America is not fixing its college financing system

Student debt cancellation is just throwing more money at the problem.

“Out of student loans and tree house homes, we all would take the latter” — 21 Pilots

Joe Biden has just announced that he’ll forgive student loans of up to $20,000 for Pell Grant recipients and $10,000 for other people making up to $125,000 a year. I’ve generally been a fan of student debt cancellation — the benefits for job mobility, geographic mobility, and upward mobility are undeniable. Four years ago, when inflation was comfortably low, I was a vocal advocate of a one-time student debt forgiveness.

In macroeconomic terms, however, now seems like a bad time to do this. The total expected cost of Biden’s debt cancellation is estimated at $300 billion — approximately equal to all of the tax hikes in the Inflation Reduction Act, and to the total amount we’re spending on climate change and the energy transition. Essentially we’re spending all of the IRA’s austerity on mailing out checks that mostly go to the middle class. That’s an inflationary policy. And at a time when inflation has not been decisively defeated yet, and still represents the greatest threat to Dems’ election chances in 2024, canceling student debt seems like too big of a risk. I would definitely have waited til 2023 or 2024.

The bigger problem with student debt cancellation, however, is that it’s an ad-hoc, one-off move that does absolutely nothing to fix the deep pathologies in the way America financed undergraduate education. Matt Yglesias was exactly right to ask what happens on the morning after the debt cancellation:

Matthew Yglesias @mattyglesias

What is the plan for the day after universal debt cancellation when masters programs raise tuition and tell prospective students not to worry about it because the debt will be cancelled down the road?

But this perverse incentive, which economists call moral hazard, will only exacerbate an underlying problem. For decades, our strategy has been to limit the supply of available college seats while using subsidized loans to pump up the demand for those limited spots.

So we need to ask ourselves why we’re merely applying an expensive band-aid instead of addressing the deeper issue — and why we’re still so enamored of the idea of hurling big wads of cash at already-overpriced service industries.

Restrict supply, subsidize demand