As he announced his latest round of student loan forgiveness last week — the previous one was just last month — President Joe Biden was greeted with an unpleasant reminder of why his policy is not only ill-considered but also ill-timed.
Specifically, the Bureau of Labor Statistics reported last week that consumer prices rose 3.8% from a year earlier. Inflation’s stubborn refusal to fall to 2% makes it unlikely that the Federal Reserve will cut interest rates aggressively this year.
That’s bad news for consumers, many of whom may experience high interest rates as simply another form of inflation. But it’s also bad news for broader economic reasons. High interest rates slow down homebuilding, exacerbating a national housing shortage and making it more likely that high wages will simply feed through into rents. High interest rates also encumber clean energy projects, which need a lot of upfront capital to pencil out.
Biden, in short, really needs a plan to help bring down interest rates. So why is he traveling around the country canceling billions of dollars in student debt?
Recall the context in which this idea arose. The Democratic presidential race started in 2019 — before Covid, several rounds of stimulus, soaring inflation and multiple interest rate hikes. In this now-bygone era, student loan forgiveness was plausibly a freebee. Interest rates had been at or near zero for years with inflation persistently below target. There was plenty of room to debate the optics of a giveaway to recent college graduates, or the distributional impact of various forgiveness plans, but fundamentally the case for doing it was simple: There was no downside.
Then came Covid, and soon the government was rushing huge amounts of cash out the door. Why not send some out in the form of student loan forgiveness? Biden’s predecessor even got in on the act, putting a “pause” on payment collections in order to help people out during the pandemic.
As Election Day got closer, Democrats began to strategize about how to provide pandemic relief if the Senate remained under Republican control. Under those circumstances, student loan forgiveness was seen as something the president could do by himself, via executive order. As it turned out, however, Democrats narrowly won control of the Senate, and used it to pass a massive stimulus bill. Biden then showed his skill at reaching bipartisan legislative deals, securing a major infrastructure funding package and the CHIPS and Science Act, both of which were largely financed with deficit spending.
These initiatives had significant benefits. But they shocked the US economy into an entirely different paradigm from the one that prevailed before the pandemic.
Today, unemployment is ultra-low. Inflation is a concern. Interest rates are high. In other words: It is not the ideal time, for both the economy and the government’s balance sheet, to be putting more money into people’s pockets.
As a political matter, of course, it’s possible to argue that it makes sense because the benefits are concentrated among a relatively small number of young people whose votes Biden sorely needs, while the costs to the economy as a whole are diffuse and minor on a per-person basis. But by those standards the benefits probably aren’t narrowly targeted enough. Biden’s efforts to keep cheap Chinese electric cars out of the US market are a little puzzling from the standpoint of his inflation and climate goals, for example. But at least this protectionism benefits pivotal swing states.
Meanwhile, loan forgiveness continues to blot out the president’s more serious and significant changes to higher education policy.
In his second term, former President Barack Obama issued a new regulation aimed at cutting off low-performing for-profit colleges from access to federally subsidized student loans. The so-called “gainful employment” rule aimed to penalize schools whose enrollees typically ended up earning too little to cover the debts they amassed.
When Donald Trump took office, his administration argued, somewhat reasonably, that limiting the rule to for-profit schools was unfair. But rather than expand its scope, it simply scrapped the rule — putting Republicans in the odd position of arguing that subsidized student loans are bad, but if they exist they must be available in the most wasteful and abusive form possible.
Biden has proposed bringing back the “gainful employment” rule in stronger form that asks not only whether a program’s enrollees can pay back what they owe, but whether schools can demonstrate that their graduates have higher earnings than those of the average high school graduate who didn’t attend college. Biden is also widening the scope of the regulation to cover non-degree programs at nonprofit schools. He has also issued complementary transparency rules that try to force schools to be more forthcoming with potential students about the employment outcomes of their graduates.
Taken together, the Biden administration’s higher-education policies amount to a thoughtful effort to improve competition and efficiency. Not only do they deserve more emphasis and attention, but they also show an appealing side of the Biden administration — one focused on solving real problems rather than chasing shiny objects from progressive activists. The serial proposals to forgive student loans, unfortunately, are precisely the opposite.
© 2024 Bloomberg L.P.
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