I stated a few weeks ago that whether or not the Supreme Court agreed, the Biden administration would use the new SAVE plan to enact student loan forgiveness. The administration has since released information highlighting how the SAVE plan offers even more lenient forgiving terms.
This week's Ask an Economist topic was inspired by the discussion of student debt. Garrett says he's from Ohio.
The claim that student loan debtors are making the general public pay down their debts on their behalf is one of the most popular arguments against student loan forgiveness.
However, hasn't the general public already paid for it through inflation if this money was created or put into the economy to meet school costs? If so, wouldn't loan forgiveness simply be a net zero? Or does repaying the debt (either by the taxpayer or the borrower) lessen the effects of that inflation?
Therefore, is the forgiveness of student loans already covered by inflation? Supporting it would seem to be a no-brainer if it had already been paid for.
But the reply is "no." The cancellation of student loans is not already covered by inflation. Discuss the reasons why.
Student Loans Aren’t Necessarily Inflationary
We must comprehend how the current student loan system operates in order to comprehend why student loans aren't currently being repaid through inflation.
Today, federally created loans make up the majority of student debt. In other words, the federal government lends money to a student in exchange for a pledge from them to repay the money. Where then does the government obtain the funding for this? Taxes are a source of revenue for governments, but the current U.S. government spends more than it takes in each year. Expenditures that exceed income are referred to as deficits.
How can there be a deficit in the government? Politicians can borrow money in the same manner that you or I can if they want to spend more than the government has.
What is the source of this money? Buying government bonds is an option open to both businesses and individuals. This bond is a note. When you pay money to the government now, they pledge to return it to you later along with interest.
Since the U.S. government borrows money every year, it is probably appropriate to consider student loan debt to be another source of debt for the country.
It is not actually inflationary if the government utilizes this money to provide student loans. No new money was produced. Just one person received it before giving it to another. The purchaser of the bond donated funds to the government. The student received funding from the government. Although money has been transferred, there isn't any more of it.
It's likely that some costs will differ from what they otherwise would have been if the student purchases different products from the person who provided the government with the loan. However, this is a shift in the prices of some commodities in comparison to others. Only when prices for products as a whole increase relative to the value of money do we experience inflation.
But as you may have noticed, the procedure is not through yet. The bond buyer must still be reimbursed by the government. What makes them do that? The government can utilize the money from the student to reimburse the bondholder if the student repays their student loans and the government holds them accountable for paying back the correct amount. Once more, no money is being printed in this situation.
We shouldn't anticipate any meaningful inflation from the agreement as long as the government requires the borrower to repay their loans. What happens, though, if the borrower fails to repay them or if the government sets an unreasonably low down payment or interest rate? In that event, the government will have to use government funds to repay the bondholder. The only ways the government can achieve this are by expanding its debt load, raising taxes, or printing more money because they consistently run deficits.
In response to Garrett, the government does not print new money when people repay their loans, therefore inflation has not yet paid for loan forgiveness. However, in the event that the government grants forgiveness, taxpayers will be responsible for paying the price through either increased future taxes or inflation.
This is why the COVID-era freeze on interest loan forgiveness is appropriate. Less was paid back by borrowers, thus someone else will be on the hook for the difference. Less student loan payments would result from increased forgiveness, thus the government would have to pick up the difference to repay bondholders.
There’s No Such Thing as a Free Education
Remembering the economic adage will help you keep your composure when evaluating the impact of loan forgiveness or any other government program. There Ain't No Such Thing As A Free Lunch, or TANSTAAFL.
This adage implies that the resources needed to prepare your lunch may have been used in other ways if you weren't eating it. Never can it be said that there was no other way to use resources. The opportunity cost is what economists refer to as the best alternative use of resources.
The labor of a teacher, the supplies, the building, and the administrative costs are only a few of the resources that go into education. Owners of certain resources expect payment from users. If students borrow money and the loan has reasonable terms for repayment, they are ultimately responsible for paying for their education.
However, the proprietors of those resources still demand money if the student abruptly stops using them. In the end, the cost is borne by someone else.
In the private sector, a lending institution that either improperly sets repayment terms or fails to weed out borrowers who won't pay back their loans will be responsible for the loan's costs. And a lender that issues enough subprime loans will eventually lose money and shut down.
Unfortunately, when the government engages in this behavior, it can shift the cost to another party by using money taken from taxpayers through direct taxes or inflationary money creation. This is minimized as long as students are expected to pay off their debts. The resources will be paid for by the taxpayer as forgiveness increases. No such thing as a free education exists.
