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Student Loan Forgiveness: Why It's Dangerous

by Joseph Alonso

Demonstrators gather outside the U.S. Supreme Court on Feb. 28, 2023, ahead of oral arguments in the lawsuit against President Joe Biden's student debt forgiveness plan. (Daniel Desrochers/The Kansas City Star/TNS)

In a world of rising inflation, economic hardship and pandemics, the thought of loan forgiveness seems needed. Over $1.7 trillion is owed to both the federal government and private institutions, which begs the question of whether we should forgive all student loan debt.

The argument can be made that these loans allow our economy to thrive, taking the burden of those who cannot afford these plans and giving them the opportunity to put their money back into the economy.

However, this simply misses the truth in that total forgiveness may be regressive and, in fact, harmful to the economy as a whole.

Before any of that, let's first delve into what are student loans and how forgiveness works.

In the world of student loans, there are two types: federal loans and private loans. Federal loans are distributed by the federal government and tend to have lower interest rates while also having the potential to be subsidized based on income and need.

On the other hand, private loans are distributed by banks, credit unions, state agencies, or schools and tend to have more volatile interest rates while also rarely receiving subsidies.

With this information, a clearer picture can be painted of the effects of student loan cancellation. Specifically, because cancellation only affects federal loans, Alicia Hahn of Forbes in 2023 explains, "Federal student loans make up the vast majority of American education debt—about 92% of all outstanding student loans is federal debt. The federal student loan portfolio currently totals more than $1.6 trillion, owed by about 43 million borrowers."

In this way, student loan forgiveness would mean canceling more than $1.6 trillion in federal loans where the federal government would be at a net loss. Although the federal government would not have to immediately increase spending by any means to cancel these loans, this $1.6 trillion would eventually appear in the deficit over time as the government loses the revenue from the loan repayment.

While this may seem minuscule, that is tens of billions, even hundreds of billions, of dollars added to the deficit yearly. Not only would this increase pressure on the federal government, but it would also add to the current inflation crisis. This happens in two main ways, the first being increased consumer spending.

When consumers no longer have to pay for student loans, they are free to use that disposable income to spend more. While this spending may not be high ticket items, it will certainly continue to devastate the current demand and supply chain crisis as more people are buying up things in low supply.

The second way inflation increases is with government spending. In order to offset the lost revenue from loan repayment, the government must increase its spending through bonds or other means in order to continue spending the same amount. More spending, however, means more printing which could inject more money into the economy.

While these two arguments seem the most plausible, there is one underlying issue: deficit reduction.

Under the Inflation Reduction Act (IRA) passed in 2022, President Joe Biden's goal under this plan is to reduce the inflationary pressure occurring in the status quo. Under these goals, the government has made certain cuts and commitments to decrease the deficit over time.

Unfortunately, if we were to forgive student loans and increase the deficit as a result, the government would either have to reduce spending or increase taxes in order to prevent the inflationary impact of forgiveness.

This affects every American as social programs would decrease in funding, preventing necessary anti-poverty measures such as unemployment benefits and food stamps. Reduced spending could also impact retirement benefits such as social security which could be detrimental to the aging population getting ready to retire.

Increased taxes also have a major negative impact on the economy. While the Federal Reserve is known for increasing interest rates in order to combat inflation, an increase in taxes would only add to the growing despair of American consumers. With taxes already high and debt being a major obstacle in the lives of many Americans, an increase in taxes could be something that prevents economic growth in the long term.

Student loan forgiveness may improve economic growth as people are freed from debts and have a newfound ability to spend and contribute to the economy, but given current inflationary issues, it may not be the right time for forgiveness.

Maybe partial or future forgiveness may be on the table, and this has proven to have some benefit. Unfortunately, given the current circumstances of our nation, loan forgiveness will only continue to hurt the already struggling economy.

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