Politics is a game some people play and most people dislike. An overwhelming majority of Americans dislike politics because they distrust our governmental institutions. That lack of trust is not unwarranted.
Politicians on both sides of the aisle mislead or lie to American citizens, time and time again. (Does “If you like your health care plan, you can keep it,” ring any bells?) Many of the 2020 Democratic presidential candidates are advocating for, and completely misrepresenting, a new policy: government-funded student loan debt “cancellation.”
Elizabeth Warren, the Massachusetts senator, has supported the idea most vocally. To break down Warren’s policy, the government will automatically “cancel” $50,000 or so of student loan debt for middle-class and upper-class Americans.
Sen. Bernie Sanders, the Vermont independent, trotted out the most radical plan. His plan is simple: “cancel” all of the $1.6 trillion of student loan debt. For reference, the 2008-09 mortgage crisis was over $500 billion worth of debt. A brief overview of the state of student loans is necessary to discuss this idea.
Taxpayers Already Underwrite All Student Loans
The federal government fully guarantees, or secures, the debt for all student loans. It has since the passage of the Higher Education Act of 1965.
Student loans originate through either the federal government, which originates 90 percent of student loans today, or private lenders. The largest creditor of the $1.6 trillion in student loan debt is the federal government (i.e., American taxpayers), holding more than $1 trillion in liabilities. So American taxpayers are left to deal with the consequences whenever a person defaults on any student loan.
Policy advocates’ misrepresentation of the matter, either willful or ignorant (my money is on the former) is multifaceted. First, these advocates label the policy debt “cancellation.” It is nothing of the sort, but rather a transfer of wealth. Debt cannot be “canceled.” Debt can be forgiven or repaid.
By definition, “cancel” means to “negate the effect of another.” In a transaction involving debt, one party is the creditor, and the other is the debtor. The debtor receives an asset from the creditor, who, in turn, assumes a liability — usually the promise to be paid back with interest. A creditor can choose to forgive debt, but debt cannot be canceled because the effect would still be there: the loss of the investment.
In this case, the American people are the true creditors because their tax dollars secure every student loan and fund the government’s holding of more than $1 trillion in liabilities. This policy, then, of government taxing Americans, backing student debt, and writing it off, is a transfer of wealth, something done in communist and socialist countries.
So the students who took out loans — that they promised to repay — would receive an asset (their degree) at no cost to them, and the taxpayers would not be refunded, nor government coffers paid back. Thus, the effects of the loans would not be negated. Under this proposed policy, taxpayers would foot the bill for 95 percent of the 45 million borrowers.
That’s 42.25 million borrowers who would not have to suffer the potential consequences of the risks they willingly took. The costs of bailing them out would be spread out to the approximately 209 million Americans over the age of 18, nearly 167 million of which were not a party to these agreements. (Not to mention, if you have paid off your loans, you get no refund.)
This Is a Policy of Soak the Poor to Feed the Rich
Second, private lenders are also creditors to these loans. They loaned money based on their expectation of making profits from their investments.
The government cannot force private lenders to “cancel” or forgive the debt. That would be unconstitutional. Someone is going to have to pay the private lenders, or part of the financial system could collapse. If the federal government instills this policy, who do you think ends up paying these lenders? American tax-payers.
Third, advocates promote this policy as a way to begin closing gaps between higher-income families and lower-income families. Do not be fooled, however. This policy would injure low-income or minority family households, not help them.
Only 14 percent of students from low-income households actually receive their bachelor’s degree, while the large majority of students enrolling in four-year institutions come from high-income households. Loan “cancellation” would merely transfer wealth to Americans whose post-college earning potential will place them in the upper echelons of income, further widening various inequality gaps in our country.
Ironically, Warren and Sanders vehemently oppose those who have more wealth and earn higher incomes, yet this policy would directly benefit those people and burden those who these politicians claim to care about so much.
Debt Bailouts Reward Bad Decisions and Punish Prudence
Lastly, this policy is being represented as the good and moral thing to do. It is actually a moral hazard. That means it rewards rather than punished poor choices. To take it one step further, it is un-American. This policy would reinforce the notion that Americans should rely on the government to fix their problems when they willingly assumed the risks.
We live in a world where actions have consequences. People assume risks and either fail or are rewarded, requiring them to calculate risks responsibly. This policy tells people they can make choices without considering or facing the consequences of those choices.
Americans live in the greatest country, where one of our founding principles is individual responsibility, going back to the Declaration of Independence: “We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty, and the pursuit of Happiness.” How can all Americans pursue their happiness or have a right to their life when others claim the right to take their lives and property by government-driven work confiscation? That’s what taxing is: taking the portion of a person’s life it took to produce wealth.
It seems society has been raising younger generations to believe they are not a product of their own decisions but of “environmental forces.” It is abhorrent. Not only has the last generation coddled young people and absolved them of responsibility, but it has also proliferated the idea that in order to be successful, young people must earn a college degree of some kind. This has turned what ought to be a life path for some people into an entitlement.
Maybe instead of absolving young people of responsibility, encouraging them to pursue degrees in unmarketable fields of study, and then proposing we “cancel” their debt, policymakers and parents should encourage responsible risk-taking and leave taxpayers alone.
As someone who will incur more than $250,000 in student debt before completing my J.D./M.B.A, I’m all for fixing the tuition crisis we face. I have plenty of ideas about what the government should do to correct it, starting with getting out of the student loan business altogether. However, I took on my debt, and so did everyone else. We each must deal with our own consequences.
This article has been corrected to reflect that Sallie Mae no longer originates government student loans.
