Felt the need to get to the bottom of the student loan relief package offered by President Biden. The mass media is doing a terrible job educating the public on what is actually happening with this.

Here’s what we know for facts:

• About 45 million Americans owe about $1.75 Trillion in Student debt.
• The proposal is to forgive $10,000 for everyone making under $125,000/year and $20,000 for those receiving Pell Grants.
• The majority of student debt is held by the government.

Estimates from Left sources in the media report that the total amount forgiven is in the order of $300 Billion. Sanity check: 45 million borrowers X $10,000 = $450 Billion. But this doesn’t count how many people owe on Pell grants or how many owe less than $10,000. So let’s just say between $300 and $450 Billion will be forgiven.

Interest on Federal student loans is typically between 5 – 7%. If you take an average of 6% and say the average borrower pays off $10,000 in student loans in 10 years, the government gains about $3300 in interest for the life of the loan. 45 million borrowers X $3300 interest = $149B.

The total amount of money paid back in 10 years to the government = $450B + 149B = $599B. That’s about $50B per year – worst case – that we are not getting back what we loaned out.

I think my numbers are a bit high as they don’t include Pell borrowers. Plus, many borrowers owe less than $10,000. But we get an idea.

Fear-Mongering

The media on the Right wants to paint a picture that loan forgiveness is extremely inflationary – similar to the money injected directly into the system with the stimulus. This is not accurate.

As part of COVID Relief, Federal student loans have been in forbearance since early 2020. The result has been that people haven’t made student loan payments for the last 2-1/2 years. Rough calculations say this is about 4X what we will be losing with Student Loan Relief – or $200B per year. This was an extremely inflationary move, as it put a lot of extra money in people’s pockets.

There is no difference between giving money away for free or loaning money with no intent to having it paid back. Both have equal impact on inflation.

So not having people pay their debts for the past 2-1/2 years was the inflationary move and this is continuing until December 31st. After that, payments will resume, except that now about $300- 450B of student loans will no longer be on the government’s books.

When payments resume, this will be DEFLATIONARY as people will have LESS disposable income. It just won’t be as deflationary as it would have been due to Student Loan Relief.

The bottom line is that the government will lose $40-50B per year in money coming in. To make up for this lost revenue, the government will need to borrow more money. On the other side, the economy will gain less indebted consumers who will be able to afford more. It’s estimated that the Relief will wipe out student debt for 15 million Americans.

That doesn’t sound too bad, right? So what’s wrong with Student Loan forgiveness?

For sake of simplification, let’s disregard the following moral hazards:

• Going down a path of forgiving debt is opening a can of worms. Forgive one person’s debt and another will feel slighted. How pissed are people that just paid off their student loans and missed a $10,000 bonus from the government?
• Not all people need debts forgiven, particularly ones that have degrees and are making good money.
• This move will exacerbate the issue of accelerating cost of education. It is the easy money of student loans that has caused the skyrocketing costs of education.

Forget all that…

Let’s look at strictly the financial ramifications of Student Loan Relief.

(Side Note: If you look at the graph, you’ll notice a huge dip in the deficit in April 2022. This is because of the huge tax receipts from the stimulus from prior years 2020 and 2021.)

Inflation – The Boogey Man

The biggest financial issue facing us today is inflation. Political parties know this and play the inflation card whenever they can.

Major inflation over the past couple of years has been fed by four main sources:

1. Flooding printed money into the system. The Fed printed trillions and lent it to the government which in turn distributed to the masses. The extra money chases fewer goods (thanks COVID) and voila, prices spike.
2. Spiking fuel costs. Reduced supply due to Russian sanctions along with rising demand and higher production (labor) and transportation costs.
3. Reduced labor supply due to aging demographics. Less labor equals higher input costs.
4. Inflationary environment feeding greed and overpricing. People accepting high prices promotes companies charging more.

As mentioned, the student loan payment forbearance pumped extra money into the economy (1. above) in a big way by relieving 45 million Americans of student debt payments.

Student loan forgiveness – not near as much.

Right now, inflation is bad. CPI is at 8.5%. It came down a little in the past month, but much of that is credited to the SPR release of oil.

The Federal Reserve Bank is carefully tightening policy to get inflation under control without putting the economy into a tailspin. It is raising interest rates and has stopped buying Treasuries and Mortgage Securities. All of these efforts are meant to cool the economy.

It’s important to the government to get inflation under control as it exacerbates our Federal debt by increasing the carrying cost. If inflation is not controlled, the government will pay much more for it’s debt servicing. A 1% move in government debt yield (interest) will increase government deficits by around $300B per year.

Forget the puny $50B in student loan payments – if we don’t get inflation under control, the government will be paying many times more than that for its debt!

The single best thing our government could have done to fight inflation would have been to let the Student Loan forbearance expire and forget the Loan forgiveness. This would have cooled spending and increased government revenue at the same time. It would have been the right thing to do.

But it likely would have cost a lot of Democrats their jobs in Congress. The right thing isn’t necessarily the political thing.

Back to Moral Hazard

Loan forgiveness is a relatively small step in the wrong direction of inflation. In the realm of bad decisions the government makes, this is a small one.

I mean we just came off of $5T of stimulus distribution. What’s another $40-50B (1%) in loan forgiveness payments per year?

It’s all going on the government credit card anyways.

And that’s what it all really boils down to, right? Our overwhelming debt.

History has played this scenario out at least a hundred times. We know how it ends:

1. The government racks up overwhelming amounts of debt.
2. The government devalues money (prints) to pay for its debt, which diminishes the value of money (inflation).
3. The government creates a new currency backed with something sound like gold or silver (or maybe crypto)?

Step 2 to Step 3 is very difficult and stressful. Some people refer to it as the The Great Reset or the Endgame. Most agree that the transition will result in a economic decline and trillions of financial assets being wiped out.

Most people also agree that the more we can delay the Reset, the better. Keep THIS party going as long as possible.

But if the government continues to answer everything that ails us with printed money, we will continue to take steps towards the inevitable. Student Loan forgiveness is a small step, but it is important as far as precedent. It’s not the impact of the action that counts – it’s the PRINCIPLE behind the action.

We are literally telling people that they don’t have to pay their debts. If they complain enough, and vote the right people in office, the government will come to the rescue and bail them out.

In the case of Student Loan forgiveness, we have to ask ourselves WHY was it so important to take this inflationary step? The reason given for the Relief is to allow more money for people to spend – a kind of stimulus. It is intended to be inflationary!

As the Federal Reserve Bank tightens policy to reduce inflation, our government is doing the exact opposite. Sure, the magnitude is miniscule, but how can we justify it?

These small handouts are setting up for more, bigger ones. Pension funds and Social Security are underfunded and we just gave a bunch of young people $400B? You can bet more hands will be out. The precedent has been set.

Debt is increasing exponentially and the cost to service the debt is also increasing because of inflation.

If we truly want the music to continue to play, we must be more financially responsible and limit the “gifts”. We will focus on inflation.

But we won’t.

My hope is that the people that receive the $10,000 gift will invest it wisely knowing what is coming. From where I sit, this program COULD be a good thing to happen to Americans IF they do the right thing and use the money to spare them from what is coming.

Ron