Student Loan Forgiveness: Who Pays?

People think student loan forgiveness will place it to the evil banks who seem to lent out all of that cash. But it doesn’t work this way.

Student loan forgiveness has been in the news lately. There are a number of different plans being floated, from blanket debt repudiation up to various amounts, to more restricted income-based schemes.

But no one ever talks about a key issue: who is going to pay for it?

Well, you will.

I think most Americans think Joe Biden or even Congress can just influx some kind of magic wand and student loan debt will just disappear. Poof! No damage, no foul. In fact , I think a lot of people believe student loan forgiveness will stick it to the wicked banks who lent away all of that money.

But it doesn’t work that way.

Most student loans are backed by the federal government. That means the taxpayer is at the hook. The “ evil” lenders will still get their money. The only thing that would alter is who foots the particular bill. Instead of the person who signed their name promising to pay off the loan, the United states taxpayer will get stuck with the particular bill.

A lot of people object to student loan forgiveness because they view it as “ unfair. ” After all, the borrower willingly took out there the loan. This is certainly a legitimate objection. But most people avoid care about your moral scruples. They’ll just call a person uncaring and move on.

But the economic ramifications are a little harder to disregard – if you understand them. And they will impact everybody whether or not they think they care today or not.

Keep in mind those stimulus checks?   Everybody was thrilled to get that “ free” cash. But you’re paying for all those stimmy checks today via the  inflation taxes . Most people seem less than pleased.

The Scope of the Problem

Presently, 46 million Americans have outstanding student loans. Of that amount, 45. 4 million keep federally-backed loans. The total student loan bill stands at $1. 75 trillion.

In 2020, the US government ended defaults and allowed debtors to pause payments due to the COVID-19 pandemic. At that time, 11. 1% of student loans were 90 days or more delinquent or even were in default. This doesn’t count number the people who were in various deferment programs and were not measured as delinquent.

President Biden recently  extended the payment stop until September . It had been the sixth extension considering that authorizing the initial deferment.

“ We are still recovering from the pandemic and the unprecedented economic disruption this caused, ” Biden mentioned, in an April 6 statement announcing the latest pause.

(On a aspect note, the president helps to keep telling us  how strong the economy is . Something here would not make sense here. )

Ironically, the fault for this glut of education loan debt falls squarely on the shoulders of the US govt – the same people encouraging to fix the problem. Had The government not guaranteed all of these financial loans, lenders would have never already been willing to loan a bunch of university kids money to begin with.


Student loan financial debt forgiveness sounds good, but it will have a slew associated with nasty consequences.

For one thing, loan forgiveness would likely raise the cost of college also higher.   The wide-spread availability of student loans drove upward college tuition in the first place.   Studies have shown   the influx of government-backed student loan money into the university or college system is directly linked to the surging cost of a college schooling.

As  Peter Schiff pointed out inside a podcast , loan forgiveness would be like Christmas regarding colleges and universities. College administrators can figure, “ Now we can really raise tuition since our students know they can borrow the money and they won’t have to pay it back. ”

Peter said it won’t likely be a one-time point. This will create a moral risk.

“ If they do it once, they will do it again. Everyone is going to anticipate it. … The moral hazard there is nobody will probably pay for college. Nobody will work to try to avoid entering debt because you’re an idiot. Take on the debt! It will be forgiven. ”

The second problem is the US government doesn’t have any money. It will have in order to borrow billions more to pay for any loan forgiveness scheme. Borrowed money has to be repaid by taxpayers, either by means of higher taxes or pumpiing – likely both.

Student loan forgiveness would also pour more gas on the inflationary fire. It might be another massive stimulus program. If the Fed forgave $1. 7 trillion in student education loans, it would basically be like dropping $1. 7 trillion from the helicopter.

Again, think back to the coronavirus stimulus.

Considering the mechanics of mortgage forgiveness, it becomes clear precisely why it would be inflationary.

Under normal circumstances, whenever somebody defaults on financial debt and simply doesn’t pay, it is a gain to the borrower, yet a loss to the loan provider. This isn’t inflationary. The extra money the debtor saves on debt payments and now has to spend is offset by the cash the lender will never have to spend. But when the government backs the loan, the calculus modifications. Borrowers will have extra money given that they no longer have to pay on the financial loans. Lenders will get their cash because the government will pay the total amount. And of course, the government will borrow that money and the Fed will monetize the debt.

In the cases where the government issued direct student loans, it effectively printed money that will never go come out of circulation because the student right now doesn’t have to return it to the government.

In essence, loan forgiveness is not greater than  quantitative easing . But unlike QE, the money will flow in to Main Street instead of Walls Street. That means this inflationary action would be more likely to show up in consumer prices.

Student loan forgiveness seems good. It’s politically well-known. But it is bad economics. And economics doesn’t care about anybody’s feelings.


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