In the early months of 2009, as the U.S. economy was reeling from the bursting of the housing bubble and the resulting collapse of financial markets, student loan balances had surpassed $700 billion.
One of the lessons of the financial crisis was that individuals, financial companies, and the government should be more careful about accumulating debt. Unfortunately, when it comes to student loans, the government has decided to subsidize profligacy, and the conventional wisdom says we should all encourage it.
As we write, overall student loan debt has exploded to $1.7 trillion. And now, Democrats, led by Senate Minority Leader Chuck Schumer and Sen. Elizabeth Warren, are pushing President-elect Joe Biden to forgive much of this debt by executive order. But doing so will just mean that taxpayers will have to absorb the tab for reckless decision-making.
There’s no doubt that student loan payments are a burden on the younger generation as it enters the workforce. These were people who, in their formative years, had every adult figure in their lives telling them that they needed to go to college, even if it meant incurring huge debts. Studies have shown that student loan debt has caused younger people to defer major life decisions such as saving for retirement, getting married, and purchasing homes.
However, attempting to resolve this problem by simply wiping away debt with the stroke of a pen, were it even constitutional to bypass Congress in such a manner, would simply be repeating the same mistakes that created this mess in the first place.
The current pandemic has exposed the scam that colleges and universities are running. These days, many of them are charging full tuition while running virtual classes, many of them with online lectures no better than anything available for free on YouTube.
But that’s just the newest scam. For decades, the government has been inflating the higher education bubble by supplying easy loan money that cannot be discharged in bankruptcy. Fat cat university administrators have been hiking tuition because they know the government will subsidize them via student loans. This has created a vicious circle in which ever-larger loans are chasing ever-higher tuition. In 2016, a National Bureau of Economic Research working paper found that the staggering increases in college tuition between 1987 and 2010 could be explained by the explosion in financial aid.
Were the Biden administration to respond by wiping away the debt, it would simply be a green light for students to absorb more debt and for colleges and universities to hike tuition still further. It will have registered that at some point, the government will step in and come to the rescue.
Some liberals are trying to push the student loan bailout as a form of economic stimulus because those who no longer have to pay off their debt would have more disposable income. But if the government were to decide to spend money on a stimulus, there are many more effective ways it could do so while targeting relief not to tomorrow’s upper-class college-educated elite, but to those who have actually lost their jobs and businesses due to coronavirus lockdowns.
