President Joe Biden’s student loan forgiveness has attracted criticism from the left and right, but few express the menace it poses to economic stability and constitutional order.
Initiated as a Great Society program, federal student loans created more equal access for working and middle class students to quality higher education that was once the preserve of the wealthy or gifted.
However, the indiscriminate nature of the program permits universities to hawk programs that offer few prospects of landing a good job and overenroll the adolescent population.
About half of college freshman either leave without a degree or earn less than the average high school graduate. Yet many are saddled with heavy debt they can’t or struggle to repay.
Federal undergraduate student loans are capped at $57,500 for financially independent students—$31,000 for those with parental support—but borrowing for graduate school has virtually no limit.
It doesn’t matter whether you are studying philosophy or electrical engineering.
The typical NYU Masters in film studies owes $113,180 and earns $30,581 three years after graduation. Columbia’s program numbers are even worse, and the problem is endemic throughout softer professional programs and non-elite law schools.
Universities use the profits to subsidize undergraduate programs, bloated administrations and light teaching loads.
All of this discourages college students from choosing majors wisely and high schools from steering more young people into apprenticeships and training programs that pay better.
University priorities for financial aid are sometimes questionable.
NYU offers free tuition for medical school.
Considering medical schools are among the most expensive enterprises universities run—and medicine is one of the few fields that offers graduates both handsome incomes and virtually guaranteed employment—the free ride raises enormous equity issues when the institution is saddling students who will often end up in low paying work with massive debt.
As White House briefing material indicates, the cost of a four-year education at a state university has risen about two and half times the pace of inflation. Yet universities generally use few resources that justify this—buildings, PhDs, managers of questionable competence and all subsidized by land grants and federal financing.
All this shrinks the productive labor force, misallocates capital and undermines growth—and encourages universities to jack up prices.
The president will forgive $10,000 for individuals earning less than $125,000—$20,000 for couples earning less than $250,000. And doubles those figures for folks who received Pell Grants.
The immediate budgetary impact will be about $460 billion and give a massive jolt of new spending powers to former students. That should add 0.3% to 0.5% to inflation and wholly overwhelm the net revenue effects of the Inflation Reduction Act.
More menacing, the required repayment rate for Income-Driven Repayment Plans will be lowered to 5% from 10 to 15% and apply to incomes above 225% percent of the federal poverty line—up from 125%.
After 10 years, the balance will be forgiven—not the current 20 years. Consider what that means for the typical NYU or Columbia film studies graduate earning $30,000.
In 2022, 225% of the poverty line is $30,578. NYU can charge $75,000, $150,000 or more, and impose debt of $100,000, $300,000 or even
$1,000,000 for students. After graduation, they can sign up for debt repayments of nearly zero and have it all forgiven in 10 years.
This morass will encourage the most irresponsible and managerially challenged chief executives in America—our university presidents—to jack tuition and spend recklessly as never before.
It will all get turned into bonds as the federal government borrows to finance the loans, and either the Federal Reserve will print money to purchase equivalent securities or the supply of U.S. Treasuries in circulation will jump.
What is terribly underappreciated is that Treasuries may not be money per se, but they are close. Corporations and rich individuals use those as sources of liquidity.
The Federal Reserve’s control of the money supply and inflation will be further compromised by this reckless fiscal policy.
The legal justification for an executive order as opposed to legislation for all this irresponsibility appears to be a 2003 statute that permits the Secretary of Education to waive or modify student loans in a national emergency. Two years after the COVID-19 shutdowns, it is hard to justify that we are in such an emergency.
Businesses are ordering workers back to offices and pandemic protocols are being relaxed, for example, by the airlines.
Arguably, the statute is applicable only on a case-by case-basis—it is not a writ for blanket forgiveness.
All this stinks of presidential arrogation of congressional power to spend.
Sadly, identifying individuals with standing to challenge this madness in court appears difficult.
Mr. Biden likes to point a finger at his predecessor as a threat to democracy. He might do well to look in the mirror.
• Peter Morici is an economist and emeritus business professor at the University of Maryland, and a national columnist.