Updated: Jul 28
In an effort to provide relief to borrowers, many have called for the cancellation of student loan debt. While this proposal may seem appealing to some, it is important to consider the potential drawbacks. Here are three cons of cancelling student loan debt:
Moral hazard refers to the idea that people may take more risks or behave irresponsibly when they are insulated from the consequences of their actions. In the context of student loan debt, cancelling the debt could lead to a moral hazard by removing the incentive for borrowers to carefully consider the financial implications of their educational choices. This could result in an increase in tuition rates, as colleges and universities may be encouraged to raise prices if they know that students will not be held responsible for the full cost.
Cancelling student loan debt would have a significant economic impact. The Congressional Budget Office (CBO) estimates that cancelling $1 trillion in student loan debt would increase GDP by $86 billion per year over the next decade. However, it would also increase the federal deficit by $1 trillion over the same period. The CBO also notes that cancelling student loan debt would have a small effect on the labor force participation rate, as some borrowers would choose to work less if their debt was cancelled.
Cancelling student loan debt would not benefit all borrowers equally. According to a report by the Urban Institute, only 37% of student loan borrowers would have their entire debt cancelled under a proposal to forgive up to $50,000 in student loan debt. Additionally, the report found that borrowers with higher incomes and graduate degrees would benefit the most from debt cancellation. This could exacerbate existing income inequality, as those who are already financially secure would receive the most significant relief.
Cancelling student loan debt may seem like a quick fix to a growing problem, but it is important to consider the potential drawbacks. Moral hazard, economic impact, and unequal impact are three cons of cancelling student loan debt that should be taken into account. As with any policy proposal, it is essential to consider all the potential outcomes and weigh the costs and benefits before making a decision.