Three takeaways from our post-hiatal pod on Biden’s student loan giveaway:
It could cost a trillion dollars. Not a typo.
It’s going to fuel yet more inflation.
There were better ways to do this.
Hope you all had a wonderful August. As history suggests, August is a bad month to take a hiatus (no matter how you pronounce that word). Sure enough, Mar a Lago search and seizure, student loan ridiculousness, and worse were all on tap. For the sheer brazenness of the student loan write-off, WTH opted to start our new season asking how this will work, whom will it impact, and how much it’s going to hurt non-coastal elites. Spoiler: A lot.
If the so-called American Rescue Plan was a disaster for the very economy it pretended to “rescue,” the student loan write-off is a close second. Inflationary, regressive, and unfair — the Biden trifecta. Or as one observer put it, next time someone comes by to repair your plumbing or your electricity, ask them to pitch in a few thou for your kid’s tuition. Because that’s effectively what Biden’s student loan “write-off” will do.
Worse yet, it’s not like there weren’t alternatives… What about leaving off grad school? Or is it the administration’s view that the folks answering the phone in your doctor’s office should actually pay off their boss’s med school bills? How about limiting eligibility to folks who are crushed under the debt, folks who went to community college, folks who were forced to drop out of college and are never going to earn what other college grads will?
And yep, there are more questions: What about the debt for that truck driver whose bad back kept him off the road? How about the single mom who couldn’t afford child care and borrowed so she could work and pay the sitter? Is their debt unworthy?
The Democratic Party is often parodied as the party of America’s new aristocrats — college educated fancy people who live in Washington and New York and LA and San Fran and Seattle. Isn’t this college loan write-off yet more evidence of that…? Have they forgotten how Donald Trump got elected? Yeah, they have.
HIGHLIGHTS
Where is the money coming from?
MS: This loan forgiveness will go to households with incomes as high as $250,000. It will go to individuals with incomes that are as high as half that. In order to qualify, you have to have student loans. Poor people go to college at much lower rates than middle class people or upper middle class people. And so, if you look at people who actually hold student loans, they have a higher expected lifetime income than people who don't, on average.
Think of somebody who borrowed money to go get a college degree, somebody who borrowed money to go to dental school, somebody who borrowed money to go get an MBA, these sorts of folks. They may be earning 50 or $60,000 in the year or two after they graduate. They may have very low income while they're in school. But over the course of their lifetimes, they're going to earn significantly higher incomes than people who didn't go to college.
And so, this money will be borrowed. And that borrowed money will be paid back through higher taxes in the future, through lower spending in the future, through higher inflation in the future.
Where did the Biden administration go wrong?
MS: The administration had a number of choices to make when it decided to do this. And one of those choices was whether or not to open this policy up to people with debt from graduate school. And they chose to do that, which I think is just truly indefensible.
Was there another way to do this?
MS: So there's a group of borrowers who I think we can talk about how best to provide them assistance. If you are a person who went to a community college, went to your local private for profit college. And you racked up $10,000 or $15,000 of debt. And then you dropped out before you graduated, you have a debt burden, but you also aren't getting the benefit of a higher income associated with having graduated. We should talk about policies that can offer some financial assistance to people who are in that situation. There are some good options that are worth discussing.
I don't think blanket debt forgiveness even in that situation is the right way to go. But you can look at reforms to bankruptcy laws, or you can look at reducing the amount of payment that people in that situation based on an updated formula that ties their payments to their income, things of this nature. There are things that can be discussed.
Is this good public policy?
MS: I've been on your excellent podcast before. And I described the American Rescue Plan as the single biggest fiscal policy mistake in decades. This isn't as bad as the American Rescue Plan, but this is really, really bad. And it's bad because of its economic effects. But it's also bad because of what it says about the way that we make public policy. It's bad because of it's distributional effects. It's bad because I think it's a very unjust.
The real kicker?
MS: And another consideration, why student debt? What about a person who was in a horrible car accident, through no fault to their own, and racked up a whole bunch of medical debt? What does the president have to say to that person? What does the president have to say to somebody who served in the military in order to qualify for the GI Bill so that he or she wouldn't incur student debt? What is the president have to say to that person? What does the president have to say to somebody who didn't go on vacations, and who didn't buy the kind of automobile they wanted, and who didn't buy a home in the neighborhood that they wanted in order to pay off their student debt? And who just paid it off last year? What does the president have to say to that person who could have just sat around and waited to get up to $20,000? This is a very, very unjust policy.
What about inflation? And the price of college?
MS: I think there's no question, but that it will be inflationary. It'll be inflationary through a number of channels. Part of what the president did was to change the repayment system. So one thing the president did was just wipe away up to 20 grand of debt. Another thing the president did was change the way that student loan repayment will work in the future. So this will kind of increase the disposable income that people have, because they'll be paying less, they'll be repaying less of their student loan debt. That's one mechanism that will be due inflation because some of that money will be spent. A second way that this will be inflationary is by increasing the wealth of households. The president just gave households $10,000, $20,000, depending on the type of student loan they had. We can think of that as a wealth transfer.
We know that people increase their consumption when their wealth goes up. So you have more consumption because incomes will be higher. You have more consumption because wealth will be higher. And then a third mechanism that's been talked about a little bit, those two should kick in immediately. The third mechanism should take a little while longer to kick in. This will increase inflation by increasing tuition prices. And I think that that's something to certainly keep in mind.
But it’s a one off, right?
MS: The administration's saying this is a one time thing. And if it is a one time thing, then maybe it won't have an effect on tuition. But of course it's not going to be a one time thing. The next time there's a primary race for the Democratic Party's presidential nomination. They're all going to be tripping over each other to do another round of debt cancellation. If for some reason or another, this is not struck down by the courts, then I expect it would become kind of a permanent but irregular feature of higher education policy for at least the next couple of decades. And so it'll be inflationary, the question is how much.
Inflation again… isn’t it going down?
MS: The president has said that fighting inflation is his number one priority. And it's not. He does this. He keeps the Trump tariffs in place that are keeping prices up. And that I think is, it demonstrates that his priorities are much more geared toward political considerations and much less geared toward the welfare and wellbeing of the American people as a whole.
I think that there's maybe some case you could make that underlying inflation is slowing. I think you could probably make a stronger case that underlying inflation is accelerating
So step back from that, why is headline inflation going down? Headline inflation is going down because oil prices and gasoline prices have been going down. That's one big driver of it. And of course, those prices are determined at global markets and respond to big changes in supply and demand for those commodities. So I wouldn't take too much comfort in that
If inflation slows down, that’s good, right?
MS: I do think that over the next 12 months, we will see underlying inflation slow down. But that's mostly due to kind of economic disaster that the UK is experiencing, that European nations are experiencing, that China is experiencing. It is mostly due to the Fed and you're already starting to see the Fed's interest rate increases have some effect. And it's also due to these higher prices that are keeping people from spending money.
Is a recession coming?
MS: I think a more likely outcome than that is that we actually do have a recession, and that the recession's relatively mild. It's nothing like the recession that followed the 2008 global financial crisis. But the economy is shrinking and not growing, the unemployment rate is going up by over a percentage point or two percentage points, something like that, and that that is what ends up getting inflation to come down. We'll still have inflation well above the Fed's 2% target, but hopefully a recession will read to inflation no longer being 8% or 9% annual rate, things of that nature.
A third option is a severe recession. The severe recession I think happens if we're in a mild recession due to the economy collapsing a little bit under the weight of these high prices due to the Fed increasing interest rates and then something else happens. A massive slowdown in China happens, huge spike in global energy prices, some sort of horrible debt crisis in Italy that throws the eurozone into a terrible situation, an escalation in the Russia-Ukraine War, or something we don't even know, something that's not really on the radar right now.
Find the full transcript here.
SHOWNOTES
On student loans, the debt, and the underlying legislation the President used to justify this expenditure….
Biden’s loan forgiveness is an act of stolen valor (Marc Thiessen, Washington Post, August 30, 2022)
Biden’s About to Make a Big Mistake on Student Loans (Michael Strain and Katherine Abraham, Politico, May 31, 2022)
Student loan forgiveness in hands of “understaffed and overcommitted” agency (Axios, August 26, 2022)
Student Loans: A New Initiative to Stop the Stifling of an Innovative Approach (National Review, August 12, 2022)
Joe Biden’s Legal Argument for Student-Loan Transference in Cynical and Ludicrous (National Review, August 24, 2022)
The HEROES Act (Veteran.com)
The Secretary’s Legal Authority for Debt Cancellation(US Dept. of Ed, August 23 2022) FROM DOE General Counsel Lisa Brown
Here’s the Legal Justification Cites by Biden Administration Attorneys for Student Loan Debt Forgiveness Plan (Law and Crime, August 24 2022)
Betsy DeVos calls Biden’s student-loan forgiveness ‘100% illegal’ after she concluded Trump did not have the authority to cancel debt broadly when he was in office (Business Insider, August 26, 2022)
Student loan handout – illegal, inflationary, immoral, inequitable and more (Fox Business, August 25, 2022)
Was Joe Biden’s Student Loan Wipeout Illegal? (1945, August 26, 2022)
The GI Bill and Tuition Transfers (National Review, August 25, 2022)
Biden’s Student-Debt Debacle (National Review, August 26, 2022)
Biden’s Student Loan Forgiveness is Wrong. Here’s How to Handle College Debt Instead. (Politico, August 24, 2022)
Biden’s Half-Trillion-Dollar Student-Loan Forgiveness Coup (Wall Street Journal, August 25, 2022)