Does student loan forgiveness make economic sense?

It would have been a great idea in 2008. In an inflationary world, it's trickier.

“They hired the money, didn’t they?” — Calvin Coolidge

President Biden is thinking of canceling a large amount of student loans:

Jeff Stein @JStein_WaPo

Scoop: White House *looking* at $10K or more of per-borrower debt forgiveness for earners under $125-150K single/$250-300K couples prior year, per sources Overwhelming majority would qualify ***No final decision on amount canceled or means test*** White House officials weigh income limits for student loan forgivenessSenior aides of President Biden have examined limiting the relief to people who earned less than $125,000 or $150,000 as individual filers for the previous year.washingtonpost.com

April 30th 2022

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The political wisdom of this is unclear. Biden has been losing support from young voters, and presumably this is a move to win them back. But it’s not clear what young people want when it comes to student debt forgiveness — a recent Harvard poll found that while 85% of young voters want some kind of action on student loans, only 38% want total forgiveness for everyone. In fact, older voters seem to show the same pattern — only about 30% say there should be no debt forgiveness at all, but only about 20% say it should all be forgiven.

So if you believe polls, then the American populace at large would prefer some sensible middle path. By limiting the amount of debt that gets forgiven for each borrower, and by only forgiving debt for people below a certain income level, Biden clearly hopes to find this happy medium. Of course there’s also the possibility that Americans are simply in such a bitter, exhausted mood that they’ll get mad at student debt forgiveness even though they supported it before it happened. It’s always a risk. The 4 out of 5 Americans who don’t have student debt might decide that it’s simply an unfair giveaway, especially if they already paid their own loans off.

But politics aside, it’s important to ask whether student debt cancellation makes economic sense. In fact, there’s a strong argument in favor of it, but there are also some drawbacks and risks — chief among them being inflation and moral hazard. Ultimately I still come down in favor of some kind of loan forgiveness. But we need to take steps to minimize the risks, and to make sure that the way Americans pay for college is changed going forward so that we don’t find ourselves in this situation again. And even if we do that, the size of the numbers involved mean inflation is a real worry.

The case for student loan forgiveness

The first important thing to understand about student loans in American is that most of them are owned by the federal government.