What impact would student loan forgiveness have on the price?

David McClough is an associate professor of economics at the James F. Dicke College of Business Administration at Ohio Northern University.

If it weren’t entirely predictable, one could say that the first 15 months or so of the Biden Administration have been disappointing or disappointing.

I can’t imagine who could have expected anything more.

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To be clear, President Joe Biden is not personally responsible for the the highest inflation in more than one generation. He is not responsible for by Vladimir Putin invasionf Ukraineand it is not responsible for COVID-19 mutations.

Like all presidents, he took office at the wrong time and fought back from day one. That we expected otherwise seems naive.

Grabbing for any sort of traction with voters, the administration continues to wrestle with the idea of student loan forgiveness.

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Unlike the “welcome basket” that awaited him when he moved into the White House; if the president evades the legislative process and instead employs an executive order to cancel student debthe will be personally responsible for the consequences.

Indeed, it will aggravate a legacy that already includes enabling genocide in a country the United States has promised to protect, by mishandling a pandemic and advocating inflation-fighting tactics that exacerbate inflation.

Just like the promotion of home ownership by removing the “barriers” to home ownership, debt cancellation is a “good” policy.

The proposal aims to make the president and the Democrats appear sensitive and in tune with the issues facing the electorate. The message resonates with voters because people think they are getting something for nothing.

Protesters call for cancellation of student debt outside the U.S. Department of Education on April 4, 2022. The protest was organized by the Debt Collective, a group that recently purchased and discharged student debt at Bennett College, an all-female HBCU.

Rather than exploring the intergenerational injustice and blatant political expediency driving the proposal, I will explain how canceling student debt will raise tuition fees and accelerate the accumulation of student debt.

After demonstrating why debt cancellation is a terrible idea, I’ll offer suggestions for solving the problem.

For starters, debt cancellation changes the price of college attendance, but not in the way the president and his political handlers peddle it to voters.

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Expecting debt forgiveness, parents and students will now be willing to borrow more. Quite simply, debt cancellation increases the demand for college education. Increased demand tends to translate into higher prices.

As a result, debt cancellation results in increased tuition fees, room and board, books, etc.

When the federal government began subsidizing college education, demand for college education increased and tuition fees outpaced inflation for decades, contributing mightily to the student debt situation that the forgiveness program claims. to resolve.

Readers hesitant to adopt this line of reasoning might recall that cheap credit fueled house prices, leading to a bubble that burst dramatically less than two decades ago, so it’s no surprise that the Free credit fuels the cost of college education.

The only question is when will we experience the spectacular breakout? As heard on late night television, But that’s not all. There is more!

A more harmful implication of debt cancellation will amplify the negative consequences. Parents and students who expect debt forgiveness will be less likely to assess the value proposition of potential colleges. Additionally, borrowers will be less likely to seek scholarships and grants.

No one will observe these subtle behavioral effects, but one can be sure of an aggregate effect that will increase borrowing to pay higher costs and to cover the absence of scholarships and grants.

The term “moral hazard” refers to changes in behavior due to the removal of some risk. The classic example is that of motorcycle helmets. Bikers, on average, are less cautious when wearing helmets. One can only imagine how less dangerous football would be without pads and helmets. Direct Contact would likely crash like the NASDAQ.

Altogether, debt cancellation changes the price and market incentives of higher education. Politicians are notoriously selfish and voters are myopic. The solution is to eliminate government involvement in funding higher education.

Reduced government involvement will put downward pressure on prices and encourage students to seek scholarships and grants to offset costs. Students would leave college with less debt, which would free them to pursue employment in line with their interests and abilities.

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Ultimately, the monetary value of a college education is determined by the strength of the economy and the demand for college-educated workers.

Rather than keep hammering misinformed policy measures that burden future generations, the administration would be well advised to adopt policy initiatives that contribute to a robust economy and a vibrant labor market that provides opportunities for individuals to realize their potential while meeting their needs materials.

David McClough is an associate professor of economics at the James F. Dicke College of Business Administration at Ohio Northern University.

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