One reason that Washington, D.C. is so corrupt and corrupting is that it is a place where we perpetually reward vice and punish virtue. The welfare state, for example, has for decades rewarded not working and government dependence. And look where that has gotten us. The tax code – meanwhile punishes work, thrift enterprise and economic activity – i.e. the building blocks for a prosperous economy.
Now we have the latest clear example of perverse incentives with President Biden’s plan announced today to bail out millions of student loan borrowers by paying off $10,000 of outstanding student loans if the borrower has an income below $125,000 per year. (As an aside: Isn’t it Congress – not the president – who has the power of the purse?) The White House has the nerve to describe this giveaway a program of loan "forgiveness."
But nobody bothered to ask the taxpayers – you know, the people who are going to pay the cost of this $300 billion program – whether they want to "forgive" the deadbeats (that IS the correct term for someone who doesn’t pay back a loan). Do you want to? I don’t. And I suspect the people who are angriest about this "forgiveness" policy are the millions of Americans who HAVE done the responsible and morally righteous thing to do. These are the people who made the financial sacrifice to pay off their debts.
By the way, these student loans already come with taxpayer subsidies in the form of super-low interest rates. But even with those low rates, many millions of college grads still don’t pay back what they owe.
One wonders whether this group has been cleverly waiting for a Joe Biden to come along and deem them "forgiven." Will they now knock on Washington’s door requesting forgiveness of their mortgage, car loan, or credit card debt?
This program also creates perverse incentives to the nation’s universities and colleges whose outrageous tuitions put these students into six-figure debt in the first place. If taxpayers are going to pay the cost and universities effectively become "free" to the students, this only incentivizes the schools to keep raising tuition – which over the past thirty years have grown at almost three times the rate of overall inflation. Prediction: if this program is implemented, we will soon see colleges charging tuitions of $100,000 a year.
To add insult to injury, universities are sitting on more than $700 billion of tax-free endowments. Why don’t THEY forgive the debts of their graduates?
Perhaps the most perverse incentive of all is that almost no American will ever repay a student loan in the future if this program is implemented. We will have to do away with the façade that this is a loan – rather than a trillion dollar money transfer money from the roughly half of Americans who DO go to college, to the half that don’t. In other words this program robs the poor and middle class to pay the rich.
Does that sound fair or logical?
What we have here in the president’s loan forgiveness program is an example of where to forgive is anything but divine.
Stephen Moore is a senior fellow at the Heritage Foundation and an economist with Freedom Works.