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April 24th, 2019

modest proposals

I see that the proposal to abolish student loan debt is gaining a lot of popularity with the Democratic Party. On one hand, this seems to be mainly a huge subsidy to the upper middle class, who are likely to have attended more expensive colleges and to have higher student loan debt—which of course is exactly what a public choice theorist would predict as a likely real result of government policy, so much of which is created by the upper middle class in the first place. On the other, it's going to be a big hit to the financial system, and to people who have funds in the financial system as a source of financial security. In fact, it's effectively a net transfer of wealth from middle-aged people and retirees to their adult children. It seems to be exactly the "abolition of debts" that James Madison thought the Constitution would protect us against as an "improper and wicked scheme."

So I had two thoughts on ways to mitigate the harmful effects of such a proposal:

First, declare that cancelling a loan is legally a taking of the creditor's property for public use (a loan being an asset to the lender). It therefore must be paid for at fair market value with public funds. That may already be legally necessary, and the question of raising taxes to pay for it may simply not be coming up.

Second, to avoid subsidizing the privileged, set an upper limit on the amount of loan debt that is affected. Make it, say, $40,000 (or $10,000 for each year of a four-year degree). That will work just fine for anyone who went to a state university (which includes some extremely good schools such as the University of California); but it's a fraction of the likely debt of someone who went to an Ivy League school. Statistically it's going to be a lot better at targeting the working class.

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