The cost of higher education has gotten ever more expensive in recent years, and students have had to go ever deeper into debt in order to afford a college degree that, in many cases, doesn’t do all that much for them. With over $1.5 trillion in student debt outstanding today, there are calls across the board for a general student loan amnesty to allow overburdened Americans to free themselves from debt slavery. But if such a plan were to come to fruition, it would have numerous unintended consequences.
There’s no doubt that a student loan amnesty would allow those with student loans to see an immediate boost to their usable income. No longer would they have to pay off their debt; now they could start thinking about saving up for a down payment on a house, or buying a new car, or saving for their children’s education. But what about the companies that hold those loans?
If those loans are wiped off the books, those companies have to write off their loans and take a loss. That hurts those companies, which might then have to lay off employees, reduce business spending, etc. If the government makes those companies whole, then it’s essentially a taxpayer-funded bailout of indebted former students, with all the negative ramifications that we’ve seen from bailouts.
Not only would that mean $1.5 trillion of additional money essentially created ex nihilo to be used within the financial system, the moral hazard that would result would likely mean an even greater student loan bubble in the future. Remember how Ronald Reagan’s 1986 amnesty for illegal immigrants was supposed to stop future illegal immigration? Instead, illegal immigration soared in the years thereafter. Immigrants coming in after the amnesty had to hope that, if there had already been one amnesty, there might be another in the future.
In the same way, a student loan amnesty would encourage more people to take out huge student loans, even bigger ones than previously, in the hopes that the federal government would once again pick up the tab in the future. After all, the government has never said no to a bailout, bailing out Wall Street, Chrysler (twice), and guaranteeing all sorts of other financial loans such as mortgages. While the advocates of student loan amnesty may be well-meaning, the effects of an amnesty would be dangerous and far-reaching.