Student loan waiver will cover non-educational shopping, say.

The The Wall Street Journal The editor, and many other policy analysts and scholars, have rightly criticized the student-loan waiver proposal, on the grounds of fairness. Loan waivers remove the burden of debt from students who have voluntarily taken out loans, to taxpayers, many of whom have lower incomes than student loan recipients.

But critics of student loan waivers have overlooked how student loan waivers can effectively turn other non-education purchases, cars, trips, and home remodeling (and many other products) into waivers. This has been made possible by student loans that come with government subsidies and guarantees, and as a result, more attractive interest rates and repayment terms than personal loans (and, now, with the additional possibility of a break in payments and debt forgiveness).

Debt waiver proposals also add a touch of unfairness, as benefits will go to a relatively privileged group, with 40 percent of high school graduates enrolling in college. Many college graduates and undergraduate students (at least those who align their majors with job-market demand) use student loans to push themselves into higher income brackets than many taxpayers who will be asked to share the tax burden needed to cover forgiven debts. . WSJ The editors add, “Now millions of borrowers cannot or do not want to repay their loans, so President Biden says he can cancel their loans. Taxpayers who have repaid their loans or have not gone to college.” [or who worked their ways through college to avoid student loans] Money will be paid instead. “Where are the fighters for social justice?

But debt-forgiveness proposals are problematic for another unseen, unreasonable, perhaps more important economic reason: proponents and critics of debt forgiveness have failed to consider that subsidies, and, of course, fungi are at the heart of all debt. For millions of borrowers, there are certainly many who use loans to pay for their education, leaving behind their personal funds that can be used to upgrade their college accommodation as well as buy better and newer cars.

Similarly, many parents who set aside funds to pay for their children’s college expenses are likely to force their children to take out student loans to empty their savings for home repairs, vacations or other luxuries.

Why would they do that? Again, government-backed student loans come at lower interest rates and / or better terms, which they can get in a new car from a private bank. (If that were not the case, the government would not need to be in the student loan business.)

To see how debt can be switched off, consider a publisher example of parents who have saved $ 30,000 for their child’s college expenses over the years. During their child’s college matriculation, parents will also want a new all-electric car (or any other purchase). They can take a loan at a car dealership with an interest rate of 5 percent and pay for 60 months (with examples only). But their child’s college qualifies him (showing only a “financial need”) for a ,000 30,000 student loan in four years, which will carry a lower interest rate – say, 3 or 4 percent – after graduation and repayment for decades. Can go (and can only be forgiven).

What will many thoughtful students and parents (even those who are not financially distressed) do? The question itself answers. Many parents will use their savings to buy a car and apply for a student loan for their child. Scary! Subsidized student loans effectively pay for parents’ new cars, albeit indirectly and unseen by debt-forgiveness proponents. Many colleges will not mind the change of parents in their financial resources because they understand that federally subsidized student loans will increase their demand, enabling them to absorb some subsidies through higher education and fees. Many faculty and administrators will support the loan because the cost of higher college can be absorbed in reducing the salary, benefits and tuition load of higher faculty.

The fungibility of student loans means that many forgiven loans will be an indirect (and confidential) way for parents and students to forgive “loans” for remodeling their cars and homes. This means that taxpayers will be involved in paying parents and students for non-college purchases. Many professors, understandably, would be key to student-loan forgiveness.

Richard Mackenzie

Richard Mackenzie Emeritus Professor of Economics at the Marriage School of Business at the University of California, Irvine. His latest book The Selfish Brain: A Leperson’s Guide to Economic Thinking in a New Way (2021).

Receive notifications of new articles from Richard McKenzie and AIER.

Leave a Reply

Your email address will not be published.