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Monday, May 23, 2022

OPINION:

With a nod to Oliver Hardy, here is another nice mess the federal government has gotten us into.

When Congress passed the CARES Act in March 2020, it placed student loans into “administrative forbearance” until September 2020. That is, there was no penalty for borrowers to stop making payments. Through executive action, the Trump and Biden administrations have extended the pause on student loan repayments multiple times, with the latest extension ending Aug. 31, 2022. 


On April 27, former White House press secretary Jen Psaki crowed: “Not a single person in this country has paid a dime on federal student loans since the president took office.” By the end of August, student loan borrowers will have enjoyed two and a half years without having to make any payments towards their unpaid debt. 

Any private lender knows, that once loan payments stop, it is difficult to get borrowers back into the habit of paying. Exactly how is the federal government going to get taxpayers’ money back? More importantly, if the federal government does go down the path of loan forgiveness, what then?  

Don’t we taxpayers deserve answers to $1.6 trillion questions? 

About 43 million people have chosen to take on student loan debt. A recent poll claims that 81% of the respondents say the government should make it easier for borrowers to repay their debt. Are all borrowers struggling to repay? Is it wise to cancel billions in debt without making any lending reforms that would prevent the problem from reappearing? 

In the Consumer Credit Protection Act of 1968, Congress chartered a National Commission on Consumer Finance. Congress wanted the Commission to study the entire consumer financial market in America. At the time, however, student loans were practically nonexistent.  

We need answers to what is going on in the student loan market. Like in 1968, Congress should enact a new bipartisan national commission, one charged with studying all aspects of the student loan market. This commission should look at the history and current state of the student loan program. A thorough and dispassionate rigorous study could inform us all. 

The necessity for a depoliticized commission is readily apparent. Already battle lines have been drawn, and political pressure for further executive action is growing. There seems to be little thought about any problems that a blanket debt jubilee can create. 

Some supporters of easing student loan burdens worry that when payments are resumed, confusion could reign, and we will get a “mess” — implying the federal government should simply forget about trying to get paid back. And it appears, at least partly, debt cancellation could soon become an unfortunate reality before the latest hiatus ends on Aug. 31. On Thursday, April 29, President Biden himself confirmed that he was “in the process of taking a hard look at whether or not there are there will be additional debt forgiveness.”

Others have spoken against a forgiveness program. Arguments exist that such a cancelation program is not forgiveness, that there are tax implications, and there are nettlesome legal issues. Moreover, this program is demonstratively recessive: It benefits higher-income borrowers much more than lower-income borrowers. Forgiving the bulk of this debt is likely not a stimulus. So, why do it?

A basic prediction of economic theory is that incentives matter. If you incentivize bad economic behavior — even in the name of “fairness” — you wind up with more bad behavior. 

Suppose the federal government “gives away” college education by erasing student loans. Does this action incentivize future borrowers to borrow even more? Does it incentivize institutions of higher learning to increase tuition? What incentives would students have to shop among colleges for the best value if they do not have to pay? If the government prints money to wipe out student debt, won’t there be calls for forgiving other consumer debts follow?

This fine mess has been 20-plus years in the making. Current student loan debt tops $1.6 trillion. Why the rush to forgive student loan debt before the expiration of the Aug. 31 extension? The economic forces underlying the perceived chaos swirling around student loan debt will not disappear by then. 

The path of forgiving student loans through executive action is fraught with legal peril and moral hazard. It certainly does nothing to reign in the current costs of college. The unintended consequences might even harm student borrowers in need of relief.

We need answers before action. A bipartisan national commission brings both sides to the table and provides empirical research to guide Congress toward a robust solution.

• Thomas W. Miller Jr. is a professor of finance and holder of the Jack R. Lee Chair in Financial Institutions and Consumer Finance at Mississippi State University and a senior research fellow at Consumers’ Research.  


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