Trump’s Student Loan Plan is Bad Economics

27819707396_4349108eeb_bAt a campaign stop in Columbus, Ohio, one month before Election Day, Donald Trump shared his plan for addressing voters’ growing concerns about student loan debt.

Trump’s student loan repayment plan came late in the campaign cycle, long after Senator Bernie Sanders and Secretary Hillary Clinton released their respective plans, both of which would have increased government intervention in higher education, further distorting the already-convoluted education and student loan markets.

At the time of his speech, Trump’s proposal seemed likely to elicit support from voters, especially among millennials concerned about college affordability and rising levels of student loan debt. From 1980-2014, the cost of attending college rose by nearly 260%. Total student loan debt is nearing $1.25 trillion, and over forty-three percent of former students who borrowed from the federal government are in default, behind on their payments, or aren’t making payments on their federal student loans.

Free market advocates had hoped that Trump’s proposals would constructively tackle the causes of the student loan bubble. Alas, this was not to be. Instead, Trump’s plan bears more similarities to alternative plans released by Obama, Clinton, and Sanders than many conservatives would like to admit.

Called “the most liberal student loan repayment plan since the inception of the federal financial aid program” by The Washington Post, Trump’s proposal would cap repayment at 12.5% of a borrower’s discretionary income. Furthermore, a borrower’s remaining student loan balance would be forgiven after he or she makes their full payments for 15 years. While it’s possible that Trump has considered restoring the pre-2010 system, in which private banks (instead of the government) issue student loans, such loans would still be subsidized and guaranteed by the federal government, eliminating much of the risk that incentivizes banks to engage in prudent and sustainable lending.

Basic economic principles help us predict how Trump’s student loan plan would affect the greater economy and the financial welfare of individuals. At any given time, there exists a limited amount of funds available in capital markets. This capital can be directed toward any number of alternative uses (home loans, car loans, business loans, etc.). But government artificially boosts demand for student loans when it intervenes in the market by enabling student borrowers to repay less than the balance of their loan. This artificial demand for student loans bids capital away from alternative uses, making it more difficult for families and businesses to receive loans for other important purposes.

Moreover, the cost to taxpayers would be steep. The federal government (and, by extension, current and future generations of taxpayers) would be responsible for paying the remaining balance of everyone’s student loan debt after their loans are forgiven. Colleges and universities would grow even richer, receiving billions of dollars as wealth is redistributed from America’s taxpayers to its institutions of higher learning.

Today’s college tuition is so expensive because easy-to-acquire federal student loans have rapidly boosted demand for higher education. Unless supply keeps pace with demand, prices will inevitably rise. Millions of students have become burdened with previously unimaginable levels of student loan debt needed to finance schooling that has been made artificially expensive by government intervention.

If Trump had been sincerely concerned about college affordability and the soon-to-burst student loan bubble, his plan would have eliminated the federal student loan system entirely. As Jason Morgan predicted in his recent article for Mises Wire, “Without the artificial demand generated through taxpayer-funded subsidies, universities [would] be forced to lower their tuition prices to meet what students and their families are able and willing to pay. This new reality [would] force higher education institutions to adapt to the needs of students.”

Instead of addressing the underlying cause of the problem (namely, the inflated cost of education resulting from federal education subsidies), Trump’s proposal attempts to mitigate the regrettable effects of government’s intervention into the student loan market by forgiving the debt of millions of working professionals.

While Trump’s proposal might score him political points among millennials saddled with an excessive volume of student loan debt, it certainly doesn’t make good economic sense. We might momentarily feel better if our student loan payments are reduced and our balances are forgiven, but we will all be poorer because of it.


This article was originally published by The Mises Institute: https://mises.org/blog/trumps-student-loan-plan-treats-symptoms-not-disease.

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