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Biden’s Misfire on Student Loans

President Joe Biden’s debt forgiveness plan won’t solve the student loan crisis or reduce the cost of higher education in America. A better approach would be to optimize the tax and welfare systems to encourage workers to invest in acquiring new skills throughout their lives.

NEW YORK – The student debt forgiveness scheme announced by US President Joe Biden last month can certainly alleviate many of the desperate conditions some borrowers face. But it will do so at a disproportionately high cost. Much of the money spent will go to people who do not really need it. Given that a college degree already confers a significant wage premium, those who never went to college and pay taxes may well perceive this aid as unfair. And in today’s inflationary environment, the timing is less than optimal.

Two other flaws in the program are the lack of predictability and the intergenerational inequality it will bring about. People who have already paid back their loans are excluded, while future students won’t know for certain whether their debts will be forgiven. This could create a type of moral hazard, encouraging borrowers to max out their student loans in the hope that someone will one day pay for them.

A better policy would create a system that rewards human capital formation – learning skills but also improving health – throughout a person’s lifetime. Biden’s plan won’t solve the student debt crisis, nor will it reduce the cost of college and health care. Moreover, most of the truly dire debt burdens could probably be ameliorated by retraining students who have seen very poor returns on their investments in higher education.

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