The Student Loan “Forgiveness” Scam

by | Oct 10, 2022

The Student Loan “Forgiveness” Scam

by | Oct 10, 2022

fpc (1)

“Forgiveness” is such a kind word that it’s no wonder politicians latched on to it to describe the extremely unkind thing they’re doing to us. Recent discussions on social and mainstream media reveal that the typical voter is not only confused about what “loan forgiveness” means, but (disturbingly) also confused  as to what “loan” means.

Myth #1: Student loan forgiveness doesn’t cost taxpayers anything because the loaned money has already been spent.

Yes, the money has already been spent. But that’s not where the cost occurs. Suppose that a student was supposed to pay back $10,000 five years in the future, and that the government has now just forgiven the loan. Five years from now the government will have $10,000 less revenue than it otherwise would have. And that means that the rest of us either (1) will receive $10,000 less in government services than we would have otherwise, or (2) will pay $10,000 more in taxes than we would have otherwise, or (3) will endure $10,000 more worth of inflation than we would have otherwise.

The student who has his loan forgiven will end up paying back some of that forgiveness later, likely in the form of higher taxes or inflation. But he’ll only pay back some. Some will be paid by people who already paid for their own student loans. And some will be paid by people who didn’t go to college at all. No matter how you slice it, the government hasn’t forgiven loans. It has instead forced the rest of us to pay them back. Notably, it has forced people who didn’t go to college to pay for those who did.

Myth #2: Forgiving student loans will cause inflation.

Forgiving student loans won’t cause inflation. But, the manner in which the forgiveness is financed could cause inflation. Forgiveness means that the government will be collecting less money in the future from the borrowers. If Congress doesn’t cut spending to match the money it won’t be collecting, and doesn’t raise taxes to compensate for the money it won’t be collecting, then it will have to print money to compensate for the money it won’t be collecting. That will cause inflation. Astute readers may note a fourth option: The government could borrow more in the future to compensate for the money it won’t be collecting. But the government’s borrowing money is the same as raising taxes. It just happens over a different time frame. Rather than raising taxes by a large amount in one year, when the government borrows, it raises taxes in small amounts over many years to pay the interest on the borrowed sum.

Myth #3: Student loan forgiveness benefits private banks.

Contrary to what detractors say, loan forgiveness is not some sort of bank bailout. Way back in 2008, politicians buried in the text of the Affordable Care Act language authorizing the Department of Education to lend directly to students. Consequently, today the Department of Education holds more than 90 percent of student loan debt. Student loan forgiveness applies to this government-held debt, not to debt held by private banks.

Myth #4: Forgiving student loans is good for the economy because those students will be more able to purchase homes and cars.

It is true that student loan forgiveness will give students financial freedom they wouldn’t otherwise have – freedom to invest in starting businesses or to buy big ticket items like houses and cars. But this is only half of the truth. For every additional dollar students will be able to spend because their loans are forgiven, the rest of us will have one dollar less to spend because we must pay for the forgiven loans. In the end, there’s no positive economic effect. All the forgiveness does is augment students’ spending in exchange for diminishing the general population’s spending.

Myth #5: Forgiving student loans won’t cost that much.

Relatively speaking, the current round of loan forgiveness isn’t that big of a deal. In the face of trillion-dollar deficits, another hundred billion or so isn’t noticeable. What is worrisome is what comes next. Next year’s students will, understandably, want loan forgiveness also. Tuition will rise because now universities don’t have to worry about students not attending high-priced schools because the students aren’t paying. As tuition rises, there will be a call for even more loan forgiveness. Then there will be an influx of students into colleges and universities who are looking for a four-year all-expenses-paid vacation. This increase in demand for higher education will push tuition up even further. And what will these vacationing students study? On average, they’ll want to study easy subjects. And so demand for majors like gender studies and child and family education will skyrocket. When these students hit the job market and can’t find jobs in their fields, politicians will hold hearings asking why higher education is costing taxpayers so much and delivering so little. Politicians will then say that, since the government is paying for higher education, it should have a say in what’s going on in higher education. And there we have Public School 2.0. All the problems that the government has brought to public education, it will then bring to higher education.

Myth #6: Student loan forgiveness is good for Americans.

The reality is that student loan forgiveness is good for some students, bad for the rest of us, and the collective pain to the rest of us will exceed the collective good for the students. The one group for whom student loan forgiveness is unquestionably good is politicians. What student loan forgiveness really does is allow politicians to use our money to buy the votes of an entire group of young voters.

In the end, a college degree is either valuable or it isn’t. If it’s valuable, it will pay for itself. If it’s not valuable, no one should pay for it. Either way, there’s no reason for the government to be involved in higher education. The more involved it does get, the worse the problem becomes.

 

This article was originally featured at the American Institute for Economic Research and is republished with permission.

About Antony Davies

Antony Davies is the Milton Friedman Distinguished Fellow at the Foundation for Economic Education, and associate professor of economics at Duquesne University. He has authored Principles of Microeconomics (Cognella), Understanding Statistics (Cato Institute), and Cooperation and Coercion (ISI Books). He has written hundreds of op-eds appearing in, among others, the Wall Street Journal, Los Angeles Times, USA Today, New York Post, Washington Post, New York Daily News, Newsday, US News, and the Houston Chronicle. He also co-hosts the weekly podcast Words & Numbers. Davies was Chief Financial Officer at Parabon Computation, and founded several technology companies.

Our Books

latest book lineup.

Related Articles

Related

TGIF: Why Isn’t Antifa Marching for Apple?

TGIF: Why Isn’t Antifa Marching for Apple?

I was all ready to don a black mask for the Antifa demonstration when I realized that the self-styled antifascists hadn't planned a demonstration. What are they waiting for? After all, the national government has just started a new fascistic crusade. You'd expect the...

read more
Israel Lets AI Decide Who Dies in Gaza

Israel Lets AI Decide Who Dies in Gaza

The Israeli military has employed yet another AI-based system to select bombing targets in the Gaza Strip, an investigation by +972 Magazine has revealed. The new system has generated sweeping kill lists condemning tens of thousands of Palestinians, part of the IDF’s...

read more
How Big a Factor is Iran in the War on Gaza?

How Big a Factor is Iran in the War on Gaza?

In both Ukraine and Gaza, the Joe Biden administration has adopted the dangerous doctrine of war management in which, while not stopping a war diplomatically, it attempts to contain it and prevent it from becoming a wider war into which the United States might get...

read more
Triple Tap Murders…Oh Look, a Cat Video

Triple Tap Murders…Oh Look, a Cat Video

Recently the Israeli Defense Force murdered an aid convoy. A group of international aid workers who had coordinated with the IDF and who were travelling on an IDF approved route. When the aid workers came under attack, they contacted the IDF. Three assaults were...

read more
Diagnosing Israel’s Imperial Narcissism

Diagnosing Israel’s Imperial Narcissism

As it continues to engage in a “plausibly genocidal” mass murder spree in Gaza, the state of Israel has embraced the most psychotic and psychopathic interpretation of one of the most violent narratives from the Hebrew Bible. This is fueling a narcissism that puts the...

read more