Student-Loan Forgiveness Would Double Down on Progressive Failure

L et’s start with basics. If you lend someone money, you expect to be paid back. If you give someone money without expecting to be paid back, that’s called a gift. Lending implies a desire to be paid back.

If you are considering lending someone money, you will want to know how trustworthy that person is to pay you back. Even the most informal lending agreements between kids lending their friends $10 include some kind of judgment of creditworthiness.

Those basic instincts, which arise from natural and prudent concerns, scale up to the financial institutions that lend trillions of dollars around the world. That’s why we have credit scores, loan-approval processes, and background checks. Financial institutions, at a more sophisticated level, are doing exactly what any sensible person would do before lending someone money: making sure the person could reasonably repay the loan. The process isn’t perfect, and there are plenty of cases of abuse, but in general, markets do a good job of directing money to where it is most productive.

On student loans, however, Congress decided it knew better than the markets. In 1965, as part of Lyndon Johnson’s Great Society, it passed the Higher Education Act, which created federal student-loan programs. In his speech at Southwest Texas State College before signing the bill, President Johnson said the Higher Education Act would open “the door to education” for “a high school senior anywhere in this great land of ours” to “apply to any college or any university in any of the 50 States and not be turned away because his family is poor.”

Anyone from anywhere can go to college anywhere with no financial concerns. That’s the promise.

Here’s what Johnson was saying, translated from politician-speak into economics: We’re going to pretend resources are not scarce and make up the difference between the demand for student loans and the supply for student loans with government funds.

Over time, the market for student loans, for all intents and purposes, would cease to exist. All the problems of creditworthiness and repayment that markets developed institutions to solve would cease to exist as well. What would not cease to exist, however, are the laws of economics. Resources actually are scarce, and subsidizing demand for college while restricting supply of college has real-world consequences.

The most obvious is higher prices. It’s very difficult to start a new university, and the better a university is, the more it prides itself on rejecting applicants. That keeps supply down. It’s very easy, by design, to get a federal student loan and compete for the limited number of seats that universities offer. That jacks demand up. High demand plus low supply equals higher prices, every time. And so, tuition soars.

Actual education doesn’t have to cost that much (many of the most important things you learned in your life probably came from your parents, who didn’t charge you a dime for it), and there are only so many professors you can reasonably hire. And we already said universities want to keep rejecting students to remain prestigious. So the extra money that universities bring in starts to go to amenities, administrators, and athletics.

As the universities become bloated, students continue to borrow more money, which the government has guaranteed will be available to anyone for any university and any major. For the individual, this is a great deal. Earning a college degree (note that that is not the same thing as getting an education) is associated with a huge increase in lifetime earnings compared with those without college degrees. If you can buy higher lifetime earnings at the age of 18 at less than the market rate of interest, that’s a steal.

But at the system-wide level, problems arise. A loan “market” that explicitly rejects concerns of creditworthiness is going to break. People who weren’t creditworthy and got loans anyway will not be able to pay the loans back, by definition.

So Congress steps in again to save the day. As part of the Bankruptcy Reform Act of 1978, Congress established the presumption that student-loan debt is not dischargeable in bankruptcy. The point of this provision, as a 2019 Congressional Research Service report makes clear, was to preserve the federal student-loan system. If recent graduates, who have virtually no assets, are allowed to declare bankruptcy upon graduation and have their student debt discharged, the program will only be sending money out and won’t be bringing any back in. The money has to be repaid by someone, and it’s a government loan, so taxpayers would foot the bill.

Some progressives now want taxpayer-funded college, but Congress did not intend to create that when it passed the Higher Education Act. The progressives who are upset that student-loan debt is treated differently in bankruptcy than other forms of debt should realize that it’s a natural consequence of treating student loans differently from other forms of loans.

In 1965, Congress and Lyndon Johnson decided that student-loan debt was good debt and should be encouraged. Progressives stood and cheered. They knew better than the market, and everyone would be able to go to college.

But almost 60 years later, everyone doesn’t go to college (or want to). The student-loan program has been expanded way beyond what Lyndon Johnson envisioned, and still, as of 2019, only 36 percent of Americans over the age of 25 have a bachelor’s degree or higher. The median American adult has no student debt because the median American adult has never borrowed any money to attend college.

The progressive beliefs that the laws of economics can be suspended by legislation, that everyone should go to college, and that the government should pay for it is what led to borrowers holding $1.7 trillion in student debt, many of them with useless degrees, while universities blow money on turning dorms into luxury apartments and hiring hundreds of new administrators (who still won’t answer phone calls or emails from students in a timely manner). By forgiving student debt, President Biden would be changing what was agreed upon as a loan into a gift, at the taxpayer’s expense, while doubling down on the economic delusions and educational superstitions that will guarantee that this broken system will stay broken for years to come.