Beware the Incentives of “Forgiving” Student Loan Debt

Reality has a habit of interrupting the stories people tell themselves.

The 18th-century philosopher George Berkeley constructed complex arguments to prove that matter doesn’t really exist. In response, Samuel Johnson famously kicked a rock and said, “I refute (him) thus.”

Like Berkeley, our politicians spend too much time imagining how they might shape society to achieve their preferred outcomes. But they don’t live in the real world. When you earn enough that you don’t have to ask how much things cost, and you’re surrounded by people who are afraid to tell you when you’re full of it, you won’t often know when you’re thinking stupid thoughts.

But once in a while, someone like Samuel Johnson comes along, and with a few words brings reality back into sharp focus. We received two such welcome doses of reality this month. January opened with Ricky Gervais reminding the Hollywood glitterati who pontificate on economics and politics that they have no idea what they’re talking about. And now it closes with an angry father confronting presidential candidate Elizabeth Warren about her proposal to forgive student loans.

Unfair Paybacks

The father, who worked two jobs so his daughter could graduate college with no debt, asked, “Am I going to get my money back?” Warren’s reply: “Of course not.”

With those three words, reality intruded into Warren’s story about student debt forgiveness, and everyone except Warren appeared to realize it. The father drove the lesson home:

My buddy had fun, bought a car, went on vacations. I saved my money. He made more than I did. ... We did the right thing, and we get screwed.

But still, Elizabeth Warren didn’t get it.

Politicians’ elaborate plans for “fixing” things so often go awry because, in their minds, we will all respond to their policy tinkerings in exactly the way they intend. In Warren’s mind, her plan to have the government “forgive” student loans will magically resolve with students everywhere being debt-free, and everyone else’s lives being the better for it.

But that’s not how it works. People don’t respond to laws. People respond to incentives.

The Wrong Incentives

When politicians decide to “forgive” debt, they give people an incentive to borrow more and to borrow less prudently. For the same reason that people’s menu choices change when someone else is picking up the tab at the restaurant, so too would students’ and parents’ behaviors change if Warren forces someone else to pay the tuition bill.

Too many students already choose majors that have little market value. Imagine how much worse this would be when students don’t have to pay back the money they borrow for their degrees. College tuition is already too high. Imagine how much worse this would be when students don’t care how much college costs because someone else is paying the bill.

Too few high school students already choose to go into the trades. Imagine how much worse this would be when high school seniors face a choice of working to learn a trade or spending four years partying on the taxpayers’ dime. The federal government already runs trillion-dollar deficits. Imagine how much worse this would be when the government has to spend even more money each year to pay off student loan debts.

The stark reality is that “forgiving student debt” really means forcing people who didn’t go to college to pay for those who did, and forcing people who scrimped and saved for college to pay for those who didn’t. This punishes prudent, frugal choices while rewarding their opposite.

The father who confronted Elizabeth Warren knows this, but Warren just can’t see it. He is Samuel Johnson, kicking her rock. Apparently he didn’t kick hard enough.

This article was republished from Canton Rep. 

Antony Davies

Dr. Antony Davies is the Milton Friedman Distinguished Fellow at FEE, associate professor of economics at Duquesne University, and co-host of the podcast, Words & Numbers.

This article was originally published on FEE.org. Read the original article.