Canceling student debt will help some people but that does not make it a good policy

Two days ago, President Joe Biden announced that he is canceling some portion of student debt for individuals who earn less than $125,000.

American Experiment has written extensively in the past about why this is a bad policy. For one it is regressive; the majority of student debt is owned by graduates who make above-average wages. Canceling student debt will force many poor Americans who did not go to college to subsidize these wealthy individuals.

But since this announcement, a lot of people have come to defend the policy on the grounds that “someone they know will benefit.” Even the Star Tribune put up a few profiles of some Minnesotans that will benefit from this decision.

But is the fact that some people will benefit a good justification for the policy? Far from it.

Cost-benefit Analysis

Even bad policies have their benefactors. But that does not make them good. The same is true about student debt cancellation. For a policy to be good, its benefits have to justify its costs. And for student debt cancellation the costs are massive.

The Wharton Business school, for example, estimates that canceling $10,000 of debt per borrower making less than $125,000 would cost $300 billion — an average of about $2,000 per taxpayer. Moreover,

Between 69 and 73 percent of the debt forgiven accrues to households in the top 60 percent of the income distribution.

But Biden’s plan would cost more than $300 billion because it cancels $20,000 of debt for borrowers who also received Pell Grants. The plan also extends the payment moratorium till December and caps payments at 5 percent of income for undergraduate degrees.

Taking into account the $20,000 amount for Pell Grantees, Cato roughly estimates

that the cost to taxpayers will be $427 billion.

How big is $427 billion?

To put that in perspective, it is more than the gross domestic product of Hong Kong and 182 countries. For those who support federal social programs, it is nearly 36‐​times greater than the federal government spent on Head Start in 2022. And if you support defense spending, it is nearly two‐​and‐​a‐​half times larger than the U.S. Army’s 2022 budget. And this, by the way, does not include non‐​cancellation elements of the Biden announcement, including proposals to significantly cut many borrowers’ monthly payments and more generous loan forgiveness in the future

So, not only are we giving money to people who do not need it, but it is coming at a huge expense to taxpayers.

Not to mention that there are long-run effects stemming from the perverse incentives that will come with student debt cancellation. With the federal government shouldering debt, colleges will likely raise tuition in the hopes that the government will always cushion the high prices. And people who wouldn’t have likely gone into debt might be encouraged to do so hoping that their debts might be canceled.

Canceling debt also erodes the idea of personal responsibility, discouraging positive financial behaviors like saving.

Some studies even estimate that canceling student debt might raise inflation by a higher rate than the Inflation Reduction Act (IRA) would lower it, thereby eroding all the Savings brought forth by the IRA — not that the savings were significant, to begin with.

A policy needs to be judged on both its costs and benefits

Anyone who judges policy based solely on who it benefits and by how much will probably champion student debt cancellation as something positive. But policy is judged on its costs and benefits — both seen and unseen consequences, immediate and long-lasting.

Any close analysis of the Biden Administration’s decision to cancel debt reveals that this is regressive; it will cost taxpayers a lot of money; and will increase the cost of higher education in the long run. Not to mention the savings from interest rate caps might fuel further inflation.

It is highly doubtful that a lot of Americans think these massive costs are worth incurring considering that canceling loans will only help out a few well-off individuals who made an individual decision to get into debt.