Here’s an economics lesson that belongs in the text books.
Student loan debt soared to more than $1.5 trillion during the Biden presidency and the response by Washington was to “forgive” hundreds of billions of these unpaid loans by deadbeat borrowers and let the taxpayers pick up the tab. It was never clear why the universities who charge exorbitant tuitions that have reached more than $75,000 a year at many elite schools shouldn’t bear the cost of the program – but that’s another story.
Those of us who watched these events upfold predicted that one result of this policy would be that many college graduates would stop paying back their loans. And guess what?
Just like clockwork, this headline from Bloomberg recently told the whole story:
“Student loans drive U.S. delinquency rate to highest since 2020”
Gee, who – except a bunch of head-in-the-sand- politicians in Washington – would have ever thought that forgiving as many people from paying their student loans as possible would increase future non-payments?
Well, the Biden administration for one. Now that the Department of Education is honestly reporting the data, we find that serious delinquency rates are over more than 10 times what the Biden Department of Education said they were.
There is an old saying in physics and economics: every action in the universe has a reaction. How many students in the future will pay back unpaid student loans when the next forgiveness program is right around the corner? So people who did the right thing and paid back their debts now have to pay more for the people who refused to pay back the money they owed.
In Washington, we love to reward vice and punish virtue.
As we said many times last year: expect student loan defaults to remain sky high for many years, as deadbeat borrowers wait for the next student loan amnesty program.
Fortunately, in the House of Representatives “Big Beautiful tax bill,” there are new caps of $50,000 on student loans for undergraduate students and $100,000 for grad students. This cap should help slow the stampede of higher tuition prices, which have grown two to three times the rate of overall inflation over the last thirty years. The availability of cheap student loans only fueled this stampede of tuition prices. The Wall Street Journal calls this move “The End of The College Free Lunch.”
The bad news is that we should anticipate bigger stashes of student loans to pile up at taxpayers’ doors in the years to come. The good news is that this scam has reminded us that in life incentives matter. This episode brought to light the financial foolishness of debt forgiveness programs and so hopefully we will never do this again.
Except that politicians have very short memories.
Stephen Moore is a cofounder of Unleash Prosperity and a former senior economic adviser to Donald Trump. His most recent book is “The Trump Economic Miracle.”
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