Beware of “forgiveness” incentives for student loan debt

Editors’ note: This article is republished from the Foundation for Economic Education in light of the Biden administration’s student loan forgiveness program.

Reality has a habit of interrupting the stories people tell themselves.

Eighteenth-century philosopher George Berkeley constructed complex arguments to prove that matter does not really exist. In response, Samuel Johnson famously kicked a rock and said, “I refute him therewith.”

Like Berkeley, our politicians spend a lot of time imagining how they can shape society to achieve their preferred outcomes. But they don’t live in the real world. When you earn enough that you don’t have to ask how things cost, and you’re surrounded by people who are afraid to tell you when you’re full of them, you often won’t know when to think stupid thoughts.

But every now and then someone like Samuel Johnson comes along and, with a few words, brings reality back into sharp focus. We’ve had two welcome doses of reality this month. He opened January with Ricky Gervais reminding Hollywood glitterati who talk about economics and politics that they had no idea what they were talking about. And now an angry father ends up confronting presidential candidate Elizabeth Warren over her proposal to waive student loans.

The father, who worked two jobs so his daughter could graduate college debt-free, asked, “Will I get my money back?” Warren replied, “Of course not.”

With those three words, the truth broke into Warren’s story about student debt forgiveness, and everyone but Warren seemed to realize it. Father drove the lesson home:

My boyfriend had fun, bought a car, and went on vacations. I saved my money. He made more than I did. …we did the right thing, and we failed.

But still, Elizabeth Warren did not understand this.

Politicians’ elaborate plans to “fix” things often go awry because, in their minds, we will all respond to their policy reforms in exactly the way they intend. In Warren’s mind, her plan to have the government “forgive” student loans will magically solve with students everywhere being debt-free, and the lives of others will be better.

But that’s not how it works. People do not respond to laws. People respond to stimuli.

When politicians decide to “forgive” debt, they give people an incentive to borrow more and borrow less wisely. For the same reason that people’s menu choices change when someone else picks up the tab at a restaurant, so do the behaviors of students and parents if Warren forces someone else to foot the tuition bill.

Too many students are already choosing majors that have little market value. Imagine how much worse it would be when students don’t have to pay back the money they borrow for their degrees. College tuition fees are really high. Imagine how bad it can be when students don’t care about college costs because someone else is footing the bill.

Very few high school students actually choose to go into the professions. Imagine how much worse this will be when high school seniors are faced with a choice of working to learn a trade or spending four years partying on the taxpayer’s dime. The federal government already has a trillion dollar deficit. Imagine how much worse it would be when the government had to spend more money each year to pay off student loan debt.

The stark truth is that “forgiving student debt” really means forcing people who didn’t get into college to pay for those who did, and forcing people who skimped and saving on college to pay for those who didn’t. This punishes wise and frugal choices while rewarding their opposite.

The father who confronted Elizabeth Warren knows this, but Warren can’t see it. It’s Samuel Johnson, kicking her rock. Looks like he didn’t kick hard enough.

James R. Harrigan

James R.  Harrigan

James R. Harrigan is a senior editor at AIER. He is also a co-host of the Words & Numbers podcast.

Dr. Harrigan was formerly Dean of the American University of Iraq-Sulaimani, and later served as Director of Academic Programs at the Institute for Human Studies and Strata, where he was also a Senior Research Fellow.

He has written extensively for the popular press, having articles appearing in the Wall Street Journal, USA Today, US News & World Report, and a host of other media outlets. He is also the co-author of Cooperation and Coercion. His current work focuses on the intersections between political economy, public policy, and political philosophy.

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Anthony Davies

Anthony Davies

Anthony Davis is the Milton Friedman Distinguished Fellow at the Foundation for Economic Education and Associate Professor of Economics at Duquesne University.

He is the author of Principles of Microeconomics (Cognella), Understanding Statistics (Cato Institute), and Cooperation and Coercion (ISI Books). He has written hundreds of opinion pieces for the Wall Street Journal, Los Angeles Times, USA Today, New York Post, Washington Post, New York Daily News, Newsday, US News, and the Houston Chronicle, among others.

He also co-hosts the weekly Words and Numbers Podcast. Davies has served as Chief Financial Officer at Parabon Computation, and has founded several technology companies.

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