In my Econ 385 class on Tuesday (International Economic Policy), an excellent discussion on student loan debt came up. One of my students asked the probing question: “Student debt is approaching $1.8 trillion. Everyone seems to recognize this is a bubble. Why is there so much resistance to student debt forgiveness?”
I opened the discussion up to the class. Lots of excellent, well-reasoned opinions were expressed. Some argued that the schools have no incentives to keep their expenditures in check since the government is subsidizing the loans. Some argued that the politicians do not bear the full costs of these loans, nor a default, so they have little incentive to address the issue. Others noted that the banks would keep giving loans so long as they are backed by the government. All of these are excellent points, which I’ll not rehash here (I wish I could take credit for teaching these students, but they were already smart before they came to my class).
There is a larger issue I wanted to discuss, one which was not discussed in class (we were acting under the assumption, for the sake of the discussion, that forgiveness was the best option). This issue is: who gets forgiven?
What is it about student loan debt that makes it worthy of being forgiven, but other forms of debt are not? There’s credit card debt, housing debt, business debt, auto debt, etc. All this debt can have the same effect as student loan debt. True, student loan debt is larger than these other sources, but if that’s the case, that’s just an argument either for partial forgiveness, or for people to mount up other forms of debt.
If student loan debt is forgiven, the holders of the other forms of debt will wonder “why not me? Where is mine?” Indeed, recently a friend used exactly this line of reasoning when justifying tariffs for his own industry: “My competitors and suppliers get protection. Why not me?”
This is the problem with most government handout programs. Those that are designed to help a certain and arbitrary group can compel members of the out-group to seek their own rents. If student loan debt is forgiven, business owners might lobby to have their debt forgiven (“I’m creating jobs! if my debt is forgiven, then I can create more jobs!”). Or automobile owners (“My car lets me get to my job!”). Anyone could come up with various excuses.
This rent seeking, of course, then results in wasted resources. Resources that could have gone to productive uses are now trying to capture rents. And there are other issues as well that I’ll not touch on here: the sanctity of contracts (will it become harder for people to get loans since the value of a loan contract will be reduced?), moral hazard problems (will former debtors seek even more debt since their previous amount was forgiven?). These are all important issues to consider.