The US Department for Education has decided in March to fully cancel debts from student borrowers.
The BBC reports that the decision was part of a larger series of steps that the Biden Administration had made to address the growing student debt within the US.
Currently, student debt in the US amounts to a total of $1.7 trillion, however, this large figure may be misleading as not all of this debt is “bad debt.”
“Bad debt” essentially occurs when individuals are unable to pay their debts back, thus making it a burden for the individual.
However, student debt for those who are successful is a good thing.
For example, if you were to get a University degree in the UK, you are on average expected to earn £10,000 more annually than your peers.
So, going to University, which for most people requires you to accumulate debt, is an investment of some sorts, your return on the investment is the extra income you will earn.
With this extra income, successful individuals will utilise their extra pay from their University degree to increase their standard of living as they can afford higher quality good and services and also on paying back their debts.
But what about those who are unsuccessful and are unable to pay back their debts?
Well, in the UK, if you do not pay your student debt back in 25 years, 30 years in Scotland, your debts will be written off by the government.
This makes a very fair system, cheap student loans subsidised by the government allow for increased social mobility, and, those who fail to increase their financial status for whatever reason, will have their debts become void.
Because of this, young people in the UK do not have to necessarily worry about keeping a life long burden that prevents them from being able to have as much freedom.
However, the UK system is different from the American one, which, up until now, did not write off the debts of its students.
So, the decision by the Department for Education has been one that has been in demanded by the American public since the “Occupy Wall Street” protests, the decision to write off student debts.
More than 1 in 6 adults or 42 million people in the US have student debt, however, only a third of that debt is “bad debt” which will never be paid back.
Democrats such as Chuck Schumer have asked the president to use his power to wipe debts of up to $50,000.
Biden however only backed forgiveness of up to $10,000 in student debt, analysts believe that the decision will clear the burdens of about 15 million people.
But, the decision to clear this debt has a very large cost to the American government, with a hefty price tag of $400 billion.
This decision to cut this debt have a very large opportunity cost, the US government either has to cut spending in other areas or has to increase the size of their budget.
It seems like the US government has gone with the second approach with its announcement to raise corporation tax to 28% from 23% since the Trump Administration.
Assuming this tax rate does not force firms out of countries/does not severely impact their operating budgets, the decision will raise the US governments operating budget.
Because of this, the US government will be able to write off student debts, with the opportunity cost being higher taxes.
But maybe there is another solution to dealing with “bad” student debt.
If one-third of student debt cannot be repaid, one reason for this could be that people are simply going into the wrong degrees.
These are degrees that do not raise the standards of living of the individuals and degrees where there are very few jobs within them, so, perhaps student debt is high for this specific reason.
To prevent people from going into such degrees, the US government could choose to subsidise degrees that create jobs that are in demand, such as STEM fields, engineering, medicine and the like.
This will reduce the tuition fees on STEM-related courses, thus incentivising young people to go into these areas.
Thus, bad student debt will decrease as more young people will be going into degrees that are in demand and have a lot of job prospects and high paying careers.
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