Earlier this week, President Biden confirmed that the US federal government is going to forgive student loan debt for millions of students. Apparently, if you earn less than $125,000 annually, you're eligible to receive cancellation of up to $10,000 in federal student loans.1
Biden’s approval rating is in the tank, so what better way to rally support than to offer more free stuff. But instead of addressing the root of the student loan problem, the government simply seeks temporary appeasement. No one seems to be asking why the cost of higher education is through the roof in the first place and how this impacts future costs.
Could it be that subsidies and easy monetary policy are what is pushing tuiton costs so high? That’s a rhetorical question. Of course, that’s the cause. When you subsidize something, you get more of it. It’s no secret that colleges know students can get these enormous, low-interest student loans courtesy of the government. So when a student suddenly has access to a large bucket full of loaned cash, college administrators see green in their eyes. They raise tuition. And so begins the vicious cycle — college gets more expensive, students cry out for government help, the government “helps” by offering more subsidies, the costs go up, the students cry out, rinse & repeat.
It used to be the case that colleges themselves would work with students to provide financial aid. The colleges would take the risk. But this is becoming less so. Why would a college take on risk when the American taxpayer can take on the burden?
Of course, it’s the banks that hold the loans, so the banks are also the ones getting “forgiven” for their reckless behavior … giving loans out to people seeking degrees that have little potential to earn salaries that could even afford the loan payoff. I’m sure Biden’s banker buddies sure appreciate him taking those looming defaults off their backs. Not to mention the banks are on the losing end of these loans right now because a high-inflation environment benefits the debtor and hurts the lender.
This situation is all so similar to the mortgage crisis of 2008.
Homeownership Society
Back at the turn of the millennium, then president George W. Bush was pushing the fantasy of an “ownership society” in which everyone, no matter their financial situation, could own a house. It sounded nice. It was like Oprah Winfrey awarding her guests, “you get a house, you get a house, you get a house!” After all, accumulating assets, such as property, can be key to wealth generation. But it must come about naturally, not artificially.
In 2002, the President announced the arbitrary goal of increasing the number of minority homeowners by at least 5.5 million families before the end of the decade.2 Instead of promoting sound money, fiscal responsibility, and capital accumulation, the government promoted the opposite: currency debasement, excessive leverage, and debt accumulation.
Like a shot of heroin in the arm, it felt good for a bit. Many people were becoming home owners, no matter if it made sense financially or not. Banks were giving loans. Such a mode of operation is unsustainable, obviously. Hence the crash of 2008.
This would all lead to the $700 billion bank bailout passed and signed into law by our benevolent overlords in 2008 (Biden among those voting in favor, by the way). Funny thing is, the politicians had the audacity to call it a “rescue plan.” It’s obvious who they were rescuing.
Student Loan Debt
It’s the same story with student loans. There is this fantasy that everyone should go to college with no discernment of what they should study. Reality and fantasy are not the same thing, even in the wacky times of 2022. The older generation has been conditioned to believe that a degree, no matter the type, is the path to success. Many caring mothers of the last 20-30 years have demanded, “I don’t care what you study, but you’re going to college!” I don’t blame them. After all, that was relatively true back in the day. A degree was unattainable for many of our parents. They only want what’s best for their kids. But like everything else, college degrees are subject to the law of supply and demand. When the supply of degrees goes up (especially artificially), yep, you guessed it, the demand for those degrees goes down.
But not everyone is made for college, nor is college a necessity to be successful. In fact, this student loan bonanza is a big middle finger to the working class, particularly those that chose not to go to college.
Florida Governor, Ron DeSantis, said it well:3
“Why would you make a truck driver, or a waitress, or a construction worker pay off the debt for somebody that got a PhD in gender studies? That's wrong.”
“It’s a bank bailout..”. Exactly what I told my wife.