Six Myths About Student Loan “Forgiveness”

by | Sep 22, 2022

The reality is that a college degree is either valuable or it isn’t. If it’s valuable, it will pay for itself. If it’s not valuable, no one should pay for it. Either way, there’s no reason for the government to be involved.

Politicians deliberately use the word “forgiveness” when discussing what they’re doing to student loans because it sounds magnanimous. The reality is very different.

Myth No. 1: Student loan forgiveness doesn’t cost taxpayers anything because the lent money has already been spent.

Imagine that a student was supposed to pay back $10,000 five years in the future and that the government has just now forgiven the loan. Five years from now, the government will have $10,000 less revenue than it otherwise would have. That means that the rest of us will receive $10,000 less in government services than we would have otherwise, or will pay $10,000 more in taxes than we would have otherwise, or will endure $10,000 more of inflation than we would have otherwise. No matter how one slices it, the government hasn’t forgiven loans. It has simply altered who is responsible for paying them back.

Myth No. 2: Forgiving student loans will cause inflation.

Forgiving student loans won’t cause inflation. But, how the forgiveness is financed could cause inflation. If Congress doesn’t cut spending and doesn’t raise taxes, then it will have to increase borrowing. A significant chunk of borrowing has been funded by printing money. As we are learning now in the aftermath of the Federal Reserve creating trillions of dollars out of thin air to finance the Trump and Biden deficits: printing money causes inflation.

Myth No. 3: Student loan forgiveness benefits private banks.

The Department of Education holds more than 90 percent of student loan debt. Student loan forgiveness applies only to this government-held debt, not to debt held by private banks.

Myth No. 4: Forgiving student loans is good for the economy because students will be better able to purchase homes and cars.

Loan forgiveness will give students more financial freedom. But that’s only half the truth. For every additional dollar students can spend because their loans are forgiven, the rest of us will have one dollar less to spend because we must pay for the forgiven loans. Forgiveness augments students’ spending in exchange for diminishing the general population’s spending.

Myth No. 5: Forgiving student loans won’t cost that much.

In the face of trillion-dollar deficits, an additional hundred billion or so might not be noticeable, but what’s important is what comes next. Future students will want loan forgiveness too. Universities will hike tuition because students are less concerned about tuition when someone else is footing the bill. There will be an influx of students who would otherwise have entered the job market but now see the opportunity for a four-year all-expenses-paid vacation. 

This increase in demand will push tuition up even further. On average, vacationer-students will study easy subjects like gender studies and child and family education. When these students ultimately can’t find jobs, politicians will hold hearings asking why higher education costs taxpayers so much and delivers so little. Politicians will attempt to “reform” higher education, arguing that since the government is paying the bills, the government should be calling the shots. And that will give us Public Schools 2.0. All the problems that politicians have brought to public education, they will bring to higher education.

Myth No. 6: Student loan forgiveness is good for Americans.

Student loan forgiveness is good for some but bad for others. The one group for whom student loan forgiveness is unquestionably good is politicians. Student loan forgiveness allows politicians to use taxpayers’ money to buy off an entire group of young voters.

The reality is that a college degree is either valuable or it isn’t. If it’s valuable, it will pay for itself. If it’s not valuable, no one should pay for it. Either way, there’s no reason for the government to be involved.

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Antony Davies is an associate professor of economics at Duquesne University and co-host of the weekly podcast Words & Numbers.

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