Forgiving student loans is a costly mistake

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With Wednesday’s long-awaited announcement of debt forgiveness for some student borrowers, President Joe Biden hopes to give Democrats a boost in this fall’s midterm elections. Whatever the short-term political gains, the decision is a costly mistake — one that the administration will almost certainly regret.

Biden’s plan forgives $10,000 of federal student loan debt for borrowers with annual incomes of $125,000 or less, or $250,000 for married couples. Students who have received Pell grants, which help low-income families pay for their education, will be awarded up to $20,000. Biden also extended the loan repayment freeze for all borrowers through the end of the year — the seventh such extension since the pandemic began.

The new policy provides relief to more than 90% of the 45 million Americans who have federal student loan debt. The White House estimates that 20 million borrowers would see their register completely erased. Yet the forgiveness of any student loan is highly regressive, benefiting those who graduated from college at the expense of the roughly 60% of Americans who did not. An analysis released Tuesday found that about 42% of the benefits from student loan forgiveness would go to the wealthiest two-fifths of Americans, with the bottom fifth receiving just 12%.

On the contrary, these figures underestimate how much this gift harms working class and poor Americans. The combined impact of canceling the debt and extending the repayment freeze will cost taxpayers hundreds of billions of dollars. Worse still, by depriving the government of expected revenues, it will reduce the funding available for investments in K-12 and early childhood learning, which would do much more to promote economic opportunity and future growth. .

Although loan forgiveness does not put money in borrowers’ pockets, it still risks fueling inflation by encouraging consumers to spend money they would otherwise have spent on paying down their debts. And writing off debt now will only encourage students to take out even bigger loans in the future, which will reduce the incentives for colleges to cut tuition fees – thus, in all likelihood, making l higher education even less accessible to the middle class.

The best that can be said for that decision is that it could have been worse: Progressives had pressured the White House to forgive up to $50,000 of debt per borrower, with no cap. of income – an even greater boon for the wealthy and those with advanced degrees. That this order was advanced under dubious legal justification — and will surely be challenged in court — only underscores that the administration’s goals are more political than practical.

And now? At a minimum, Biden needs to clear up any lingering ambiguity about the end of the repayment freeze and make it clear that all borrowers will have to start repaying their loans in early 2023. The administration should do more to protect taxpayers, such as reducing the Public Service Loan Forgiveness Program, which allows workers in public sector and nonprofit jobs to erase their remaining student loan balances after making 10 years of payments. Biden’s income-based repayment plan would allow current and future borrowers to make monthly payments of 5% of their Discretionary Income, half the current amount; the Ministry of Education should work to make it easier for borrowers to enroll in the program and pay automatically, which would reduce their likelihood of default.

These measures would help limit the damage, but only up to a point. With an announcement, Biden undermined any commitment to fiscal discipline, bolstered his party’s reputation for serving elites, created significant moral hazard, and likely made higher education less affordable for a generation. The cancellation of these debts may well please parts of Biden’s base. But everyone else will have to foot the bill.

The editors are members of the Bloomberg Opinion Editorial Board.

More stories like this are available at bloomberg.com/opinion

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