"And if you assume there's a likelihood it's canceled, you're going to be more likely to take out more debt up front. That's going to give colleges more pricing power to raise tuition without pressure and to offer more low-value degrees."
The concern then, and for the wealthy Paris Club creditors in the current epoch, was with what economists call “moral hazard”. This is the idea that if you let people, firms or even countries get debt relief easily, they'll just spend again, and badly.
The nonpartisan organization also argued that this policy will lead to more inflation and drive up higher education costs. Additionally, the cancelation of these loans is fundamentally unfair. It will occur at the expense of Americans who have worked hard, repaid their debts or chosen not to go to college at all.
When the government forgives loans, it's not erasing debt but shifting it from individuals to taxpayers. This increases government debt, which can have long-term economic consequences. Poor people might seem to benefit initially, but everyone pays the price later through potential inflation or higher taxes.
In February 2022, CRFB argued that “cancellation of all outstanding student debt would boost . . . inflation by 37 to 50 basis points.” Given that canceling all student debt is more than six times the cost of canceling $10,000, it's hard to see how these two numbers square.
Myth: Student loan forgiveness is the fair way to help Americans escape massive amounts of debt. Fact: Borrowers signed on the dotted line for their loans. Erasing these loans does not teach borrowers to manage their debts. Moreover, the cancelation is an insult to those who diligently paid off their loans.
Another concern of forgiving student debt is “moral hazard,” the idea that students might make riskier choices if they think their debt will end up being forgiven, Jones said.
Research has shown that cancellation would boost GDP by billions of dollars and add up to 1.5 million new jobs, reducing the unemployment rate. 5 Workers who are Black, Latinx, immigrants, women, and those in industries paying low wages are still facing a terrible economic situation with high levels of unemployment.
As of mid-July 2023, approximately 662,000 borrowers have qualified for forgiveness under the limited PSLF waiver.
For example, if someone buys the latest cell phone and takes out insurance on it, they may be less likely to be careful with it. The assumption that it will be replaced regardless of their level of care creates a moral hazard.
If you've got a debt relief order (DRO) or have had one in the past, it will affect your credit rating. This could mean you find it more difficult to get credit in the future.
Moral hazard will occur when one party has incentive to take abnormal risks in a desperate attempt to earn some profit before the contract settles. Moral hazard is most likely to occur when there is a debt agreement two parties. One party is most likely to benefit from acting contrary to the agreement in the contract.
It penalizes hard-working Americans
We've already discussed how the poor and working classes are treated unfairly by this plan. But the unfairness extends to many middle class families as well who worked hard to pay off their student loans or their children's student loans.
Consistent with predictions derived from theories of operant learning, perhaps forgiving relatively disagreeable or negative partners led to decreased self-respect and increased problem severity in those studies because it failed to discourage those partners from continuing their negative behaviors.
It may take years to reestablish a good credit record. You may not be able to purchase or sell assets such as real estate. Your loan holder can take you to court. You may be charged court costs, collection fees, attorney's fees, and other costs associated with the collection process.
Student loan debt slows new business growth and limits consumer spending. Broad student loan debt forgiveness may help boost the national economy by making it more affordable for borrowers to participate in it.
Student Debt vs Income by Age Groups
Among the age groups, adults between the ages of 18 and 29 are the most likely to have student loan debt. Meanwhile, adults between the ages of 35 and 49 years old on average owe the most student loan debt.
It occurs whenever a borrower or insured entity (an approved borrower or policyholder, not a mere applicant) engages in behaviors that are not in the best interest of the lender or insurer. If a borrower uses a bank loan to buy lottery tickets instead of Treasuries, as agreed upon with the lender, that's moral hazard.
Even if you take out a high number of loans to pay for medical school, your overall debt burden might be low if you participate in a service program once you graduate. Due to the exceptional need for primary care physicians, loan forgiveness programs in these fields are more widely available than for other specialties.
That is a per- sonal decision. It is safe to say that so long as you acknowledge that nothing happens apart from God's will, God's Word does not prohibit this type of borrowing. Seeking the will of God must be your highest priority in each college-related decision, including the question of taking student loans.
"Democrats may express views about education contributing to the public good and supporting an engaged citizenry. Some who oppose student loan forgiveness view education as a private commodity that benefits the person who purchases it."
Student loan balances may seem stagnant due to the significant portion of payments going towards interest rather than the principal. Initially, a larger share of a student loan payment is allocated to interest, with a smaller amount reducing the principal.
Cancelling student loan debt may reduce unemployment by adding up to 1.5 million new jobs. Federal student loans represent 90.8% of all student loan debt, public and privately held ($1.77 trillion total).