Student Debt Forgiveness

Debt forgiveness is a strange animal. A person borrows money and then the government says -- don't worry about it. Someone else will pay it for you. Or maybe, they say, no one will pay it. Sorry banks -- you made a loan in good faith but now no one is going to pay you back. In either of those two cases the borrower skates while someone else ends up holding the bag. 

How our government can support that seems crazy to me. For one thing, it creates a moral hazard. Once this is allowed to happen, then who is going to lend you money? Hi Mr. Banker. I would like a bunch of money. Sorry Mr. Davidson, we don't lend money to people like you anymore. We just ran out of money yesterday because people don't pay us back anymore. Stick up a 7/11 if you need some cash. 

Hold on you say. The government exists to redistribute money from those who have a lot of money to those who need it. Higher income folks pay income taxes while lower income people get transfers to cover the cost of living.  We seem to think that is okay. Why is writing off loans so different? Give a poor person some income. Write off a loan. What's the big difference? It's all redistribution of income. 

For one reason it is different. It seems very different to me because this is a very specific financial transaction. We are not accustomed to using transactions to make incomes more equal. 

Back to basics. What is the value of education/training? There are two ways to estimate it. One estimate of the value of the education is the stream of income/benefits you get because of the education. Another way to estimate the value of education is what it costs to get it. Let's suppose the benefit stream is much larger than the cost of the education. In that case we say that education is a good deal. It has bang for the buck. We want to buy more education.  At the other extreme is that the income/benefits might be small relative to the costs or outlays for the education. In that case, education is not a good deal and we want less of it.  

Why go through all this obvious information? Because we seem to have lost track of the basics. We get all riled up about debt forgiveness. President Biden wants to let people borrow for education and then not have to pay back the loans. That doesn't make sense to me. Does the education have value? Can former students earn enough after graduation to pay off the loans? If so, what's the issue?

The issue could be that the educational benefit stream is too small. That means you can't earn enough after graduation to pay off the loans. The issue could be that the cost of the education is so high that it could never generate incomes that could pay down the debt. At the center of both of these possibilities are the schools and the lenders. 

Why would schools charge too much for the expected benefits? Why would lenders loan money to people who have zero chance of replaying the loans? The answer is found in our government. The market should work but the government waddles in without saying anything about the costs and benefits of an education. Someone has to point out when costs and benefits are so out of line that the government has to provide loans and then forgive them. Once we know the government is going to step in, then we have two problems. First, schools can raise prices knowing the government will make sure they get paid. Second, borrowers can fail to pay on their own with few consequences. 

As long as the government stands ready to bail out schools and borrowers -- these problems will never end. And taxpayers and paying students will end up footing the bill.