Biden Giveth and Taketh Away

Based on what I see on social media, I wonder if people understand that the student debt forgiveness program isn’t really coming out of taxes. It is money owed directly to the government. And it’s statistically money that isn’t likely to be paid back in full, so it’s not like it even changes how much the government has to spend on other programs anyway.

Student loans typically have a poor return on investment; the government doesn’t (and can’t) treat student loans like a normal account receivable like a business. For the federal budget to be realistic, they don’t plan on collecting anywhere close to 100% of their principal. First, 15% of student loans are in default at any given time, so we are already at a discount when compared to the value given by the loan forgiveness. Second, the government has numerous programs that end in loan forgiveness without repayment of the full principal amount, such as income based repayment plans, LRAP for lawyers in public service, etc. None of these loans are getting repaid in full, discounting the “price” of forgiveness even more.

But what if I told you there’s a government program that can directly take away businesses’ and individuals’ right to seek payment at all from a debtor directly? In 2019 alone, it’s estimated that $101 billion of accounts receivable are wiped out due to this program.

It’s called bankruptcy. And, despite it resulting in fewer amounts collected, it is considered an essential part of a market-based economy as it frees up assets to higher and better uses. The boost to GDP and the economy in general outweighs the individual costs that businesses bear. They may not like it, but it’s necessary for the system to work.

This is precisely why we have bankruptcy laws and did away with debtor jails (in addition to it being morally iffy to torture someone who can’t pay and has no reasonable way of doing so in the future).

Pictured: The man who has both argued for short term student debt relief

while at the same time crippling student borrowers' ability to get a fresh start in bankruptcy.

In the same way bankruptcy adds to the quality of life and success of a market based economy, the positive economic effects of forgiving these loans is similar (albeit smaller).

Just because the accounts receivable of the government might shift, it comes at a heavy discount and adds benefits to the economy as a whole. The price being “paid” nets out. Perhaps this is an accounting loss on paper, but this is really a gain in real terms due to discounts and positive economic effects.

But for a bit on why the blanket forgiveness may just be a stopgap measure and is particularly unfair:

College tuition rates have increased at a rate significantly higher than inflation.

Because of the way bankruptcy laws were reformed in 2005, the normal consumer protection safeguards against the debt destroying the borrower’s life do not apply since a discharge in bankruptcy is basically unavailable. The result is that student debt has ballooned with borrowers having no kind of realistic way of getting out from under it. No other type of debt has this issue; it’s just student debt. (Ironically, that bill was pushed for by none other than Joe Biden).

Pictured: The thing I just mentioned in the last paragraph.

Most people take out student loans in their teens. They have been told that one of their best chances of success and doing well in life is to go to college. And this is true: many professional jobs that once required a high school diploma require some form of a college degree now. If you think a teenager had any idea about bankruptcy law and has weighed the consequences of costs outpacing inflation (and that it’s therefore “fair” to take the hard line), I’ve got a bridge to sell you.