Guest Commentary / May 13, 2022

Compassion Gone Awry: Forgiving Student Loan Debt

Diverting money in the form of taxes or loan forgiveness from one class of individuals who make less than the benefited class is just legalized theft.

By Mark W. Fowler

A critic might describe government operations as a never-ending cascade of solutions to the latest mess the government has made. Each step in the progression leads to ever more waste, ever more expense, and ever more disruption of societal function.

Our country was founded on the notion that society functions best when individuals are left alone to chart their own route in the pursuit of happiness. In the marketplace, the seller must forgo a higher profit to move his merchandise. The buyer must select between competing desires to find the best combination of goods that satisfy his/her needs. These concepts allude to why economics is called the dismal science. Wants will always exceed supply. As the medical director of a state prison, I often tell my patients that no one gets a gold wheelchair from the government. By this I mean to suggest that I have a limited supply of resources to address their concerns. Accordingly, I will attempt to solve medical issues that might just as easily be referred to a specialist but for the fact that specialists are expensive and appointments are hard to get. I dare say this has worked well. But it works because I can see when my treatment is not successful and when I need to go to the next step. I am willing to accept I cannot fix everything.

It often seems to me that politicians do not understand economics, and particularly do not understand the law of scarcity. In this life, there is not enough for everyone to have all they want. Careful selection is required to best allocate resources. Let us then look at the latest mess brought to you by the same folks who have driven up the national debt to trillions of dollars.

For decades, politicians have proclaimed that the best way to prepare for adulthood is a college education without regard to the actual talents of people and the needs of the marketplace. We need a certain number of experts in French art, Medieval languages, Philosophy, and so on. We need even more truck and helicopter mechanics, plumbers, and electricians. We need fewer diversity, equity, and inclusion experts than we presently have.

The notion that “everyone has the right to a college education” or that everyone who wants to go to college should not be held back by economic limitations does not square with reality. Economic reality is a very real limitation on everyone’s behavior. Nevertheless, over the course of a few years, politicians decided to reduce the economic limitations by making loans available to college students. These loans were tied to the cost of tuition (problem #1) and were guaranteed by the government (problem #2). Colleges then experienced a demand for their services over and above what the market would naturally bear, leading to a significant increase in tuition (problem #3). This led them to vastly increase ancillary services in the way of amenities to attract students (problem #4).

College tuition has increased 497% between 1985 and 2018, or over four times the rate of inflation. In an ever-increasing spiral, tuition increased, loans to pay for the increases increased, and today we face outstanding student loan debt of $1.6 trillion dollars that was borrowed from the government. Forty-five million Americans owe this debt. The average debt is about $37,000. There are politicians who want to have the government forgive this debt. It is argued that this debit is “crushing” and prevents debtors from moving on with their lives. It should be erased to allow them to buy what they want, get married, have children, and so on. In short, people who borrowed money are now discovering that the consequences of borrowing money reduces their options in other area of economic life.

Well.

This problem is the result of the lack of economic constraint ordinarily found between lenders, colleges, and students. Banks, which formerly loaned this money subject to a federal guarantee, would examine the creditworthiness of the loan applicant. Colleges, before the expansion of tuition loans, had to control costs to attract students. And students had incentives to monitor and limit costs to get the best return on their investment. Unlinking these constraints led to what economists called moral hazard, simply defined as the adoption of extra risk by an economic participant who has reduced exposure to the risk. Colleges then raised tuition fees at a rate that exceeded the rate of inflation. They increased bureaucracies, built fancy student centers, and spent money carelessly. Banks were cut out of the picture and the government now loans the money directly. Bureaucrats have every incentive to expand their programs without meaningful limits. Students often do not finish their areas of study for which there is no meaningful market, or they select colleges without regard to the expense. In short, all actors made decisions and engaged in behavior without an appropriate view to reducing their risk and maximizing their return. All because politicians were bribing people with someone else’s money.

Of student loan debtors with outstanding debt, 20% are behind or in default. African Americans and Hispanics default at greater rates than whites. Asians default at lower rates than whites and African Americans. Individuals with lower family income default at higher rates than individuals with higher income. Let us take a closer look at some numbers. According to the Federal Reserve, 3% of adults with student loans owe 20% of the debt balance. But this 3% have advanced degrees (doctors, lawyers, individuals with PhDs) and have household income over $100,000. Individuals who attended for-profit schools are three times more likely to default than individuals who attended public or not-for-profit schools.

Individuals who did not obtain a degree default at higher rates than those who completed a degree. Of all borrowers, 9% are behind, 42% owed money and are current, and 48% had paid off their loans.

Individuals with a college degree make about 40% more than high school graduates. About 29% of people over age 25 have college degrees. But obviously, most people in this country do not.

Here then is the dilemma: To forgive outstanding student loans requires that we take money away (or impose more tax or incur more debt) on people, the majority of whom make less than those with college education. Even people with some college make more than those without any college at all. If we forgive student debt on those who hold the most debt, we are now transferring money from poorer people to people with more wealth and more income. To the extent that no one is reimbursing those who paid off their debt (and no one is suggesting we do), we have incentivized people to spend more than they could afford, delay repayment, and seek government redress for their poor judgment. In summary, we are subsidizing bad behavior in the same sense we encourage illegitimacy, drug abuse, homelessness, and criminal behavior by decreasing the cost of wrong decisions or subsidizing them outright. It is axiomatic that if you pay for behavior, you get more of it. If you pay women who have children out of wedlock, you get more illegitimacy. If you provide drug abusers with safe spaces, clean needles, and medically supervised injection clinics, you get more drug abuse. If you decriminalize shoplifting, you get more of it.

It is an invaluable and inevitable lesson to learn that to choose one thing is to forgo something else. We all have fixed incomes in the sense that we do not have unlimited access to money to buy whatever we want. For a class of individuals to say we want our loans forgiven so we can buy or do the things we want is to encourage profligacy. To heed that request by diverting money in the form of taxes or loan forgiveness from one class of individuals who make less than the benefited class is just legalized theft.

This is not to prohibit some allowance for individuals who have suffered misfortunes (illness, disability) that prevents them from paying loans back. It is to say that society owes the able-bodied nothing by way of economic advantage at the expense of others.

We should not forgive student loans. It is a bad precedent.

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