- Can The Bank Take Your House Even If You Pay Your Mortgage? - January 30, 2023
- Reader Case: How do I Squeeze More Income From my Portfolio? - January 16, 2023
- Our 2022 Portfolio - January 3, 2023
The last time I wrote about US politics right after the election, the comments section (and our inbox) immediately filled with rage-spewing MAGA people. Biden didn’t win! The media is corrupt! Something something George Soros!
Well, sorry MAGA people. Biden did win. So let’s take a look at some of his crazy left-wing nutjob policies that will inevitably slide the US into a bankrupt socialist failed state. Specifically, his proposal to cancel part of everyone’s student debt.
While right now, Joe Biden is focusing mostly on vaccinations and COVID-related stimulus, part of his agenda is to tackle the student loan crisis.
Americans owe more than 1.5 Trillion dollars in student debt, and the problem is getting worse. The numbers we get when people write into us are eye-popping. Nowhere else in the world do people graduate with hundreds of thousands of dollars in debt, and sometimes we even get people who are approaching regular retirement age with student debt still not repaid. It’s nuts!
So his proposal is to forgive part of it.
We don’t know the specifics of this program yet because it’s still being debated inside the Democratic party. The centrists think the program should be limited to $10k, the progressives are arguing it should be closer to $50k, and Bernie Sanders probably wants it delivered by Che Guevera riding a unicorn or something.
While there’s wide consensus that something has to be done about America’s student debt problem, the solution is quite tricky, and a relatively simple solution like forgiving part of it won’t actually solve the underlying problems long term. Let’s dive into the proposal and see what we find, hmm?
The Problems with a Blank Check
Biden’s current solution is to simply write a check. While appealing in its simplicity, this solution would not only be enormously expensive but it has a variety of problems associated with it.
First of all, as a straight stimulative measure, it’s not well targeted. Student debt relief would, by definition, only affect people with student debt. These are not necessarily the people who would benefit the most from government stimulus. Under this proposal, the doctor who has a high-paying job and the unemployed arts major would get the same level of stimulus if they both have student debt. And the barista who never went to college and lost her job due to the pandemic would get nothing. It doesn’t take into account whether the person needs help or not.
Secondly, it incentivizes bad behaviour. If I knew the government was going to ride to the rescue of my student loan balances, guess what? I’d stop paying my student loan. If I were particularly nefarious, I might deliberately get into even more student debt because I know I won’t have to pay for it. And think of the message this sends to people who scrimped and saved to pay off their student loan. It would feel like a slap in the face for being responsible.
And finally, remember that forgiving student debt doesn’t just magically make it disappear. It simply transfers the balance owing from the student onto the government, meaning everyone would be paying for it with their tax dollars. Is that fair? I’m not so sure.
All that, and it doesn’t actually solve the problem, which is figuring out what’s causing people to get into crushing debt to begin with. Why is college so damned expensive? And why are those degrees not allowing people to pay off their loans? A blanket, untargeted loan forgiveness program helps some people bail themselves out a bit, but it doesn’t tackle the underlying issue that’s causing it in the first place.
Make Income-Based Repayment Non-Taxable
The US isn’t the only country with student loans, but other countries have what I like to call the “useless degree escape hatch.” Meaning that if the degree fails to increase the borrower’s earning power, there’s a way for them to eventually get out of paying off the loan.
This system is inheritently more targeted because it only affects people who can’t repay their loans rather than everyone who has an outstanding balance. In Australia, student loan repayments are calculated automatically as a percentage of your paycheck, so if you’re not working, you don’t pay anything. In the UK, the loan gets written off after 25 years. Here in Canada, if your income is too low the government takes over the interest portion of each loan payment, and after 10 years they take over the principal part as well.
The US version of this are the various income-based repayment plans such as IBR or REPAYE. Similar to the Australian system, it limits your student loan payment to a percentage of your disposal income, which sounds good until you realize that it doesn’t prevent the loan from accruing interest. So while it prevents you from technically defaulting, the problem keeps getting worse and worse over time if you don’t make enough money.
Under the Obama administration, these programs were expanded to include a debt forgiveness portion. If you’re enrolled in an income-based repayment plan and you still have a balance after 20 or 25 years (depending on the program), then the loan will be forgiven. But it too has a huge flaw: that loan forgiveness is counted as taxable income. So in the likely situation that the borrower doesn’t have the cash to pay the resulting humongous tax bill, the student loan debt becomes an IRS debt and the misery continues.
So the income-based repayment system has some of the pieces of a workable student loan escape hatch solution, but the missing piece is the fact that loan forgiveness is taxable. That’s the part that has to change. It will cost money to do this, but if the government is going to spend money to fix the student debt issue, I’d argue this is a better way to do this because it targets only people who can’t repay the loan.
But even beefing up the IBR doesn’t solve the underlying issue, which is people graduating with ridiculously high student debt balances. Why is college education so expensive in the US relative to the rest of the world? And why are people graduating with expensive degrees that don’t land them high paying jobs?
Make the Schools Pay For It!
Here’s my proposal: Make the schools pay for selling useless degrees.
Higher education being expensive is fine if it means the borrower makes more money. But if it doesn’t, that’s what creates this huge insurmountable debt crisis.
I think it’s completely immoral that schools charge people north of six figures for fine arts degrees that they know are worthless, and marketing these expensive useless degrees to a population that’s the least capable of making good financial choices: clueless high school students.
Remember when you were 17? How much stupid shit did you do back then? Would you trust that person with making a decision worth hundreds of thousands of dollars? Of course not!
Yet that’s exactly what the current college system does! Trick young, stupid people into taking on massive loans without any regard for whether that loan can ever be repaid. It’s a completely predatory practice!
So here’s what I think should happen. If the degree was useful, then the current system is fine because the loan will get paid back through normal channels. But if the degree wasn’t useful and the loan just keeps ballooning in value with no hope of being paid off, there should be a mechanism where the school has to chip in and shoulder part of the loan.
This can be added onto existing IBR programs, where your required payment is limited to a certain percentage of your paycheck, but after a certain number of years, say 10, the school would have to start covering a percentage of the loan payment. This can start off small, like 10% of the monthly payment, but gradually increasing by 10% per year until after 10 years where the school is now covering 100% of the loan payment.
Here’s why I think this would help. Right now, schools are incentivised to get as many kids enrolled as possible. They don’t particularly care if their degree is useful. By forcing them to have skin in the game, it would change the incentivisation from pure enrolment to making sure the degree is worth what the student paid for it.
Not only would this force bad colleges to reform and improve the quality of their programs to maximize employability, it would also push them into investing in developing internship, job placement, and career counseling programs. Success would no longer be determined by grades alone, but by whether the student is able to get a job in that field. And while this wouldn’t completely eliminate useless expensive degrees (maybe the student comes from a wealthy family and doesn’t care about affordability), it would make the university think long and hard about accepting a student into such a program who needs a loan to afford it.
This model is not a completely new idea. It’s called a Risk-Shared Student Loan, and the last adminstration to consider it is, ironically, the Trump administration. In 2019, Trump issued an executive order to draft a policy reforming student loans into a risk-shared model similar to the one I’m proposing, but the proposal never came to fruition due to the pandemic that swamped all our lives.
But the idea does have merit because it’s the only proposal that even attempts to address the root cause of sky-high student debt in America rather than just put a temporary band-aid on the problem.
What Would You Do?
The student loan crisis is massive in scale, so any solution is bound to be messy. But ignoring it is clearly not an option as the current system dooms millions of borrowers to a lifetime of debt that they can neither repay nor discharge through bankruptcy. But any solution has to take into account who caused this situation to begin with. Is it irresponsible borrowers not choosing their degrees wisely? Is it governments not providing enough financial assistance? Or is it predatory colleges selling useless degrees?
I clearly have an opinion on this, but I’d love to hear yours. Let’s hear it in the comments below! What would you do to fix the student loan crisis in the US?
Hi there. Thanks for stopping by. We use affiliate links to keep this site free, so if you believe in what we're trying to do here, consider supporting us by clicking! Thx ;)
Build a Portfolio Like Ours: Check out our FREE Investment Workshop!
Travel the World: Get covid-19 coverage for only $42 USD/month with SafetyWing Nomad Insurance
Earn 15% Cash-back: Earn an extra 15% back for a limited time with a Tangerine World Mastercard! Click here to sign up!