Loan Forgiveness Myths

Forgiveness” is such a kind word that it’s no wonder politicians latched on to it to describe the extremely unkind thing they’re doing to us. Recent discussions on social and mainstream media reveal that the typical voter is not only confused about what “loan forgiveness” means, but (disturbingly) also confused as to what “loan” means.

Myth #1: Student loan forgiveness doesn’t cost taxpayers anything because the loaned money has already been spent.

Yes, the money has already been spent. But that’s not where the cost occurs. Suppose that a student was supposed to pay back $10,000 five years in the future, and that the government has now just forgiven the loan. Five years from now the government will have $10,000 less revenue than it otherwise would have. And that means that the rest of us either (1) will receive $10,000 less in government services than we would have otherwise, or (2) will pay $10,000 more in taxes than we would have otherwise, or (3) will endure $10,000 more worth of inflation than we would have otherwise.

The student who has his loan forgiven will end up paying back some of that forgiveness later, likely in the form of higher taxes or inflation. But he’ll only pay back some. Some will be paid by people who already paid for their own student loans. And some will be paid by people who didn’t go to college at all. No matter how you slice it, the government hasn’t forgiven loans. It has instead forced the rest of us to pay them back. Notably, it has forced people who didn’t go to college to pay for those who did.

Myth #2: Forgiving student loans will cause inflation.

Forgiving student loans won’t cause inflation. But, the manner in which the forgiveness is financed could cause inflation. Forgiveness means that the government will be collecting less money in the future from the borrowers. If Congress doesn’t cut spending to match the money it won’t be collecting, and doesn’t raise taxes to compensate for the money it won’t be collecting, then it will have to print money to compensate for the money it won’t be collecting. That will cause inflation. Astute readers may note a fourth option: The government could borrow more in the future to compensate for the money it won’t be collecting. But the government’s borrowing money is the same as raising taxes. It just happens over a different time frame. Rather than raising taxes by a large amount in one year, when the government borrows, it raises taxes in small amounts over many years to pay the interest on the borrowed sum.

Myth #3: Student loan forgiveness benefits private banks.

Contrary to what detractors say, loan forgiveness is not some sort of bank bailout. Way back in 2008, politicians buried in the text of the Affordable Care Act language authorizing the Department of Education to lend directly to students. Consequently, today the Department of Education holds more than 90 percent of student loan debt. Student loan forgiveness applies to this government-held debt, not to debt held by private banks.

Myth #4: Forgiving student loans is good for the economy because those students will be more able to purchase homes and cars.

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