Young Americans Will Soon Realize Debt Forgiveness Isn’t a Good Deal
In the shell game, a street corner huckster places a ball underneath one of three cups. Then after moving the cups around on the table the ball seemingly disappears. That’s not the case. A solid ball doesn’t just vaporize. The ball is still somewhere. The only change is that the location of the ball is just then out of sight.
Political hucksters play the same game using debt. You can move debt around. But the debt doesn’t just go away. Rather, it’s just someone else that bears the cost.
In the case of student debt, young people celebrating the announcement of Biden’s student debt forgiveness plan will soon find that the debt hasn’t gone away. Rather, it’s still a burden, just in a different form.
Consider the balance sheet of the federal government. Student loans are an asset to the federal government.
Student loans are an asset because the federal government expects to receive interest and principal from borrowers. Student loan payments are revenues from the government’s perspective.
The same is true for a bank. Loans are also an asset to the bank because the bank expects that the borrower will repay the loan and the bank will collect interest in the meantime.
Forgiveness eliminates a source of revenue for the federal government. In the case of the Biden Administration plan, the loss in future federal revenues is very large. The Congressional Budget Offices that forgiveness will reduce federal revenues by $400 billion over the next thirty years. The Penn-Wharton Budget Model estimates that the forgiveness plan will cost $600 billion over the next ten years.
The loss of revenues from borrower repayments leaves Congress with three possible choices:(1) reduce spending; (2) increase taxes; or (3) borrow more to make up the difference. Assuming government is spending money on things that are worthwhile (admittedly a big “if”) then reduced spending means that young people today won’t get the benefit from whatever federal programs that are cut.
Options (2) and (3) are where things get really interesting.
Say for instance that government makes up for the loss in revenue by raising taxes (option 2). Who’s going to pay? Well for the most part, it’s going to be the same young Americans that were the borrowers in the first place.
Some of the tax burden might fall on older Americans. But the vast majority of student loan debt is held by young people. According to the Department of Education seventy six percent of outstanding student loans are owed by borrowers aged 49 and below. The author of this article is 59. That means that I’m not going to be paying taxes much longer. But if you’re a 22 year-old just receiving your sheepskin, you’ve got many, many, many years of tax payments ahead of you.
This doesn’t mean that it’s unfair for Americans that never went to college to chip in too. Plumbers, electricians, waitresses all pay taxes too. But in general, adults with college degrees earn more and therefore pay more taxes than those that didn’t. Therefore, the bulk of the taxes necessary to make up for the loss in revenues from loan forgiveness will be paid for by other college educated adults. Seen this way, forgiveness is just a shell game replacing one expense borne by college-educated Americans (loan payments) with another (higher taxes).
In fact, the borrowers that really make out from loan forgiveness are the 2.6 million borrowers over the age of 62 that collectively owe $104 billion who are unlikely to pay any meaningful amount of taxes in the future (but will be collecting Social Security–thank you very much).
Suppose the government chooses option 3, borrow the money. Borrowing isn’t free. For one, the government is going to have to make interest payment to holders of the bonds issued to plug the budget gap. Second, government borrowing crowds out private investment which means slower economic growth.
Slower growth doesn’t mean much to a 59 year-old like myself. In fact, I might like it. Lower growth generally means lower prices for stuff and higher unemployment means fewer cars on the road. But for a young person, slower economic growth is devastating. Slower growth means fewer job opportunities. Plus, since growth is cumulative, a small decline in annual growth rates means meaningfully lower living standards many years in the future. Milton Friedman famously said that “there’s no such thing as a free lunch.” So too with the forgiveness of student loans. Young Americans may be celebrating today. But soon it will become apparent that forgiveness amounts to nothing more than a shell game.