creating a sophisticated model of the college market. When they crunched the numbers, they found that the demand shock of ever-increasing financial aid accounted for almost all of the tuition increase:

Specifically, with demand shocks alone, equilibrium tuition rises by 102%, almost fully matching the 106% from the benchmark. By contrast, with all factors present except the demand shocks, net tuition only rises by 16%. These results accord strongly with the Bennett hypothesis, which asserts that colleges respond to expansions of financial aid by increasing tuition.”

George Mason University economist Alex Tabarrok pointed out that Gordon and Hedlund revealed the inevitable outcome of government financial aid policy.

Remarkably, so much of the subsidy is translated into higher tuition that enrollment doesn’t increase! What does happen is that students take on more debt, which many of them can’t pay.”

A paper published by the Federal Reserve bank of New York came to the same basic conclusion.

We find that institutions more exposed to changes in the subsidized federal loan program increased their tuition disproportionately around these policy changes, with a sizable pass-through effect on tuition of about 65%.”

In a nutshell, the federal government raised the cost of a college degree while destroying its value. Peter Schiff summed up the problem several years ago during an interview with Tom Woods.

Government wanted to make college more affordable. They made it more expensive. And at the same time, they destroyed the value of the degree. It costs more to get a degree, and the degree is worth less, because everyone now has one.”

Fast-forward to today and the problem has only grown larger. Student loan debt in the US totaled $1.59 trillion at the end of the second quarter. Around 43 million Americans hold student loan debt. Less than a third of those owe less than $10,000.

Biden’s scheme doesn’t even put a dent in the level of student loan debt. More significantly, it not only fails to address the underlying problem – it will exacerbate it.