In 2013 I started working in higher education and was immersed into the deteriorating issue of the student loan debt crisis. Of course, the media loves to report on all the negative factors surrounding the situation – $1.7 trillion total debt (second-largest form of debt in the U.S. after mortgages) carried by 45 million Americans, etc. Additionally, almost 70% of college students now borrow to attend school, and the average size of their debt has risen since the mid-90s from less than $13,000 to about $30,000 today. There was something else the media was reporting on that didn’t make sense to me – student loan debt forgiveness.
Fast forward to the presidential race in 2020 where the idea of erasing student loan debt was being pushed by a handful of candidates. However, the topic seemed to fade out of the political debate after the strongest advocates for the idea, Senators Elizabeth Warren and Bernie Sanders, ended their presidential campaigns. Until everything changed…
New President. New Ideas.
America now has a new leader from a different party who brings different ideas. President-elect Joe Biden promised to forgive at least some student debt during his campaign, and he now supports immediately canceling $10,000 in federally held loans per borrower as part of COVID-19 relief measures (Democrats in Congress want to raise the figure to $50,000). Biden also proposes easing payment terms for most borrowers and taking other steps to cut the financial burden for low-income college students.
Lending Money is Big Business
$100 billion a year: That’s roughly how much the federal government, which started issuing and backing its own student loans in 1965, now lends to students annually for tuition and other higher-education expenses.
Let’s not forget that lending money is BIG business in America, which is probably why the federal government took over the student loan industry from the banks about 10 years ago. Prior to 2010, students previously had the option to choose a private-sector lender for their guaranteed loans. Now they only have one choice—the government. Banks can continue to make private, non-guaranteed college loans, but these are generally more expensive than guaranteed loans.
A Brookings report from spring of 2015 relays the figures from a Congressional Budget Office (CBO) analysis showing that the federal government may have profited in the order of $135 billion over the prior 10 years from student loan repayment. If the federal government is profiting off students, why would it forgive their debt?
Eliminate Debt to Boost the Economy?
The consensus rationale by those who favor erasing student loan debt is—Canceling student debt will yield huge benefits for individual borrowers and for the economy at large, and the more the better.
Every time I see headlines like – Canceling student debt should be a slam dunk. Here’s why – I shake my head in bewilderment. There are many reasons why this is flawed logic. Let’s break down a few of them.
Pandemic Pause on Loan Payments
The perfect case study for this was when the pandemic hit the U.S last year. In March 2020 federal student loan payments were suspended, interest-free, through January 2021 (Biden may extend this further). This also included a stop on collections of defaulted loans. That means for nearly one year approximately 25% of adult Americans who carry a student loan debt balance did not have to make a single payment. So, what happened? Was the economy stimulated? Did people go out and spend more money? Perhaps the savings rate went up? Without having the opportunity to interview an economist, I can only go by the fact that I’ve seen no media coverage or research reports indicating any evidence of this yet.
Cash vs. Debt
There is a big difference between receiving cash and having your debt removed. If someone gets a check for $50,000, I firmly believe that will help stimulate the economy (because how many people will use that entire check to pay down debt?) as opposed to having a pile of debt eliminated that many aren’t even paying on in the first place. The consensus I’m getting from the people I’ve talked to who owe student loans is that they have just shifted those would-be student loan payments to other debt balances during the pandemic pause—exactly what President Biden is saying below:
“Immediate $10,000 forgiveness of student loans, helping people up there in real trouble,” Biden said. “They’re having to make choices between paying their student loan and paying the rent. Those kinds of decisions.”
President-elect Joe Biden
Biden is spot-on here. You are just playing a debt shell game! And I have to think that all this liability will ultimately be passed along to the U.S. taxpayer. I’m not sure how more taxes will “boost the economy.”
Why loan forgiveness is enabling
Consider that the government spends a great deal of money on regulation and education on teen alcohol abuse, tobacco, and drug use and prevention. We, as a society, have decided that teens shouldn’t be able to legally use these substances, and we provide education and extremely clear warnings about the danger of their use. Yet we are all somehow enablers of teen student loan use.
Whenever I hear so-called financial experts support student loan debt forgiveness, I bust out laughing. Here’s the major issue with forgiving anyone of any type of debt – it doesn’t solve or correct the problem/reason why the individual got into debt in the first place. Dare I say, where does personal responsibility come into play? Gasp! If you do not know how to manage your personal finances and pay your debts, forgiving you of your debt is only going to encourage you to get into more debt. Why? Because you haven’t changed your mindset and behavior toward money management. You haven’t been educated on how to budget, save, and pay your bills responsibly.
Why forgiveness won’t help the economy
As previously cited, only about 25% of Americans even have student loan debt – a fact that is conveniently omitted from the media because it doesn’t fit their narrative or agenda. So if you are going to forgive everyone’s student loans, you’re only “helping” a small percentage of the population. This is the reason why it won’t stimulate the economy. And remember, required loan payments are currently paused, so forgiving debt now would provide no immediate economic stimulus.
What about all the future college students that will take out student loans? Will student debt forgiveness be offered in perpetuity? I sure haven’t heard this question asked or answered. Will it just be free loan forgiveness until the end of time? I’m sure no one would ever think of taking advantage of a system like that. Why would anyone pay cash for college if they can just max out student loan debt and not have to pay it back? What kind of message is this sending? By the way it’s already happening – I heard a caller to the Dave Ramsey show say that she took out $10,000 of unneeded student loan debt in the hopes that Biden would forgive it.
Hope is not a strategy.
Student loan forgiveness won’t help those with useless degrees get jobs. It won’t stop the ballooning cost of education. It won’t make America’s economy more just.
Over the next decade, the federal government will lend out $1.1 trillion for education. If the federal government cancels a chunk of student loan debt in 2021, total outstanding debt could climb back up to current levels within a few years. This simply gives colleges another reason to hike tuition.
The Problem is Lack of Financial Literacy
Without a doubt, young people today start their adult lives burdened with much more student loan debt than previous generations. So, how do we avoid debt in the first place? There are certain things in life that I find interesting – like how the government spends a fortune to fight substance abuse but little to encourage personal fiscal fitness. In fact, only 17 states require high school students to take a class in personal finance – the most basic, life-survival skill.
Student loans aren’t the reason there’s a student debt crisis in this country. The loans are simply the symptom of a much bigger issue. The real problem is that there’s not adequate education, information, or support systems in place to assist students (and their families) to make smarter college choices while they are still in high school. The issue is threefold: 1) lack of awareness, 2) lack of resources, and 3) most importantly, lack of financial literacy/education.
Imagine a world where the government was committed to financial literacy and wellness and invested more in helping families make smarter college choices. What if our society spent more money, time, and attention on addressing the student loan crisis by educating students before they take on the debt?
Fortunately, there are a lot of efforts underway to help people with student loans, including a growing number of employers that are committing themselves to financial wellness with college coaching and student debt repayment benefits. Let’s educate young people about risk and reward and provide them with education and tools to make informed decisions about their education and future employment.
Work for it more than you hope for it.
Final Thoughts: Don’t die waiting on student loan forgiveness
According to an article in Fortune, the U.S. government now garnishes the Social Security wages of many older Americans who have defaulted on their ancient student loans. Fortune says that as of September 2015, 114,000 Americans over the age of 50 saw their Social Security benefits reduced to offset defaulted student loan debts. An increase of 440% since 2002, this forced repayment strategy is plunging a number of retirees below the poverty line. Don’t let this happen to you.
Let’s not forget – Biden has already won and does not need your vote anymore. So there’s no guarantee he’s going to do anything he said he would during his campaign to secure your support.
My advice: Figure out the best way to aggressively pay off your debts as quickly as possible and move on with your life. You certainly don’t want to put yourself in a position to rely on and wait for the government to act – you might die first.
For more on my financial journey and thoughts from other unique individuals, check out my book Margin Matters: How to Live on a Simple Budget & Crush Debt Forever.