Thursday, December 17, 2020

Will Biden Forgive Student Loans? Why Not Automobile Loans?

 A kettle of progressive Democrats is demanding that President-Elect Biden issue an executive order extinguishing student debt in the first week of his reign. Past and present students currently owe $1,700 billion (yes that is $1.7 trillion). Since 2006, student debt has expanded by 253.4%, while income to pay the debt has advanced by one-third that pace, or 79.8%. But there are clear problems and benefits of such action.

Wrong Beneficiaries? It has been well documented that income inequality has soared over the past five decades as college educated incomes rose at a much faster pace than workers that did not earn a two-year, or four-year degree.

Except during the Trump Administration, the top 20% of income earners received a greater share of income than the bottom 80% of earners. Furthermore, higher education institutions have sucked up much of the rocketing student debt in the form of higher tuition and fees which, since 2006, expanded at 2.5 times the rate of growth in prices of other consumer goods and services.
Fairness? This month, 45 million of the U.S. population owed approximately $38,000 per individual. Thus, the remaining 284 million Americans either have paid off their student debt, or never received a student loan. How fair will the many view shifting $1.7 trillion to the favored few? Furthermore, any delay in making an executive decision, either yes, or no, will only incentivize student debtors to further delay payments, and even ramp up their borrowing.
Productivity? Economic theory postulates that higher productivity begets higher income. The latest Bureau of Labor Statistics data show that a college graduate earns 71.0% more than a high school graduate without any college experience. Thus, other factors unchanged, encouraging more individuals to earn their college degree will stimulate higher productivity and economic growth.
Economic Stimulus? It is argued that forgiving $1.7 trillion in student debt will help pull the economy out of the current recession. However, the multiplier of providing $1.7 trillion in direct payments to consumers that spend the funds on goods and services will be between 0.08 and 0.23, compared to 0.36 for small business aid, and 0.60 for unemployment benefits, according to the Committee for a Responsible Federal Budget.
The question for the Biden Administration is, will the stimulative productivity impact of debt forgiveness offset the many negatives of such a move?  This economist has serious doubts.
Ernie Goss

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