No Longer a Hypothetical Concern

Eakinomics: No Longer a Hypothetical Concern Student loan forgiveness is a policy that seems to have a life of its own. The Obama Administration – which, as a reminder, has been gone since 2017 – originated modern student loan forgiveness, which has continued to morph and expand in the years since. (The most recent efforts on this front took place last fall.) Campaigns (named the silly season for a reason) brought forth a slew of expansive (and expensive) loan forgiveness proposals, especially during the bidding war that was the 2019-20 Democratic primary. And, don’t forget, the declaration of a national health emergency became a sufficient reason to simply stop payments – not forgive, but defer payments and freeze interest rates – on student loans. All of this occurred despite the fact that loan forgiveness is a policy in search of a problem. It doesn’t rectify the inequality bemoaned by the left because the more affluent disproportionately benefit from forgiveness. So much for a distributional argument. It also does not improve educational attainment or access to higher education. These issues are in the past and “sunk” from the perspective of a forgiveness policy. So, no argument based on improving educational attainment. And it does not improve the functioning of financial markets; there is no case to be made on financial market efficiency. Indeed, the argument has always been the opposite: Student loan forgiveness sets up the expectation of forgiveness for future borrowers. This is an incentive for future borrowers to borrow too much, get into financial trouble, and harm their individual welfare and reduce overall market functioning. It is the kind of argument that soulless economics types (e.g., me) make. And the typical response is something like, “Yeah, right. Why don’t you go back to your Eakinomics and find a real problem?” So I am pleased (sort of) to report that CNBC has a story that says: “Americans believe it’s more likely that some, or all, of student debt gets forgiven than that bills will resume in three months, according to a CNBC + Acorns Invest In You Student Loan Survey.” Specifically: “Just 29% of respondents ranked student loans resuming in the spring as the most probable outcome. More than a quarter think the likelier situation is that the pause is prolonged beyond May, while 14% of people anticipate full loan forgiveness and another 28% expect some cancellation.” That is stunning, especially that over 40 percent expect at least some cancellation/forgiveness, while just over a quarter expect people to pay at all. Far from being a hypothetical problem, the expectation of future forgiveness is spreading like, well, a pandemic. Student loan forgiveness is a pointless policy that people expect a lot more of. Terrific.