I like a good lump sum tax. People *must* pay the tax without exception and the advantage over current progressive marginal income taxes is that the marginal wage received doesn’t fall with greater earnings. Employment rises and output rises. To the extent that college students fail to understand their student loans, the indebted graduates essentially pay a lump sum tax each period.

Of course, the exception is income based repayment (IBR) – especially with forgiveness after X years. IBR adjusts the incentives substantially. Under the standard system, your wages are garnished if you fail to make loan payments. Under IBR, lower earnings trigger lower monthly payments. Clearly, in contrast to the standard method, IBR incentivizes more leisure, less income, more black market activity, and higher loan balances. Indeed, all the more so if there is a forgiveness horizon. Someone just has to have low enough income for say 15 years, and their past debt is forgiven (with caveats & conditions).

My principal objection to IBR policy is the resulting malinvestment in human capital. Defaulting on loans is a sign that some investment was inadequately productive to repay the resources consumed by its endeavor. We call that a loss. Real resources of time, attention, and goods and services were consumed in order to produce capital that failed to serve others more than the opportunity cost of those resources.

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