The Cost of Debt

View of the Federal Reserve where employees work to moderate interest rates, minimize unemployment, and keep prices stable. Source for Photo: American Institute for Economics Research

Following an economic decline in the turmoil of the Covid-19 pandemic, the federal government of the United States took measures to provide relief to citizens as the country exited mandates and returned to normal. These measures have come in the form of multiple stimulus checks, and most recently to students under the Biden Administration’s loan forgiveness. While these ends are beneficial on paper, it is important to question the overarching impact these efforts will have. The Biden Administration must take care to preserve the economy and not overspend or indulge in matters the government quite literally cannot afford. Otherwise, the economy remains forever destined to high interest rates and weak currency.

The economic subject speaks to its own importance, being that if left unhandled or done so ineffectively will produce collapse. Yet, its existence provides opportunity to inform the public of action to take in controlling inflation, and methodology to reform our policies. Only recently having left the world of mask mandates, vaccines, work at home orders, and increased prices, the state of the dollar must be preserved in an already weakened economy. With inflation the highest in over forty years, having been capped in July at 9.1%, additive changes such as loan forgiveness seek to halt its decline back to the recommended 2%. To explain, if something cost $10 a year ago, an inflation rate of 9% would mean the item now costs $10.90. In a pandemic that cost many their jobs and businesses, higher costs in the essentials of food, gas, even toilet paper, the problem of high inflation is clear. 

What steps have the government taken to begin lowering this inflation towards the betterment of all? Unfortunately, they have consigned themselves to an opposite conduct. The Biden Administration is set to pass a student loan forgiveness policy which will relieve student debt borrowers of up to $20,000 for households that make below $125,000 or $250,000 in married households. This sounds benevolent, and is to be sure to be a benefit to those in need of it. What, then, is the contention? The bill is expensive, ineffective, mistargeted, and regressive. The bill is called to spend nearly $400 billion – a costly sum on our budget that increases our annual deficit; money which could be allocated towards other legislation. Colleges in response are bound to raise tuition which will counteract any positives, alongside students will be more obligated to take out loans with the expectation that forgiveness will occur in the future which inadvertently continues the student debt crisis. As one becomes free of debt, they are naturally inclined to feel wealthier. As students are forgiven ten or twenty thousand dollars, they feel that much more wealthy, and are thus inclined to spend more in the belief that they themselves have more and owe less. Increased spending, when we are in midst of shortages, will naturally raise prices and therefore inflation. Though most students can pay back on their debts, some inevitably take on means they cannot afford to repay. The program should be focused on those that cannot pay, as opposed to those who can. A household that makes $230,000 is more likely to be able to pay off debts then one that makes $60,000. Naturally, for having taken on more years of education, those with graduate degrees tend to have more debt than other students. Graduate degrees, in theory, access higher paying jobs than those of undergraduate degrees. Thus, a blanket forgiveness compared to being more accurately targeted, seeks to aid the rich and make the poor worse off. 

What then, is to be done towards these acts? Already, the Federal Reserve made efforts to encourage the federal funds rate to be raised, meaning that banks are more inclined to raise interest rates on loans that are riskier (for individuals), which then pulls more money into the no-risk Federal Reserve. Doing so reduces the overall money supply within the economy, reducing inflation by lowering spending elsewhere while also raising the overall value of the dollar. While we have seen some decline from the 9.1%, increased government spending and loan forgiveness policies as mentioned will go nowhere towards fixing this problem. If the federal government is true towards fixing the economic issues of the pandemic, they will lower their unnecessary, blanketed government spending and allow for production of goods to continue so as to prevent more shortages. If the crisis is not handled, disregarding the catastrophes of a total progressive takeover and government handle on the economy will not only crush the economy now, but leaves future generations drowning in debt unimaginable and left to pick up the pieces in wake of our inaction to call for change.