Forgiving student debt is a bad idea

One good rule of thumb is to judge parties and politicians by their priorities. Politicians often pretend to be for every good thing under the sun, so the best way to judge themis to look at which things they actually work to achieve or spend political capital on. This will tell you not only what they’re really for, but which constituents they really care about.

By that metric, it will be very revealing if one of Joe Biden’s first actions as president will be to forgive student debt.

That’s an idea swirling around Democratic circles — particularly among the progressive base, which is worried that Biden might actually mean all that centrist stuff he said during the campaign. Thebase turned out for Biden, and now they want their pay-off — literally, in the case of debt forgiveness.

Last week, a coalition of 236 progressive groups led by teachers unions called on Biden to cancel student debt on his first days at the office. Biden himself has already urged Congress to cancel $10,000 as part of a pandemic relief package. Sens. Bernie Sanders and Elizabeth Warren have called for even greater debt forgiveness. I think it’s a bad policy, and bad politics.

Let’s start with the policy: As economists, the economic cratering caused by the pandemic is not like a typical recession. In normal times, bailing out failing businesses is a bad idea because it creates what economists call “moral hazard” — incentivizing bad decisions people make when they think someone else (i.e., taxpayers) will pick up the tab.

A restaurant that was profitable before COVID-19 hit did nothing wrong. Trying to keep such businesses afloat during the pandemic, which Washington did on a bipartisan basis, was a good idea.

Proponents of loan forgiveness are claiming this is just like that. Well, before the pandemic no one was calling for a mass bailout of small businesses, but lots of progressives were calling for student debt cancellation. In other words, they think the pandemic is a crisis that shouldn’t go to waste.

That doesn’t mean they’re wrong, but it doesn’t make them right either. Student loan forgiveness has very few broader economic benefits. As Jason Furman (Barack Obama’s chair for the Council of Economic Advisors) notes, debt forgiveness would be taxable — which would cut into any stimulative effect on the economy.

Which brings me to the politics. Most Americans don’t have student debt, because most of them didn’t go to college in the first place. Moreover, most people whodidgo to college have no or very little student debt. According to the liberal-leaning Brookings Institution, roughly 30% of undergrads have none. Another 25% have upto $20,000 in loans. Despite what you may have heard about the student debt crisis, only 6% of borrowers owemorethan $100,000. Virtually all of them borrowed so much because they attended graduate school.

One reason teachers unions — a huge source of donations for the Democratic Party — want loan forgiveness is that teachers can boost their pay by getting advanced degrees. Whether you think that’s a good overall policy, using the pandemic as an excuse to reward workers who are far less likely to lose their jobs and more likely to find new employment if they do, seems awfully self-serving.

The popularity of this idea stems from the fact that the Democratic Party has increasingly become the party of educated professionals, as the GOPhasbecomemore working class. Lots of poor people are still Democrats, but they aren’t a major source of power within the party — the bureaucrats claiming to speak for them are. And that’s who Democrats are prioritizing.