Biden Student Loan Forgiveness; It’s not about the money, but rather the perceived favoritism

This is a huge story. My take is somewhat different…I think a case can be made that it amounts to a bribe, but the fact that people are so angry about it and are likening it to a bribe, speaks to its effectiveness. The total bill amounts to $250 billion, but given that student loans amortized over a decade typically, it amounts to just $25 billion/year, which is tiny relative to GDP. Also, it assumes a 0% delinquency/default rate, and moreover, we ignored the inflation discount factor, so it’s more like $200 billion (because if it’s amortized over a decade, the last payment a decade from now will be worth 20-30% less in today’s dollars given a 5% CPI). By comparison, the Covid aid and stimulus was $5-6 trillion dumped in 1.5 years. But there seemed to be less partisan anger over that.

The thing is, had Biden pledged $250 billion on something as vague as ‘improving education’ no one would have cared that much. But this is laser-focused to help specific people, so it’s seen as favoritism. People would rather have spending in which no one benefits or the benefit is hard to quantify or diffuse, than something which is less money but more targeted. $10,000 can go a long way to helping people out, instead of being lost and syphoned off in a maze of committees and middle men. To wit, in 2021 the Senate approved a $250 billion bill to ‘boost tech research’, and no one cared or even noticed. Who will get that money? How will it be spent? Who knows. Who cares.

But is it favoritism? To some extent yes, but same can be said for almost all policy: the Trump and Bush era tax cuts seemed to favor the rich and upper-middle class. The PPP loans were also inordinately expensive and very wasteful, and benefited business owners (to buy $4 million sports cars and other business expenses), who tended to be wealthier. The Covid stimulus checks benefited the poor and lower-middle class. Medicaid benefits the poor.

Because it amounts to only $25 billion/year, I don’t think it will add to inflation much. For a typical borrower, it means that the $1,000-$2,000/year they normally would pay in loans is forgiven; it’s not at all like being given a check for $10k-$20k. People seem to think that student loans are this huge expense and that this forgiveness plan will unlock vast, untold consumer purchasing power. It won’t. Student loans are not that much, around $20-30k on average. It’s not like $30k in credit card debt, which has way higher interest and worse payment terms, but something which is $2-4k/year on average, which is tiny relative to a job that pays $40-50k after taxes (typical for even the lowest-earning of college grads).

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