President Joe Biden’s student loan forgiveness has drawn criticism from left and right, but few voice the threat it poses to economic stability and the constitutional order.
Launched as a Great Society program, federal student loans have created more equal access for working-class and middle-class students to quality higher education that was once the preserve of the wealthy or gifted.
However, the blind nature of the program allows universities to offer programs that offer little prospect of landing a good job and over-enrolling the teenage population.
About half of freshmen leave without a degree or earn less than the average high school graduate. Yet many of them are saddled with heavy debts that they cannot repay or find it difficult to repay.
Federal undergraduate student loans are capped at $57,500 for financially independent students — $31,000 for those with parental support — but loans for graduate school have virtually no limit.
It doesn’t matter whether you study philosophy or electrical engineering.
The typical NYU Masters in Film Studies owes $113,180 and earns $30,581 three years after graduation. Columbia’s program numbers are even worse, and the problem is endemic in more flexible professional programs and non-elite law schools.
Universities use profits to subsidize undergraduate programs, inflated administrations and light teaching loads.
All of this discourages students from choosing their majors wisely and high schools from steering more young people into higher-paying apprenticeships and training programs.
Universities’ priorities for financial aid are sometimes questionable.
NYU offers free tuition for medical school.
Considering that medical schools are among the most expensive businesses run by universities – and that medicine is one of the few fields that offers graduates both handsome earnings and virtually guaranteed employment – the free ride raises some questions. there are huge equity issues when the institution saddles students who will often end up in low-paying jobs with massive debt.
As the White House briefing notes, the cost of a four-year education at a state university has increased about two and a half times the rate of inflation. Yet universities typically use few resources to justify it — buildings, doctors, managers with questionable skills, and all subsidized by land grants and federal funding.
All of this reduces productive labor, misallocates capital and undermines growth – and encourages universities to raise prices.
The president will forgive $10,000 for people earning less than $125,000 and $20,000 for couples earning less than $250,000. And double those numbers for people who received Pell grants.
The immediate budget impact will be around $460 billion and will give a massive jolt of new spending power to former students. This should add 0.3% to 0.5% to inflation and entirely squash the net income effects of the Inflation Reduction Act.
More ominously, the required repayment rate for income-based repayment plans will be lowered from 10-15% to 5% and will apply to incomes above 225% of the federal poverty level, down from 125%.
After 10 years, the balance will be forgiven, not the current 20 years. Consider what that means for the typical NYU or Columbia film studies grad earning $30,000.
In 2022, 225% of the poverty line is $30,578. NYU can charge $75,000, $150,000 or more and impose a debt of $100,000, $300,000 or even
$1,000,000 for students. After graduation, they can sign up for nearly zero debt repayments and be forgiven everything in 10 years.
This quagmire will encourage America’s most irresponsible and difficult to manage business leaders – our college presidents – to waive tuition and spend recklessly like never before.
Everything will be turned into bonds as the Federal Government borrows to fund the loans, and either the Federal Reserve will print money to buy equivalent securities or the supply of outstanding US Treasuries will increase.
What is terribly underestimated is that Treasuries may not be money per se, but they are close to it. Businesses and wealthy individuals use them as sources of cash.
The Federal Reserve’s control over the money supply and inflation will be further compromised by this irresponsible fiscal policy.
The legal justification for an executive order as opposed to legislation for all this irresponsibility appears to be a 2003 law that allows the Secretary of Education to waive or modify student loans in the event of a national emergency. Two years after the COVID-19 shutdowns, it’s hard to justify that we’re in such an emergency.
Companies are ordering workers back to their offices and pandemic protocols are being relaxed, for example by airlines.
Arguably, the law is only applicable on a case-by-case basis – it is not a general pardon writ.
All of this reeks of presidential arrogance of congressional spending power.
Unfortunately, it seems difficult to identify the people with standing to challenge this madness in court.
Mr. Biden likes to point the finger at his predecessor as a threat to democracy. He would do well to look in the mirror.
• Peter Morici is an economist and professor of business emeritus at the University of Maryland, and a national columnist.