Biden Toys With Moral Hazard and Backlash
The Biden administration is looking for a legal path that would allow the president to use an executive order to cancel as much as $50,000 in individual student loan debt.
The biggest push for Biden to act unilaterally is coming from congressional Democrats, some of whom, like Senate majority leader Chuck Schumer, have a cavalier attitude about the whole idea: “[y]ou don’t need Congress,” Schumer said. “All you need is the flick of a pen.”
But there are substantial hurdles in the way, but there are other, bigger, issues sweeping loan cancellation entails.
Writing in Bloomberg, Noah Smith said debt cancellation would not be the economic stimulant some think it could be. But there are other problems to consider:
Canceling student debt might provoke a backlash among those who don’t have any loans. People who decided not to go to college because it was too expensive might be upset at a government action that invalidates their decision. Those who paid off their loans early might feel that their frugality was being punished. Parents who forked over more cash for their children’s educations to help those kids avoid the burden of debt might be similarly incensed.
There’s also a moral hazard to consider. A big cancellation of student debt might convince people that such forgiveness would become a regular occurrence. That would make students more willing to take on debt, which would compound the problem in the future and push up tuition even further.
Forgiveness would do nothing to ease the galloping rise in tuition – if anything, it could create the perverse incentive for colleges and universities to raises tuition (and as a result, loan debt) even more. Schools get paid…it’s taxpayers who foot the bill for a forgiven loan.
And for those who paid off your loans…Mr. Biden intends to make you look like a sucker.