President Joe Biden’s debt cancellation plan will not solve the student loan crisis or reduce the cost of higher education in the United States. A better approach would be to optimize tax and welfare systems to encourage workers to invest in learning new skills throughout their lives.
NEW YORK — The student debt cancellation program announced by US President Joe Biden last month can certainly ease many of the dire conditions some borrowers face. But it will do so at a disproportionate cost. Much of the money spent will go to people who don’t really need it. Since a college degree already confers a significant salary advantage, those who have never attended college and who pay taxes may well perceive this aid as unfair. And in today’s inflationary environment, the timing is not optimal.
Two other flaws of the program are the lack of predictability and the intergenerational inequality it will cause. People who have already repaid their loans are excluded, while future students will not know for sure whether their debts will be forgiven. This could create a kind of moral hazard, encouraging borrowers to max out their student loans in the hopes that someone will one day pay them.
A better policy would create a system that rewards the formation of human capital – the acquisition of skills but also the improvement of health – throughout a person’s life. Biden’s plan will not solve the student debt crisis, nor reduce the cost of college education and health care. Moreover, most truly catastrophic debt burdens could probably be alleviated by retraining students who have seen very poor returns on their investments in higher education.
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