In recent days, political pressure to do something about the $1.5 trillion in student debt owed to the federal government has heightened. An average of about $35,000 is owed by some 43,000 students and their parents. Interestingly, no one seems too concerned about our collective $1.2 trillion in auto debt, where the average loan stands at $32,480 for new vehicles and around $20,000 for used cars, perhaps owed by some of the same struggling people.
To most of us, debt is debt, and paying it off is never easy. But politicians seem to see things differently, especially when it is owed mainly to the federal government and the debt holders can vote. After all, the political reduction of federal debt can be done with a bookkeeping entry. Reducing private debt takes real money.
The source of the pressure to forgive student debt has at least four elements.
First, the debt amount, which has built up over decades, is large — equal to about twice the size of the Defense Department budget — and, partly as a result of ongoing promises that it will be forgiven, woefully in arrears. Debt holders were already facing difficulty due to the 2008 Great Recession, and the COVID-19 pandemic has understandably made things even worse.
Second, when running for office and acknowledging the hardship faced by hard-pressed people in all walks of life, President-elect Joe Biden promised to cancel $10,000 of debt for each student who borrowed money to pay educational expenses. His promise, and those made by other presidential candidates, added significant fuel to the forgiveness fire.
Third, the Trump administration’s temporary relaxation of payment requirements is set to expire on the last day of January 2021.
And fourth, debt holders are stuck with the problem. Even personal bankruptcy does not allow one to discharge student debt. While Sen. Elizabeth Warren is attempting to fix the bankruptcy issue, it remains the case that student debt must be paid one way or another.
Now, it seems, lots of politicians and public figures are joining the call for debt cancellation or forgiveness, as they often put it. Described in these terms, the proposed action seems easy. Just erase the debt and get on with life. But fewer are vocally recognizing the simple realities of double-entry bookkeeping.
If debt is to be forgiven for named individuals, even by the federal government, it will have to be funded by some other named or unnamed individuals. Put another way, the books have to be balanced. Debt forgiven by one party will be debt transferred to another party. After all, the federal bonds that cover it must be paid off.
Since we cannot simply wipe these things away, student debt forgiveness would mean that instead of 43,000 former students being in hock, some yet-to-be-identified future taxpayers will face paying off another dose of federal debt. Maybe these unknown future debtors will include your grandchildren and mine.
The how-to-pay-for-it question was hit head on by aspiring presidential candidates during the Democratic primary. Indeed, Warren and Bernie Sanders were in dead-heat competition in an effort to cancel the most student debt. At times, Warren spoke about doing away with $50,000 per student loan, if not all of it. Sanders promised that amount also, sweetened with the additional promise that college education should be made available at no cost, which of course would put an end to future student debt problems.
But both candidates made serious proposals for paying off forgiven debt. Warren promised higher taxes imposed on the highest income earners; Sanders called for funding with a transaction tax levied against bond, stock, and derivative trading. While their math may have been a bit fuzzy, each recognized that there is no such thing as free debt forgiveness. Someone has to pay — if not now, at least eventually.
Months later, recognition that there is no such thing as free debt forgiveness seems to be forgotten, or irrelevant to our times. It’s awfully easy for solemn-faced politicians to talk about lifting the student debt burden without telling us where the burden will be placed. As has been said before, if you are going to rob Peter to pay Paul, you can be certain to get Paul’s vote. Failure at the national level to communicate honestly about debt forgiveness leads to a combination of distrust, accusations of favoritism, and efforts to form another debt forgiveness coalition.
If it’s so easy, why not take on auto debt? Debt owed to hospitals for cancer surgery? What about forgiving past-due mortgage and rental payments? And what about debt that comes from devastating forest fires and hurricanes? The government may not be able to cancel these by executive order as they may with student debt owed to the government, but Congress could still take action if it really wanted to.
On the other hand, maybe it’s time to get serious with some straight talk about double-entry bookkeeping and how we as a people must pay for our growing appetite for debt forgiveness. Maybe, just maybe, we should try to get to a world where I pay off my debts, you pay yours, and all others do the same.
Bruce Yandle is a contributor to the Washington Examiner’s Beltway Confidential blog. He is a distinguished adjunct fellow with the Mercatus Center at George Mason University and dean emeritus of the Clemson University College of Business & Behavioral Science. He developed the “Bootleggers and Baptists” political model.
