Student Loan Forgiveness Is Regressive, Will Increase Tuition

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When the Inflation Reduction Act passed, I pointed out that its $300 billion in tax increases and spending cuts would not begin to phase in until 2027, and that these “will also almost certainly be canceled out by future spending increases.” I was proven right in about two weeks.

President Biden on Wednesday announced a plan to forgive up to $10,000 of student loans for people with individual incomes up to $125,000, or up to $250,000 in household income. According to the National Taxpayers Union, the total cost will be about $430 billion, or about $2,000 per taxpayer. President Biden is also apparently pushing the measure through without congressional input. Even for people who favor loan forgiveness, this is an executive power overreach.

There are two other problems with the proposal. One, it’s regressive. Two, it will raise the cost of college.

The stated goal of most income redistribution, whether through private charities or government, is to help the poor. In practice, many government-run relief programs mostly benefit the middle class and up, because that’s where the voters are. Today’s student loan forgiveness is just the latest example.

According to the U.S. Census Bureau, 55.5 percent of high school graduates voted in 2020, versus 77.9 percent of college graduates. College graduates also have greater lifetime earnings than high school graduates by a margin of $900,000 for men and $630,000 for women, according to the Social Security Administration. Yet it is the more affluent of these groups that gets the $10,000 in aid.

The loan forgiveness has an income cutoff of $125,000, which is twice the average American income. It also nearly four times the $26,500 poverty line for a family of four, and nearly 10 times the $12,880 poverty line for an individual. Given the poor targeting and the close timing with the upcoming midterm elections, this round of loan forgiveness likely has more to do with politics than poverty.

A longer-term problem is that student loan cancelation will raise the cost of college. As it is now, many families are willing to save and sacrifice for years to pay for their children’s educations. Loan forgiveness will not change this. Parents will continue to do everything they can to send their kids to college, and universities know this.

With a $10,000 subsidy, colleges can charge $10,000 more for a bachelor’s degree. They will just tell families they can take out a larger loan, which will later be forgiven. For other types of subsidies, they can tell families they are offering a $10,000 discount from an artificially high sticker price. Families will still pay the same amount they do now while thinking they are getting a discount. Taxpayers will give universities the extra $10,000 behind the scenes, in this case through paying for loans.

Much of the new money will never reach the classroom. Since 2003, for example, Yale’s administrative staff has grown by 1,500 people, or nearly 45 percent. The student body grew by 600, or about 9 percent. Other funds get spent on sports facilities, aquatics centers, and lavish dormitories that look great in brochures, but that students and families might not be willing to pay for if they were aware of their true costs.

This dynamic has already been happening for years with existing lending and financial aid programs. Subsidies are a major reason why college tuition has been increasing faster than inflation for decades. Runaway college costs are an unintended consequence of subsidies, but not an unforeseeable one.

President Biden’s proposal will make existing tuition bloat even worse, while redistributing income upward. It might make for good politics, but it’s a bad long-term deal for poor and middle-class families.