Forgiving student loans is a costly mistake

With Wednesday’s long-awaited announcement forgiving the debts of certain student borrowers, President Joe Biden hopes to give Democrats a boost in this fall’s midterm elections. Whatever the short-term political gains, the decision is a costly mistake.

Biden’s plan cancels $10,000 in federal student-loan debt for borrowers with annual incomes of $125,000 or less, or $250,000 for married couples. Students who received Pell Grants, which help low-income families pay for college, will have up to $20,000 forgiven. Biden also extended the freeze on loan repayment for all borrowers through the end of the year — the seventh such extension since the start of the pandemic.

The new policy provides relief to more than 90% of the 45 million Americans carrying federal student-loan debt. The White House estimates that 20 million borrowers would see their ledgers wiped clean altogether. Yet student-loan forgiveness of any kind is highly regressive, benefiting those who graduated college at the expense of the roughly 60% of Americans who didn’t. An analysis released on Tuesday found that roughly 42% of the benefits of student loan forgiveness would go to the wealthiest two-fifths of Americans, with the bottom fifth receiving just 12%.

If anything, those figures understate the extent to which this giveaway harms working-class and poor Americans. The combined impact of canceling debt and extending the repayment freeze will cost taxpayers hundreds of billions of dollars. Worse, by depriving the government of expected revenue, it will reduce funding available for investments in K-12 and early childhood learning that would do far more to promote economic opportunity and future growth.

While loan forgiveness won’t put cash in borrowers’ pockets, it still risks fueling inflation by encouraging consumers to spend money they would otherwise have put toward paying off their debts. And wiping out debt now will only encourage students to take out still-bigger loans in the future, reducing incentives for colleges to hold down tuition costs — thus, in all likelihood, making higher education even less accessible for the middle class.That this order was advanced under a dubious legal rationale — and will surely face challenges in court — only emphasizes that the administration’s goals are more political than practical.

What now? Biden needs to remove any lingering ambiguity about the end of the repayment freeze and make clear that all borrowers will have to resume making loan payments at the start of 2023. The administration should do more to protect taxpayers, for instance, by narrowing the public-service loan forgiveness program, which allows workers in public-sector and nonprofit jobs to wipe out their remaining student-loan balances after making 10 years of payments. Biden’s income-driven repayment plan would allow current and future borrowers to make monthly payments of 5% of their discretionary incomes, half the current amount; the Education Department should work to make it easier for borrowers to enroll in the program and pay automatically, which would reduce their likelihood of default.

With one announcement, Biden has undermined any commitment to fiscal discipline, reinforced his party’s reputation for catering to elites, created a significant moral hazard, and likely made higher education less affordable for a generation.

— Bloomberg Opinion