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Student Loan Forgiveness: Expanding the Bubble, Not the Pie

Economics is all about incentives.

A few weeks ago, Houston held a “gun buy-back” event. It was intended to get guns off streets by paying gun owners to turn over their guns to the local law enforcement. We can argue about the philosophy behind gun control but that’s not what this post is about. Instead, understand that someone went out of their way to create 3D printed guns, bring them to the event, and sell them to law enforcement for $3,000.

Not too long after that, the Federal Government decided to subsidize up to $20,000 of student loans for graduates making under $125,000 per year. There’s the obvious bleeding heart argument – that it’s the right thing to do. But at what expense?

There are three major areas of failure with this subsidy:

  1. The Big Lie
  2. Financial Burdens
  3. Devaluation

The Big Lie

For decades, teens and parents were sold the idea that college graduates earned more money on average and worked more prestigious careers.

The fact that many cannot pay off their debts should raise questions about the integrity of a college degree and how necessary it is to get one in the first place to earn a living. If you ever needed an incentive to work in the trades, this is probably it.

Financial Burdens

If college graduates earn more money than their counterparts, then this relief program is a transfer of wealth from the “have nots” to the “haves”. Banks issuing student loans get a free ride at the expense of the tax payer.

Colleges now have an incentive to increase tuition costs similar to how Ford increased electric vehicle costs conveniently after the federal government approved an electric vehicle subsidy.

Tuition hikes would generally be more palatable if two things were true: 1) teachers were getting paid more and 2) students were getting a better education out of college. But we know neither of these things have been true for the last two decades.

Tax payers who never went to college or already finished paying off their student loans are essentially paying big banks to forgive the debts of the financially inept via the Federal Government.


Let’s tie this back to the firearm buy-back story at the beginning of his post. Whoever printed 3D guns had an incentive to do so because they saw a financial opportunity. Likewise, more teenagers graduating high school will see loan forgiveness as an opportunity to go to college for “cheap,” assuming colleges don’t raise tuition in kind. This is bad for two reasons:

  1. Less workers in manufacturing and construction. In an economy that already produces nothing where everyone’s chasing a desk job in a corporate office, the federal government is diverting incentives from manual labor and manufacturing to service-based desk work. Last I checked, colleges don’t teach you how to hold a shovel, repair your home, weld steel, or mix grout – you know, the stuff you need to know to keep society functional.
  2. The more there is of something, the less value it has. More college degrees floating around means your degree is worth less. How will a graduate stand out from the crowd if everyone in the (growing) crowd holds the same exact credentials? Is more schooling really the answer – or should we be incentivizing paid apprenticeships instead so young people can enter the workforce with real life experience instead of memorized lines out of a textbook?

In the long term, debt forgiveness is likely to exacerbate inflation. Consumer prices come down when there’s less consumer spending (lower demand). An extra $10k in the bank usually means an extra $10k to spend, so businesses may be placed in a position where there’s little to no incentive to reduce prices.

The benefits of a subsidy like this one are only immediate – debtors will feel temporary relief knowing that they’ll have extra cash. The question is how much relief they will feel after prices continue to go up in the long term. Then, of course, there’s the moral hazard of bailing out the banks, yet again. So the debtors and taxpayers lose in the long term and banks walk away with yet another federal guarantee that they’ll get paid. Considering the hazards, this subsidy is nothing more than an emotionally triggered policy by the Biden administration to win over votes – nothing more because crony bankers reap the benefits at the expense of the taxpayer.