Student Loan Forgiveness - The Good, the Bad, and the Ugly
Of course this battle has become political. Democrats are for it. Republicans against it. But there are a lot of nuances here that are being left out of the discussion because of the immediate polarization of the topic.
1. Let's start off with a "pro" - congrats to the people who are now able to pay off their loans
Whether it's "fair" or "unfair" (we'll get to that), I read that 43,000,000 people will benefit from this. If I were one of them (I used loans to pay for almost my entire education but they were paid off a long time ago) then I would not care whether it was fair or unfair.
I would take whatever money the government was willing to give me and I'd never look back.
So for those 43,000,000 people, congratulations. Have a big party and buy a new car.
2. But it's unfair
- people who chose not to go to college because of the massive debt and now they see their peers getting rid of that debt for free.
- people who recently paid down student loans so will get no relief even though they struggled for years just like all the people getting relief.
- people who had have less than $10,000 in student loan debt.
- people who might have used cash to pay down the student loan debt and borrowed money instead of for a house or a car. They aren't forgiving mortgages yet.
- people who are philosophically against student loans for many reasons but are now paying for this forgiveness indirectly via taxes. This, by the way, is a stretch because the amounts per household are small but still it's a truth.
3. And also it's fair but for very different reasons than people are stating.
- When people are young, student loan debt is the only debt they can have. It's also the one type of debt you can't get rid of in a bankruptcy.
Young people don't understand risk very well. That part of the brain (the pre-frontal cortex) isn't fully developed until the mid-20s (or, in my case, I'm still waiting). And the government is more than happy to lend the money out to 18 year olds who are later voters.
- Colleges and college Presidents love student loan debt.
Since they know the 18 year olds will get it, and the money goes directly to the college, college tuitions have gone up 10x faster than inflation since 1977 and have gone up EVERY YEAR at a higher pace than inflation. It's scandalous how colleges have abused the student loan debt situation which is a demonstration of why public sector funding is much less efficient than private sector.
- Colleges together have enough in their endowments to do this forgiveness. Perhaps the government should have punished them by forcing them to use their endowments to participate in this debt forgiveness.
The students who took the loans were very much exploited and were unaware of the consequences. But, does it make it fair or unfair to forgive them. I don't care.
Conclusion - Don't hate the player.
A lot of people are upset because people are getting money for free and it seems unfair to those who aren't.
They are right BUT, the fault started with the government and was then greatly aided by the colleges who let greed come before education (i.e. all of them).
4. It's a regressive tax
A progressive tax would burden higher income people more and lower income people less. A regressive tax burdens lower income more.
The lottery is an example of a regressive tax. It's a way for the government to get money every month, but most of that money comes from lower income people.
This student loan forgiving will be worth up to $500 billion to the recipients. Will the $500 billion go more to lower income (progressive) or higher income (regressive)?
From nces.ed.gov: "The enrollment rate for those from high-income families (83 percent) was higher than the rate for those from low income (67 percent) and middle-income families (64 percent) in 2016."
And although I don't have the data for this, the above statement would suggest that the higher income families send their kids to higher cost schools as well, so the graduates from lower income families may have less than $10k debt.
So in a variety of ways this will be a very regressive tax against the overall economy.
5. Will this increase inflation?
When the government dropped $4 trillion on the economy during Covid people wondered what would be the effect on inflation. Nobody knew. The Federal Reserve felt it would have no effect.
Since nobody knew, I cannot claim to know now what the effect will be. Milton Friedman said that inflation is always a monetary phenomenon. This means, more money in the economy, then more "potential" for inflation.
If the economy grows through innovation then there won't be inflation. Because of the growth, there will be more products, more jobs/hiring, more businesses, etc so the money gets spread around to handle the growth in the money supply.
During Covid we had the reverse - the economy shut down and the ONLY growth (including the rallies in the stock market and crypto and housing) were due to the increases in the money supply.
So my guess is: this will not grow inflation that much because the economy is now open. BUT....
6. There will be a bubble somewhere. Perhaps small. We don't know
The money will get spent. 43,000,000 will feel like they have an extra $10,000 to spend. It's as if they are getting a bonus at their jobs since they will have more free cash each month.
Americans do not save. We have a basically 0% household savings rate. We spend.
There is something called "the money multiplier". I get $1, I buy a newspaper. The newspaper person now spends the $1 on a flower. The flower person spends the $1 on a coffee, etc.
A one dollar bill could have a $5-10 effect on the economy depending on how much it is spent around.
This effects the US economy but it also explains why large urban areas are suffering right now.
Cities are self-containing economies because there are so many stores close together.
But during Covid, the money multiplier in cities went to almost 1. People would get their $1 and spend it in Seattle (Amazon). So if I were a high-income earner in San Francisco or LA or NYC then those cities (which need the most money to pay for their services) lost much more from Covid than smaller, lesser-income cities.
But it's the same for the nation regardless.
A $500 billion immediate injection like this could be worth $2 - 5 TRILLION extra to the economy over the next several years.
Does it start immediately? No, never. The economy starts to feel it 18-24 months after the injection. (the same thing for when the Fed HIKES rates - the economy doesn't really feel the effects for 18-24 months. Although the stock market anticipates those effects much earlier).
A move like this could counter a recession, but could drive up the markets somewhat in the short-term (the same way the Covid stimulus packages did). It's important to realize that the market would NEVER have risen as much as it has in the past 2 years without the stimulus packages.
7. Don't be angry or stupid.
Everyone seems to be shouting.
But always remember this saying, "Politics makes you stupid".
- people supporting or hating certain Covid medicines medicines depending on whether Democrats or Republicans favored them.
- people fighting over the definition of "recession" on wikipedia are doing it for purely political reasons. Which is stupid.
- "fake science" vs "settled science" seem to be only used by people in political arguments;. Scientists who don't care about politics rarely say either phrase except to talk about how stupid those phrases are.
This is another situation that is getting overly polarized so people are behaving irrationally. My gut reaction even was to get a bit angry about this (since I am in the group who paid off their student loans 24 years ago).
But that's irrational. The government spends money on lots of things I don't approve of but I hardly ever think about it.
The key here is to be rational. So...
8. Conclusion: make money
This bill is happening. $500 billion worth of loans will be forgiven. The money multiplier will kick in and this will have a minimum $2 trillion effect on the economy in the next 2-6 years.
And most, if not all, of those trillions will end up in stock markets, housing markets, banks, and crypto markets during this time.
If you think this is unfair, don't be angry, start a business.