A Poor Argument Against Ending the Student Loan Repayment Moratorium

At The Hill, Liz Peek argues against the student loan repayment moratorium begun by former president Donald Trump and continued (and now to be once again extended) by current president Joe Biden. 

There are plenty of arguments, some of them good ones, against the moratorium and/or forgiveness. In my opinion, Peek's isn't among them:

Inflation emerged in the U.S. last year because amid a fast-recovering economy, federal spending went through the roof. ... This taxpayer-funded generosity caused excess demand, exacerbating supply-chain problems brought on by COVID-19; it also led to a labor shortage. ... Every time Biden hands out another benefit, like the just-announced extension of paused student loan payments, it gives a cohort of people one more reason to stay out of the workforce.

In the case of the student loan moratorium (or for that matter actual debt relief), I suspect the opposite is the case.

I never had a big student loan "problem," because I dropped out of school fairly quickly and in the 1980s. A couple of thousand bucks, IIRC.

But I've known people who borrowed and blew big money on college, came out of the experience with huge debt, and specifically stayed out of the formal work force precisely because getting a job would mean forking over most of the income toward that debt.

The following is  a composite of true stories that I've seen play out:

Sally racks up big student debt getting a degree in, say, psychology, or some other field that doesn't tend to produce an instant great income right out of school. She also moves in with a romantic partner late in, or right out of college, and is almost immediately pregnant.

After her pregnancy, she surveys the job field. She can get a job making $50,000 a year. That's $4,166.67 per month.

FICA taxes immediately knocks $318.75 off those monthly earnings. Income tax withholding (even if her income will get her a refund) will also be deducted. There may be state and/or local income tax as well. Let's say all this gets her down to $4,000 per month.

The average student loan interest rate is 5.8%. The standard repayment period is ten years. That's a payment of $550.09 per month. So now she's down to $3,449.91 per month.

Then there's daycare -- average cost, $340 per week. With 4.3 weeks in the average month, she's forking over $1,462, so her net income is now down to $1,987.91 per month.

Working has its own costs. Does the family need a second car, which will have to be insured and gassed up? Does the job require professional clothing? Does it entail extra hours with attendant extra daycare payments? Etc.

I'd be surprised if she knocks down $1,500 per month. At 40 hours per week, that's $8.72 per hour.

That $550.09 per month loan payment might make the difference between Sally entering the labor force and Sally deciding to be a stay-at-home mom. Especially if she can round up a little "informal economy" income by say, babysitting a friend's child for $200 a week, entirely "off the books."

You've heard of the Laffer Curve -- there's a tipping point in tax rates where the incentive to earn more diminishes. In my opinion, that applies to debt as well. That is, there's an income-after-debt-service threshold beneath which many people will just move into Mom and Dad's basement, or be a stay-at-home parent, or mow lawns for the bare minimum they need to get by and can avoid reporting to the government.

But I could be wrong.