David McClough: Shortsighted to forgive student loan debts


By David McClough - Guest Columnist



McClough

McClough


If it were not entirely predictable, one might say that the first 15 months or so of the Biden administration have been underwhelming or disappointing. I can’t imagine who could have expected anything more.

To be clear, President Joe Biden is not personally responsible for the highest inflation in over a generation. He is not responsible for Putin’s invasion of Ukraine, and he is not responsible for the mutations of COVID-19. Much like all presidents, he took office at a bad time and has been on defense from Day 1. That we expect anything else seems naive.

Nonetheless, the midterm elections are just around the corner, and Democrats are desperate to score any sort of political points to stave off loss of the House and the Senate. Grasping for any sort of traction with voters, the administration continues to grapple with the idea of student debt forgiveness.

Unlike the welcome basket that awaited him as he moved into the White House, if the president eludes the legislative process and instead employs an executive order to forgive student debt, he will be personally responsible for the consequences. Indeed, he will worsen a legacy that already includes permitting genocide in a country the U.S. promised to protect, mishandling a pandemic and advocating inflation-fighting tactics that exacerbate inflation.

Much like promoting home ownership by removing the “barriers” to homeownership, debt forgiveness is “good” politics. The proposal is intended to make the president, and the Democrats, appear sensitive and in tune with the challenges facing the electorate. The message resonates with voters because people think they are getting something for nothing. Rather than exploring intergenerational injustice and the blatant political opportunism motivating the proposal, I will explain how forgiving student debt will increase tuition and accelerate accumulation of student debt. Having demonstrated why debt forgiveness is a terrible idea, I will offer suggestions that address the problem.

To begin, forgiving debt alters the price of attending college but not in the way that the president and his political handlers peddle to voters. Expecting debt forgiveness, parents and students will now be willing to borrow more. Quite simply, debt forgiveness increases demand for college. More demand tends to translate into higher prices. Accordingly, debt forgiveness translates into higher tuition, room and board, books, etc.

When the federal government started subsidizing college education, the demand for college increased, and tuition outpaced inflation for decades, contributing mightily to the student debt situation that the forgiveness scheme pretends to address. Readers hesitant to embrace this line of reasoning might recall that cheap credit-fueled real estate prices leading to a bubble that burst in spectacular fashion less than two decades ago, so it should be no surprise that free credit will fuel the cost of attending college. The only question is when will we experience the spectacular burst? But as heard on late night television, “But that’s not all. There’s more!”

A more nefarious implication of debt forgiveness will amplify the negative consequences. Parents and students expecting debt forgiveness will be less inclined to evaluate the value proposition of prospective colleges. In addition, borrowers will be less inclined to seek out scholarships and grants. No one will observe these subtle behavioral effects, but one can be certain of an aggregative effect that will increase borrowing to pay higher costs and to cover the absence of scholarships and grants.

The term “moral hazard” refers to changes in behavior due to removing some risk. The classic example is motorcycle helmets. Bikers, on average, are less careful when wearing helmets. One can only imagine how much less dangerous football would be without the pads and helmets. Head-to-head contact would likely collapse like the NASDAQ.

All told, debt forgiveness alters the price and incentives of the market for higher education. Politicians are notoriously self-serving, and voters are shortsighted.

The solution is to eliminate government involvement from financing higher education. Reducing government involvement will put downward pressure of prices and motivate students to seek scholarships and grants to offset costs. Students would leave college with less debt, which would liberate them to pursue employment consistent with their interests and abilities.

In the end, the monetary value of a college education is determined by the vibrancy of the economy and the demand for college-educated workers. Rather than continue to pound away at misinformed policy measures that burden future generations, the administration would be well advised to embrace policy initiatives that contribute to a robust economy and a dynamic labor market that offers individuals opportunity to realize their potential while meeting their material needs.

McClough
https://www.limaohio.com/wp-content/uploads/sites/54/2022/05/web1_mcclough_david.jpgMcClough

By David McClough

Guest Columnist

David McClough is an associate professor of economics for the James F. Dicke College of Business at Ohio Northern University. His column does not necessarily reflect the opinion of The Lima News editorial board or AIM Media, owner of The Lima News.

David McClough is an associate professor of economics for the James F. Dicke College of Business at Ohio Northern University. His column does not necessarily reflect the opinion of The Lima News editorial board or AIM Media, owner of The Lima News.

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