The Bad Economics of Biden’s Plan to Cancel Student Debt

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President Biden’s decision to cancel $10,000 of student loan debt for borrowers who earn less than $125,000 in annual income has caused controversy in recent weeks. The policy was met with a backlash from both the left and right. The former lament that the policy does not go far enough, while the latter rejects it entirely. While many advocates for canceling the debt claim this move will help students and possibly lower inflation, mounting evidence proves these points are deeply misguided.

Not every opponent of debt cancellation is on the political right. Larry Summers, a former economic advisor of both the Clinton and Obama administrations, said the bill would lead to runaway inflation. He was right. Summers commented that “Student loan debt relief is spending that raises demand and increases inflation. It consumes resources that could be better used to help those who did not, for whatever reason, have a chance to attend college. It will also tend to be inflationary by raising tuition.”

While this may not look like the traditional form of spending, students who would have used that money to pay off their loans can use it as discretionary income. This leads us to see that money not spent on loans is money that will remain circulating in the economy thus leading to inflation. Larry Summers is not the only former Obama staffer to come out against Biden’s move. Jason Furman, chairman of the Council of Economic Advisors under President Obama also criticized the move, saying that “Pouring roughly half a trillion dollars of gasoline on the inflationary fire that is already burning is reckless. Doing it while going well beyond one campaign promise ($10K of student loan relief) and breaking another (all proposals paid for) is even worse.”

Furman also pointed out that the fact sheet posted by the White House was misguided. He stated that “The White House fact sheet has sympathetic examples about a construction worker making $38K and a married nurse making $77,000 a year. But then why design a policy that would provide up to $40,000 to a married couple making $249,000? Why include law and business school students?”

Most progressive advocates of this policy have rightfully railed against the decision to use taxpayer money to bail out failing businesses who cannot operate without taxpayer money. So why don’t they have the same outrage about loan forgiveness? Especially considering the proposed cap of $125,000 is almost double the median household income according to the US Census Bureau.

So, why should we shift this kind of debt onto the heads of those who have either paid off their loans, are out of school and currently paying off their loans, or even worse, never attended college at all? 

Again, every economic decision has economic consequences, and another major problem is that forgiving student loans could also make college more expensive in the long run. Biden also introduced an expanded version of an Income-Driven Repayment (IDR) system. According to the proposals from the White House, those who borrowed money for a typical four-year degree would need to pay 5 percent of their earned income, while those who took out loans for a graduate degree would need to pay 10 percent of earned income. This process would occur for up to 10-20 years depending on how much more they were earning.

Canceling student debt, as noble a cause as it may seem, is a bad decision in an already challenging economic climate. Student loan forgiveness would shift the burden to almost everyone except those that took the risk of loans in the first place. Just like bailing out big corporations, we should not force those in lower income brackets to pay the price for someone else’s risk.

The views expressed in this article are the opinion of the author and do not necessarily reflect those of Lone Conservative staff.

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