Buying Failure with Student Loans

President Biden’s student loan-forgiveness scheme is the latest illustration of two economic truths. The first is that government subsidies buy what some people (the recipients) want at the expense of what other people (non-benefiting taxpayers) want. The second is that government subsidies often buy more failure, not more benefit.

A lot is at stake. The Wall Street Journal recently estimated that the student loan-forgiveness scheme could cost taxpayers $1 trillion. The Administration almost immediately began accepting applications under the plan—and just as immediately ran in to court challenges. Right now (November 11, 2022), a federal judge in Texas (appointed by President Donald Trump) has struck down the plan, but appeals follow (more on that later).

Start with the second economic principle: buying more failure. Advocates of the program point out that people who attend college enter better-paid jobs and more lucrative careers, than high-school graduates. And, as the argument used to go, can pay off student debt.

In fact, the argument over-generalizes. Some who attend college enter better jobs and careers. Richard Vedder, an economist, in his 2019 Independent Institute book, Restoring the Promise, points out that some 40 percent of those who attend college fail to finish. Others graduate, but with weak academic records (the lowest quartile in class ranking). Like those who do not graduate at all, they have the same earning power as high-school graduates.

Both dropouts and academically weak graduates have student debt, however, and must pay it off with non-college-enhanced incomes.

Financial-aid programs began with the chief goal of making possible attendance by talented, qualified students without financial resources. Financial aid was and is intended, in the first instance, to help poor people. Despite much-increased assistance, though, students from families in the lowest quartile of income are only 10 percent of recent college graduates, according to Mr. Vedder.

Increased financial assistance has enabled and encouraged millions of young men and women with little chance of succeeding in college to attend anyway. They spend what limited resources their families can provide, take large student loans, delay their work lives for up to four years—and buy no apparent income or career advantage over their high-school-graduate counterparts.

In a Wall Street Journal opinion piece, Jason L. Riley argues that “…the objective shouldn’t be to funnel as many high-school grads as possible into college…. underemployment of college graduates…has been steadily worsening as the number of graduates has increased faster than the number of jobs requiring a bachelor’s degree. In 2020, 4 out of 10 recent college graduates were working at jobs that didn’t require a college degree.”

The student loan-forgiveness scheme, a welcome talking point for some Democratic candidates in November who need larger numbers in the 18-30 bracket to get out and vote, will buy more failure of those least able to afford the lost years, discouragement, and misleading career expectations.

But many “progressives” see progress as lowering admissions standards–especially academic measures such as standardized test scores and grade-point-averages–to admit more applicants from certain racial and economic categories. Combined with student loan-forgiveness now on a trillion-dollar scale, this completes the formula for buying more failure.

Turn now, briefly, to the second economic principle: paying for what some want at the expense of what others  want. Critics of the scheme make the valid argument that many millions of Americans who worked for years to pay student debt should not now be forced to pay debts of other students. That argument is still more poignant when considering millions of college dropouts and academic underperformers–plus those who felt they couldn’t afford to attend–will pay for the program.

Mr. Riley encapsulates the case against subsidies:  “…it’s a raw deal in economic terms for millions of Americans who never went to college or who chose a less-prestigious school to avoid accruing lots of debt.”

The transparency of this “redistribution” plan, coming when Americans struggle economically, scared off some Democratic candidates but boosted others. What might be a corollary of the economic principle of subsidizing is that beneficiaries are more motivated to support a subsidy than the public (with many such schemes on the table) is to oppose it. This is suggested in a Brookings Institute rundown of political support for the scheme, reported to have approval of half of Americans—but opposition only of minorities of voters.

In the article, William A. Galston reiterates the politics driving the scheme: “If it motivates previously disengaged younger voters to participate in the midterm elections, it will boost Democrats’ prospects, especially in contested races where turnout will be key.”

Valid economic principles often (or always?) express underlying philosophical truths. Individual responsibility, a bedrock of freedom under limited government, is instilled, reinforced, and favored by a society that ensures that individuals experience the consequence of their judgments, choices, and actions. The choice to attend college, often at 17 or 18, is among the earliest important decisions of adult life–a first life-changing investment of money, time, and hope.

Many billions in tax-payer money will skew this pivotal decision by further subsidizing the option to choose college over the option to take on the challenge of finding a first job and becoming self-supporting. The subsidy also converts this decision into an adult’s first encounter with entitlement, giving young Americans a “gateway” experience of life under the interventionist-welfare state.

In all schemes that shift consequences from the individual to the collective, the first, most numerous, and most at-risk victims are those intended to benefit most.

The judge in Texas, Mark Pittman, in his 26-page opinion, said the plan “…is either one of the largest delegations of legislative power to the executive branch, or one of the largest exercises of legislative power without congressional authority in the history of the United States.”

It isn’t the first setback for the plan, which earlier a court temporarily blocked from implementation while it considered a request from Republicans in six states, including attorneys general, to block implementation permanently.

The plan has gone ahead accepting applications and on November 19 the Wall Street Journal reported: The Biden administration asked the Supreme Court to allow it to move forward with its mass student-debt forgiveness program, which had been put on hold in lower-court litigation.”

 


Walter Donway is an author and writer with more than a dozen books available on Amazon and an editor of the e-zine Savvy Street. He was program officer or director at two leading New York City foundations in the healthcare field: The Commonwealth Fund and the Dana Foundation. He has published almost two dozen articles in the Blockchain Healthcare Review.