A $600 billion administrative moral hazard.

The premise behind federal student loan forgiveness is that it is “fair”: people struggling with student loans because of a down job market, personal troubles, or other of life’s inevitable strains should be “unburdened by what has been.” At the same time, debt relief administration problems include bureaucratic inefficiencies and the increasingly sizable cost, which must be passed on to other taxpayers who may not have been afforded the privilege of a college vacation, er, education. The effort also promises to amplify obvious government-created inequities by creating a destructive moral hazard.

Profligate Student Loan Payouts

A recent assessment of the Department of Education’s (DOE) proposed student loan forgiveness rules concluded the costs to US taxpayers could approach $600 billion at a time when the national deficit is already increasing by $1 trillion about every three months. The redistribution of wealth from taxpayers to loan defaulters is patently unfair. Sheetrockers and electricians work long hours rather than seek a government hand-out. The fundamental premise of student loan forgiveness is elitist – a transfer of money to the college-educated class, who statistically already fare much better than blue-collar workers or day laborers. Combined with massive payouts to “undocumented entrants” and poor citizens, such policies are pinching the American middle class into nonexistence.

This profligacy is patently unfair even within the pool of student loan recipients. People who paid off their own loans are now essentially called upon to pay off those of others portrayed as less fortunate but may simply be less motivated or made poor decisions in career study choices. Not everyone can become a psychologist or history professor, let alone a DEI instructor, a guru of Mesopotamian relics, or a gender studies expert. The practical needs of the economy are jettisoned when government rewards non-performance.

The premise of a student loan is to give prospective students a “leg up” in their investment in themselves and their futures, not fund a four-year sorority or fraternity binge where beer pong may be the focus of study. The market naturally rewards those who study hard and disappoints those who goof off; the Department of Education’s plan implicitly does the opposite. Suppose students undertake loan commitments knowing they may well not have to pay them back. In that case, a doubly damaging moral hazard is instilled: A lax attitude about repayment invites shoddy loans but also sloppy commitment. In the back of student minds during frat-house rush week will be, “Oh well, I don’t need to study because I can fail and get a write-off” rather than “What will I tell Dad, and how will I earn the money to repay my obligation if I fail and can’t get a job?” This is akin to paying people for the loss of homes in flood zones who lacked insurance because the insurance market does not incentivize building houses in flood zones.

Fickle Administration

The proposed fickle administrative system guarantees more Kafkian inequities, using two different “pathways” to student loan relief:

“The first pathway would recognize the Education Secretary’s authority to grant individualized, automatic relief without an application. The Secretary could provide relief on a one-time basis to borrowers who the Department determines have at least an 80% chance of sliding into default within the next two years.”

This carte blanche administrative slush fund invites abuse and partisan favoritism. The US Department of Agriculture (USDA) is dispensing disaster relief funds to farmers based on skin color and gender, in direct violation of the Equal Protection Clause. In its taxpayer-indebted dispensations, will a “social justice DOE” similarly decide who the individual winners and losers are? Every dollar of forgiven student loan debt is transferred directly to the burgeoning federal deficit, essentially moved from the US balance sheet’s asset column to a greater liability. This impacts interest rates, inflation, debt service, and the overall economy.

What of those defaulting on their mortgages? Shall the Department of Housing (DOH) pay off $600 billion of home loans using a similar inequitable rubric? While compassion for those failing to meet their mortgage obligations is merited, why should Americans who scrimp, save, and work overtime foot the bill for those who hang out at the bar or eat at restaurants instead of paying their mortgage? Everyone knows people on each side of this equation. How would the DOH administer such a plan? Skin color and gender over merit — reverse-MLK Jr. — as is being implemented at USDA?

The DOE’s second proposed pathway would be needs-based and focused on hardship. Yet, as with drunks defaulting on loans (or child support – will deadbeat dads be rescued?) and houses built on watery sands, there is little hope that a massive bureaucratic agency will efficiently or equitably administer this gallant-sounding scheme.

As Maya MacGuineas, president of the Committee for a Responsible Federal Budget, noted:

“’Today the Biden Administration has sent a clear message to schools and borrowers: charge as much as you want, borrow as much as you can, and let your grandchildren worry about the bill,’ she said. ‘This is no way to run a student loan program or to be good stewards of taxpayer dollars.’”

Economist John Kenneth Galbraith observed, “People of privilege will always risk their complete destruction rather than surrender any material part of their advantage” (The Age of Uncertainty, 1977). The problem with unmoored administrative spending is that it is unaccountable, profligate, and corrupt by nature. If the American people do not control their own government’s purse strings through elected congressional representation, they surely have no oversight of what the partisans-du-jour at DOE, USDA, and other unaccountable agencies employ for recipient criteria.

Perhaps the same malaise that threatens a moral hazard for recipients of student loan debt relief already infects the DOE and other agencies: If they are not accountable to markets, taxpayers, or the Constitution, why should lazy student debtors be? Perhaps would-be recipients should just apply for a job at DOE and work off their debt to society rather than take to the streets in riotous victimhood. The real victims are those saddled with the debts they promised to repay.