The Unseen of Student Loan Forgiveness

By: Colin Combs

On Monday, President Obama signed an executive action to cap student loan payments at 10 percent of their monthly income until December 2015. This is continuing the trend of the government attempts at lifting “the burden of crushing student loan debt.”

This is yet another situation where the problems created by government regulation are used to justify even more regulation. Henry Hazlitt argued in his excellent book Economics in One Lesson, “the art of economics consists in looking not merely at the immediate but at the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group but for all groups.”

The immediate effect that we see here is people with heavy amounts of debt getting relief, and from that alone we might consider this a good thing. But what are the unseen effects of this kind of legislation?

Well, the first thing we can expect is an increased quantity demand for student loans. Like all other subsidies, we tend to see more of the thing being subsidized. If the government intervenes to make student loans cheaper by throwing money at it, people will scramble to pick up said money. People who were hesitant to take on debt will now see lower interest rates and will not be so hesitant anymore. So people will take on more debt.

The second thing we can note is that with more people getting student loans, the demand for higher education will rise. This means even higher tuition prices. So now everyone who doesn’t get a government subsidized student loan and prudently tries to go into college without taking on a huge amount of debt will see their lives made much more difficult. Parents who have saved for years to try and make sure their child can get a good education will see all that effort mean less and less.

The third thing we can expect is the creation of a “moral hazard,” which is when people take on excessive risks because they no longer face consequences for failure. If debtors are no longer considered responsible for paying what they agreed to, but instead can simply have the government impose that burden on the taxpayer instead, then there is absolutely no reason for debtors to seriously consider the burden of their debt and take it on huge reckless amount because, in the end, they won’t be paying it! And lenders are told that their loan will be paid back no matter what by the government

And lastly, if the government is going to be handing out free money, this money must come from somewhere. This means that the government must either increase taxes (making the taxpayer feel the burden of the governments hand-outs), borrow more money (diverting savings from sound investments and imposing taxes on people in the future to pay it off), or print the money out of thin air, further inflating the money supply (further weakening the dollar, causing prices to rise, and punishing savers).

So in short, student debt forgiveness will lead to more debt, raise the cost of education, and will rob Peter to pay Paul so that Paul can make bad loans.