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To cancel or not cancel student loans?

Updated: Mar 2, 2022

The cost of education is rising more rapidly than ever before. According to the Federal Reserve, the total outstanding federal student loan debt totals to $1.61 trillion dollars as of 2022. Many students feel discouraged when applying for universities because they fear the overwhelming cost of tuition. Many progressive Democrats have been calling for student loan cancellation for many years, and the demand for forgiving student loans has been escalating ever since President Biden took office. But ultimately, is student loan cancellation a good idea? In this article, we will explore some of the advantages and disadvantages of forgiving student loans.

Arguments for student loan forgiveness/cancellation

1. Rising inflationary concerns

Inflation is defined as the "de-valuation" of a fiat currency. Why does an extra guacamole from Chipotle cost 50 cents more than last year? Is it because the guacamole has suddenly become healthier for consumption? No silly, the guacamole you can acquire from your local markets is the same guacamole that the Aztecs cultivated in the 1500s. The reason why your extra guacamole is costing $2.50 compared to $2.00 from three years ago is that the purchasing power of the U.S. dollar is diminishing every year. In fact, on average, U.S. dollar experiences around 2% inflation per year. This means that your $1 from last year will now be valued around $0.98. Of course, depending on the macroeconomic cycles, inflation rates can vary significantly (As of February 2022, the Consumer Price Index reported a year-to-year inflation rate at 7.5%!).

You might be thinking...psh, 2% inflation per year. I'm losing two cents for every dollar, what a big deal. Well, imagine that you're carrying $100,000 of student loan debt from medical school. 2% of $100,000 is $2,000, which means that if you haven't paid off your medical school loans during one fiscal year, you technically owe $102,000, adjusting for inflation. And keep in mind that this doesn't even address interest rate, which can range between 6-7% yearly.

As inflation increases, the price of every goods and services increase. This includes rent, transportation, textbooks, groceries, entertainment, clothes, and many more. As more and more students become admitted to universities, aggregate demand for goods and services increase with increased competition amongst consumers, which further contributes to higher prices. In order for students to catch up with rising price expectations, students will either: 1) Apply for more student loans, which exacerbates the underlying issue or 2) Apply for part-time jobs. As the number of new part-time job applicants increase, there would be greater competition for wages, which would incentivize employers to lower wages to discourage competition. In other words, we are facing a scenario where high inflationary expectations make it difficult for students to sustain basic living expenses, but the students are being poorly compensated due to increased labor competition.

Furthermore, ask yourself this question: What is the ultimate goal of university education? Why do students spend over 4-10 years of their lives pursuing an advanced degree? For most students, their goal is to build human capital and use these knowledge to pursue a career of their passion. Unfortunately, it has become increasingly difficult for college students to passionately pursue their dreams because of constant financial distress. Studying for exams and participating in school activities are difficult when you have to constantly worry about paying the next month's rent. Working in part-time jobs can be very exhausting, and it takes time away from experiencing college activities (clubs, IM sports, internships, etc.).

Therefore, we can argue that student loan forgiveness would help dampen some of these inflationary concerns and encourage students to pursue a college education with minimal financial distress.

2. Education has a huge opportunity cost

Let's say that you earned $100 after mowing your neighbor's lawn for two hours. This is dope! Now you can finally purchase those Lululemon training shorts. Or what about that new FIFA 2K22 on PS4? What about a nice meal at an all-you-can-eat sushi restaurant with your significant other? The truth is, $100 cannot satisfy all of your interests because you eventually need to make a choice. If you choose to buy those Lululemon training shorts, you would need to give up both the FIFA 2K22 as well as the sushi date. In simple economics, the action of giving up something to pursue another is called opportunity cost.

Education is by far one of the largest opportunity cost in modern economics. The moment we submit the Statement of Intent document to the prospective university, we are committing at least 4-5 years of our life as a full-time student. Depending on the universities, students are on average, expected to come up with out-of-pocket costs between $10,000 to $20,000 per year. Most high school guidance counselors tell us that incurring student loan is "worth it" because the degree will pay for its cost. To this day, I believe this is the most absurd and irresponsible statement that a school counselor can tell their students.

The real cost of university education doesn't just stop at tuition, room & board, books & supplies, and social activities. One of the most valuable assets of humanity is time. When we commit 4-5 years into a university education, we are foregoing the opportunity of pursuing an alternative career. Furthermore, committing to a long-term education will take away the opportunity to pursue a full-time career that pays gross salary. Let's say that this potential full-time career pays $30,000 annually, and a university education costs $20,000 per year. Therefore, when taking opportunity cost into consideration, the real net cost of education is $50,000 per year, which adds up to $200,000-$250,000 by the time we finish undergraduate education. Keep in mind that this doesn't even include interest rates, nor does it include the possibility of graduate school.

We are living in a society where attending universities is almost required to have a stable career outlook. Because of this, the opportunity cost of a university education is rising more quickly than ever. Although we can argue that it is ultimately up to the students to decide on pursuing college education, we cannot ignore the macroeconomic and societal pressures that sways students into believing that college education equates to career stability. Altogether, forgiving and cancelling student loans is an economic obligation that would significantly help university students from falling deeper into financial struggles and alleviate some of these opportunity costs.

3. Student loan forgiveness/cancellation will increase consumer spending

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