Art Carden explains why cancelling outstanding student loan debt — despite its huge popularity on the campaign trail — would be a very bad idea:
University College, University of Toronto, 31 July, 2008.
Photo by “SurlyDuff” via Wikimedia Commons.
It’s one of the rules of electoral success: advocate policies that concentrate the benefits on an easy-to-identify interest group (preferably one that is sympathetic in the public eye) and disperse the costs onto the entire electorate. It’s how we get Coke sweetened with corn syrup rather than actual sugar. It’s also how we get proposals to cancel student loans. As my AIER colleague Will Luther points out, the fact that two of the Democratic frontrunners have made debt cancellation such an important part of their campaigns suggests that the issue is going to be with us for a while.
But would it be a good idea to cancel student debt? And importantly, how does even the prospect of canceled student debt affect people’s incentives?
Regressive Tax
First, let’s consider the quality of the policy. A lot of commentators are pointing out that it’s fundamentally regressive, meaning that we’re basically taxing the poor to pay the rich. As economist Alexander William Salter puts it in the Dallas Morning News, it’s
a transfer of wealth to those with relatively high levels of expected lifetime income, at the expense of those with relatively lower levels of expected lifetime income.
The idea might have some merit, but it will make wealth and income inequality worse rather than better.
Even saying that the idea might have some merit is perhaps too charitable. In 2011, economist Justin Wolfers called it the “Worst. Idea. Ever.” in a Freakonomics post. Why? First, there’s the distributional effect. If we’re going to have policies that transfer wealth from one group to another, it doesn’t make much sense to transfer wealth from taxpayers generally to high-income college graduates. As Will Luther and so many others have pointed out, a college degree brings spectacular financial returns. As a group, college graduates aren’t “needy” by any reasonable definition.
