Eighth, the student loan programs have probably contributed to a decline in personal savings and consequently lower investment in capital and technology. In the 1960s and early 1970s, before widespread student loans, Americans typically saved close to 10% of their personal income. In the last couple of decades, the savings rate has averaged less than one-half as much. Previously, families saved up to pay for their kids’ college. Now, some think, “We can just borrow the money from the Feds.” Ninth, the loan programs are commercially not viable. Good students are more likely to graduate from college and pay off their loans, but the loan program treats under-achieving students the same as good ones. Indeed, under-achieving students go to school longer because of mediocre academic performance, borrow more, and get inferior post-college jobs – and maybe not even graduate, defaulting on their debts – yet pay the same interest rates as safer borrowers. Colleges have zero incentives to turn away mediocre students as they have no “skin in the game,” that is to say they face no adverse financial consequences from admissions decisions leading to loan defaults burdening the taxpaying public. BIDEN ADMINISTRATION SOLUTIONS The Democratic president aspirants in 2020 engaged in a bidding war trying to outdo each other promising relief from college expenses. President-elect Biden wants to forgive at
least some student loan obligations for those making under $125,000 annually. Obviously, this would reduce by potentially hundreds of billions of dollars repayments that the government expected from loan recipients. If the average loan forgiveness were $8,000 for the about 45 million who owe on their loans – that would be $360 billion, or about 1.5% of a year’s national output. Loan forgiveness is highly dubious on both economic and equity grounds. It creates a horrible problem that economists call “moral hazard.” Why would any current debtor under the student loan program ever make timely repayment of their loans if there were a good prospect that politicians at some point will forgive that obligation? Loan defaults are dramatically higher than for other kinds of loans already. The idea is extremely inequitable on two grounds. First, many Americans have dutifully sacrificed buying nice cars or taking fancy vacations so they could pay off their loans, while other spendthrifts did not meet their legal obligations, spending liberally and consuming luxuries. With loan forgiveness, the government tells those responsibly paying off their loans, “You were fools.” Moreover, while Biden and his team profess to favor helping poor and minorities, there is no question student loan forgiveness benefits mainly the relatively affluent. Let me quote from a new National Bureau of Economic Research paper by Sylvain Catherine and Constantine Yannelis, “Full or partial forgiveness is regressive because high earners took larger loans.” Also, “Blacks and
American Consequences
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