Opinion: Why student loan forgiveness is a bad idea

As colleges and universities nationwide begin their fall semesters, students once again are applying for loans to cover tuition and related costs. The National Education Initiative reports that federal student loan debt grew by $17.9 billion during the first half of this year. Current figures aren’t available, but it’s safe to say more money is being borrowed this month as people (mostly young adults) work toward degrees.

The initiative reports total student loan debt in the U.S. is $1.753 trillion, a huge figure, although the total shrank by a small amount in 2023.

This highlights the real problem facing higher education in the United States today. President Joe Biden is fixated on attacking the loans, devising programs to forgive debt incurred by students.

But loans are a symptom. The underlying problem is the high cost of going to school.

U.S. News last year reported that tuition and fees rose about 132% at private national universities over the last 20 years, while they rose 158% for in-state students at public universities and 127% for out-of-state students.

Loans account for at least a part of this increase. Anytime a third-party payer is involved, distortions occur. In this case, there is an economic disconnect between many students and tuition. Universities feel little downward pressure on tuition when large numbers of students simply get loans that are paid directly to the school. If they had to pay those costs on their own, universities would be forced to adjust in order to attract students.

This is somewhat similar to the way medical costs keep rising as third-party payers — insurance companies — keep patients from bearing the true costs of services.

Roger Ma, a Forbes contributor, once described this by saying that “in higher education, with the availability of federal student loans allowing people to close the gap between what they can afford and the price of an education, colleges continue to raise prices quite comfortably.”

A study by the Federal Reserve Bank of New York bore this out when its research found tuition rising 60 cents for every dollar of new student loan debt.

This is not a new discovery. President George H.W. Bush noted in 1987 that federal loans shielded universities from market pressures.

The worst part of the Biden administration’s misdirected focus is that it’s contributing to inflation. Loan forgiveness has the effect of unleashing money into the economy. Exactly how much is unclear. The White House estimates the cost of its latest policy at $146.9 billion, but states that are challenging that program put it in the hundreds of billions of dollars.

It’s clear the nation’s courts are not inclined to let the administration’s program continue. Last week, U.S. District Judge J. Randal Hall in Georgia issued a temporary restraining order on Biden’s latest forgiveness plan, saying a group of seven Republican states had presented a case that likely would succeed in proving the Education Department didn’t have the authority to cancel loans under the plan.

What could the federal government do to apply downward pressure on tuition and fees? Experts have proposed a variety of solutions, including reducing or withholding funds from schools that increase those costs beyond the inflation rate calculated in the Consumer Price Index. Schools could be penalized for not placing enough graduates in well-paying jobs. Colleges and universities could be incentivized to charge variable tuition rates depending on the expected salaries graduates might earn. A teaching degree, for instance, would cost less than an engineering degree. This also might entice more students to become teachers.

If allowed to stand, however, student loan forgiveness would incentivize students to ignore loan payments. In fact, it already has. A Credit Karma report found that 20% of students had not made any payments on their loans, with many of these saying they anticipated these would be forgiven some day.

If the Department of Education is allowed to organize and administer such a program, it would completely bypass Congress, the branch charged by the Constitution with writing laws and appropriating money. Surely, something that amounts to a free tuition program ought to be decided by representatives of the people.

More importantly, however, loan forgiveness would do nothing to stem the unchecked rise in the cost of an education. If all sides agree on anything in this debate, it ought to be that the nation is well-served when its people are educated and primed for meaningful careers. That is best achieved through an affordable system of higher education.